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    Cost chapter 3

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    8 views39 pages

    Cost CH 3 Tewedros

    Uploaded by

    Ashe Balcha
    Cost chapter 3

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    of 39
    CHAPTER THREE JOB-ORDER COSTING SYSTEM In chapter two you studied the various terminologies and concepts of cost accounting. Now, it is time to introduce to you the issues of cost fem. You are well aware that the way in which product and service costs are determined can have a substantial impact ‘on reported profits, as well as on key management decisions. In this regard, accurate product costing is vital for business success. It is used for planning, product costing, cost control, and decision-making. With a well setup product costing system, the price of products can be precisely determined. The product costing system can therefore be used by manufacturers to select products for maximum profitability. Before the cost of Products can be computed, a determination must be made about the product n ‘system, The product costing system defines the cost object and the method of assigning costs to production, This chapter introduces the two primary cost systems - the job. . However, in this chapter, we willbe forusing os 2.2.1. Job Cost Sheet “sheet or Job Cost Record for ex ledger. While the account ystomer account vidual jobs in the the costs down in ividual yb Cost ible subsidiary kk listing of individual cu gned to indi reaks .d assigned 10 indi identify the particular tem, we maintain a Jo! accounts receiva ides a detailed Ina job order costing syst job. The cost sheets are like the receivable subsidiary ledger pro' the job cost sheets show 2 detailed listing of the costs assi work in process and finished goods inventories. Each job sheet br terms of direct materials, direct labor, and ‘manufacturing overhea' jobs. The job cost sheet will have some ‘code or descriptive data t0 i job and will contain spaces to collect costs “of materials, labor, and overhead: ‘2.2.1.1. Materials Costs the job are withdrawn wals and that specifies Form. be required to complete ithorizes these withdray ed the Materials Requisition js started, materials that will yment that aut jals withdrawn is cal ‘When a job from the storeroom. The docut the types and amounts of materi pletes the materials requisition form yervisor com} form is prepared at ‘Nommally the production department sup 1. The materials requisition f and presents it to the storeroom superviso! Jeast in three copies. One copy goes to the cost accounting department. In this department, this copy is used as a basis for transferring the cost of the requisitioned material from the “Raw Material Inventory” account f° the “Work-in Process Inventory” scouts and for entering the cost of the mater ial on the job-cost sheet for the production job in process. The materials requisition form identifies the job to which the materials are sa ed Care must taken when charging matrals to disinguish berween drs and indirect materials. For produets and product components that are produced routinely, the required materials B|Page 2. Direct materials cost: If factory overhead consists mainly of the labor and equipmes handling, a direct relationship is established and this tac nse more than one product is made, because each of materials, therefore accuracy would dictate « separate : : ‘computation of facte application rates for each product. This, however, violates the goal of agg Sa needed for material ‘The factory overhead rate is computed as follows: FOH rate as a percentage of direct material cost timated FOH cost X 100% Estimated direct material costs ‘© This method has limited use because in most cases no logical relationship exists between direct material cost of a product and factory overhead used in its production 3. Direct labor cost base: This is the most widely used base because direct labor costs are generally closely related to factory overhead costs and payroll data are readily available. It therefore meets the objectives of having a direct relationship to factory overhead cost, being. simple to compute and apply and requiring little, if any, additional cost to compute. iis method would not be appropriate: ; Tp i thre i. direct reatonship between factories overhead cos and direct abreast Lit factory ovediead costs are composed largely of depresaion and equipment - related costs. ; ; 3 2.5. Illustration on Job-Order Costing pb order costing s # costing system for assigning costs toa specific unit ot to a small eds through the production steps as a distinct bly in terms of materials, labo % y 2 oe Is, r, and overhead costs. Its used when producing different units for different jobs, Example of companies that uses job order costing includes car manufacturer, construction company, printing presses, and the like. Journal Entries to Account for the Different Manufacturing Costs In this next section, I will try to show you how the costs flow between the different accounts for a manufacturing company that uses a job order costing system, Purchase of Materials ‘When materials are purchased for consumption, both direct and indirect materials will be recorded in an account called Materials Inventory. ‘Example: Materials were purchased for Birr 40,000 cash. production there are both direct and indirect materials ct costs must be separated since they are accounted for with ‘transferred to the Work-in Process Inventory 1, Normal spoilage Normal Spoilage is spoilage that results despite e of normal spoilage are considered to be unavoidable sen hee ¢ unavoidab| therefore treated as a product cost, Normal spoilag. d. The cost le cost of producing good units and are 6 Costs are accounted for in two ways: ¥ Applied to a specific job Y Applied to all jobs Normal spoilages are recorded in an asset account like ae ‘Spoiled Goods Inventory Normal Spoilage Applied to a Specific Job When normal spoilage occurs because of the specif bears the cost of the spoilage minus the disposal value of the sp ations of a particular job, that jo ‘Normal Spoilage Applied to All Jobs Jn some cases, spoilage may be considered a normal characteristic of the production process. The spoilage inherent in production will, of course, oceur when a specific jab | being worked on. But the spoilage is not attributable t to, the specific job. Instead, the spoilage is allocated indirectly 1 the job as manufacturing overhead bt 4 hence is not charged directly suse the spoilage is common to all jobs. When normal spoilage is comiion to all jobs, the budgeted manufacturing overhead rat includes a provision for normal spoilage cost. Normal spoilage cost is spread, through overhead allocation, over all jobs rather than allocated to a specific job. Even though, for external reporting purposes, abnormal spoilage costs are writen off in the accounting period and are not linked to specific jobs or units, companies ofis identify the particular reasons for abnormal spoilage, and, when appropriate, link sbnormal spoilage with specific jobs or units for cost management purposes ee cot sprirf pare 2 of, 008

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