END3972 – Cost & Management Accounting

Week 5 – 27/3/2023

Assist. Prof. Mert Edalı

medali@yildiz.edu.tr

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 Outline
 Job Costing

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 Job Costing
 let us start with a recap on basic cost terminology:
 cost object → anything for which a measurement of costs is desired
e.g., an iMac computer (a product), the cost of repairing an iMac computer (a
service)
 direct cost (of a cost object) → costs that can be traced to a cost object in an
economically feasible (cost-effective) way
e.g., cost of parts used to make an iMac computer
 indirect cost (of a cost object) → costs that cannot be traced to a cost object in
an economically feasible (cost-effective) way
e.g., rent paid for the repair facility that repairs many different Apple computer
products

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 Job Costing
 cost assignment is a general term for assigning costs, whether direct or indirect,
to a cost object
 cost tracing is a specific term for assigning direct costs
 cost allocation refers to assigning indirect costs

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 Job Costing
 two additional terms;
 cost pool is a grouping of individual indirect cost items
broad → all manufacturing-plant costs
narrow → costs of operating metal-cutting machines
 cost-allocation base is a systematic way to link an indirect cost or group of indirect
costs to cost objects

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 Job Costing
 e.g., How should a company allocate costs to operate metal-cutting machines
among different products?
 one solution; based on the number of machine-hours used to produce different
products
 in this case, the number of machine-hours is the cost-allocation base
 in this way, we can link an indirect cost or group of indirect costs (operating costs of all
metal-cutting machines) to cost objects (different products)

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 Job Costing
 a quick example;
 assume that indirect costs of operating metal-cutting machines is $500,000 based on
running these machines for 10,000 hours
 the cost allocation rate is $500,000 / 10,000 hours = $50 per machine-hour
 “machine-hours” is the cost allocation base
 if a product uses 800 machine-hours, it will be allocated
 $50 per machine-hour × 800 machine-hours = $40,000

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 Job Costing
(Costing Systems)
 job-costing system
 the cost object is a unit or multiple units of a distinct product or service called a job
 each job generally uses different amounts of resources
 the product or service is often a single unit, such as
 a specialized machine made at Hitachi,
 a construction project managed by Tekfen Holding,
unique and distinct
 a repair job done at an Audi Service Center,
 an advertising campaign produced by Saatchi & Saatchi
 job-costing systems accumulate costs separately for each product or service

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 Job Costing
(Costing Systems)
 process-costing system
 the cost object is masses of identical or similar units of a product or service
 Intel provides the same product (say, a Pentium 4 chip) to each of its customers
 all Dimes consumers receive the same apple juice product
 Citibank provides the same service to all its customers when processing customer deposits
 process-costing systems divide the total costs of producing an identical or similar
product or service by the total number of units produced to obtain a per-unit cost

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 Job Costing
(Costing Systems)
 many companies have costing systems that are neither pure job costing nor pure
process costing but have elements of both

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 Job Costing
(Costing Systems)
 some examples for companies from different sectors

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 Job Costing
(Costing Approaches)
 two main different approaches in job costing;
 actual costing
 normal costing
 actual costing is a costing system that
 traces direct costs to a cost object by using
 (the actual direct cost rates) × (the actual quantities of the direct-cost inputs)
 allocates indirect costs based on
 (the actual indirect-cost rates) × (the actual quantities of the cost-allocation bases)

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 Job Costing
(Costing Approaches)
 as its name implies, actual costing systems calculate the actual costs of jobs
 however, actual costing systems are not commonly found in practice
 actual costs cannot be computed in a timely manner!
 calculating actual indirect-cost rates on a timely basis each week or each month is a
problem!
 we can only calculate actual indirect-cost rates at the end of the fiscal year →
problematic!
 why do we need to wait until the end of the fiscal year?

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 Job Costing
(Costing Approaches)
 two reasons for using longer periods, such as a year, to calculate indirect cost rates:
1. the shorter the period, the greater the influence of seasonal patterns on the amount of
costs
 e.g., if indirect-cost rates were calculated each month, costs of heating would be charged to
production only during the winter months
 however, an annual period incorporates the effects of all four seasons into a single, annual
indirect-cost rate
 there are also some non-seasonal erratic costs such as
 costs of repairs and maintenance of equipment
 costs of vacation and holiday pay
 aim to smooth the erratic bumps!
2. we need to avoid spreading monthly fixed indirect costs over fluctuating levels of
monthly output and fluctuating quantities of the cost-allocation base

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 Job Costing
(Costing Approaches)
 calculating actual indirect-cost rates on a weekly or monthly basis is difficult
 managers cannot calculate the actual costs of jobs as they are completed
 managers want a close approximation of the costs of various jobs regularly during
the year, not just at the end of the fiscal year
 instead of an actual indirect-cost rate, a predetermined or budgeted indirect-cost
rate is calculated for each cost pool at the beginning of a fiscal year
 overhead costs are allocated to jobs as work progresses

 using budgeted indirect-cost rates gives rise to normal costing

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 Job Costing
(Costing Approaches)
 actual costing—allocates:
 indirect costs based on
 (the actual indirect-cost rates) × (the actual activity consumption)

 normal costing—allocates:
 indirect costs based on
 (the budgeted indirect-cost rates) × (the actual activity consumption)

 both methods allocate direct costs to a cost object the same way:
 (actual direct-cost rates) × (actual consumption)

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 Job Costing
(Costing Approaches)
 summary

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 Job Costing
 we illustrate job costing using the example of Robinson Company, a company that
manufactures and installs specialized machinery for the paper-making industry
 manufacturing and installation of a new paper-making machine for the Western
Pulp and Paper Company (WPP)

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 Job Costing
 general approach to job costing
1. identify the job that is the chosen cost object
2. identify the direct costs of the job
3. select the cost-allocation bases to use for allocating indirect costs to the job
4. identify the indirect costs associated with each cost-allocation base
5. compute the rate per unit of each cost-allocation base used to allocate indirect costs
to the job
6. compute the indirect costs allocated to the job
7. compute the total cost of the job by adding all direct and indirect costs assigned to the
job

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 Job Costing
 Step 1: identify the job that is the chosen cost object
 cost object is Job WPP 298, manufacturing a paper-making machine for Western Pulp
and Paper (WPP)
 Step 2: identify the direct costs of the job
 they identify two direct-manufacturing cost categories:
 direct materials
 direct manufacturing labor

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 Job Costing
 direct materials
 materials are ordered based on the engineering specifications and drawings
 the order is placed using a basic source document called a materials-requisition record

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 Job Costing
 direct manufacturing labor
 similar to the accounting described for direct materials
 labor-time sheet → contains information about the amount of labor time used for a
specific job in a specific department

25 hours × $18 per hour = $450

3 hours × $18 per hour = $54
(indirect)

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 Job Costing
 Step 3: select the cost-allocation bases to use for allocating indirect costs to the job
 quick reminder: indirect manufacturing costs are costs that are necessary to do a job
but that cannot be traced to a specific job
 e.g., supervision, manufacturing engineering, utilities, and repairs
 they must be allocated to all jobs in a systematic way
 companies generally use multiple cost-allocation bases to allocate indirect costs
 different indirect costs have different cost drivers
 e.g., depreciation and repairs of machines → machine-hours
 e.g., supervision and production support → direct manufacturing labor-hours
 Robinson Company chooses direct manufacturing labor-hours as the sole allocation
base
 Robinson Company budgets (estimates) 28,000 direct manufacturing labor-hours

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 Job Costing
 Step 4: identify the indirect costs associated with each cost-allocation base
 a single cost-allocation base → direct manufacturing labor-hours
 Robinson Company creates a single cost pool called manufacturing overhead costs
 all indirect costs of the Manufacturing Department
 budgeted manufacturing overhead costs total $1,120,000

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 Job Costing
 Step 5: compute the rate per unit of each cost-allocation base used to allocate
indirect costs to the job
 for each cost pool, the budgeted indirect-cost rate is calculated by
from Step 4

from Step 3

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 Job Costing
 Step 6: compute the indirect costs allocated to the job
 (actual quantity of each different allocation base) × (the budgeted indirect cost rate of
each allocation base)
 Robinson Company uses 88 direct manufacturing labor-hours on the WPP 298 job
 manufacturing overhead costs allocated to WPP 298 is
(88 hours × $40 per direct manufacturing labor-hour) = $3,520

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 Job Costing
 Step 7: compute the total cost of the job by adding all direct and indirect costs
assigned to the job
coming from job-cost
record

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 Job Costing
 assume Robinson Company bid a price of $15,000 for the job
 total manufacturing costs are $9,705
 gross margin = $15,000 - $9,705 = $5,295

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 Job Costing
 How would the cost of Job WPP 298 change if Robinson had used actual costing
rather than normal costing?
 no change in direct cost tracing
 reminder: the difference between actual and normal costing is about how they allocate
indirect costs!
 normal costing uses budgeted indirect-cost rates
 actual costing uses actual indirect-cost rates calculated annually at the end of the year

budgeted

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 Job Costing
 we need to calculate actual manufacturing overhead rate:

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 Job Costing

 the actual indirect-cost rate is $45 per hour

 the budgeted indirect-cost rate is $40 per hour

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