Cost Accounting

Job Costing System

The same basic purpose exists in both systems.

Job-Order
Costing Vs. To assign direct material,
Process Costing 1 direct labor and
manufacturing overhead
- Similarities
to products.

2 et ’s
L
To provide a mechanism for
computing unit cost.
The same basic purpose exists in both systems.

Job-Order
Costing Vs.
Both systems maintain
Process Costing 3 and use the same
- Similarities manufacturing accounts.

4 et ’s
L
The flow of costs through the
accounts is basically the same.
Differences arise from two factors . . .

et ’s These units are indistinguishable

L from one another.

Job-Order
The flow of units in a Costing Vs.
process costing system is 1 Process Costing
more or less continuous. - Differences
Differences
 Job-Costing and Process-Costing Systems
Main Differentiation

Job-costing Process-costing
system system

Distinct units Masses of identical

of a product or similar units of
or service a product or service
4-7
Examples of Job Costing and Process Costing in the
Service, Merchandising, and Manufacturing Sectors
 Cost Flows in a Manufacturing Firm

Manufacturing Costs Balance Sheet

Unused
DM DM Inv.
Used
DL Used WIP
Unfinished
WIP Inv.

e d F in is
MOH pl i hed FG Inv.
Ap

Sales
- COGS Sold

Income = Gross Margin

Statement
- S&A Selling & Administrative
Expense

= Net Income
 Job-Order Costing
Job 100

DM DL Cost of Goods
Finished Sold
MOH Job 101
Goods

Job 102

Work in Process Finished Goods Cost of Goods Sold

 Process Costing System
Process A

DM
Process B
DL
MOH
Finished Cost of Goods
Process C Goods Sold
 Flow of Documents in a Job-Order Costing System

A sales order is prepared as

Sales Order
a basis for issuing a . . .
A production order initiates
work on a job, whereby Production Order
costs are charged through:

Materials
Direct Labor Predetermined
Requisition
Time Ticket Overhead Rates
Form

Job Cost
Sheet
 Direct
Materials

Direct Work-in- Finished Cost-of

Labor Process Goods Goods Sold

Mfg.
Overhead
 Direct
Materials

Direct Work-in- Finished Cost-of

Labor Process Goods Goods Sold

Mfg.
Overhead
 How About the Manufacturing OH?

Direct
Materials

Direct Work-in- Finished Cost-of

Labor Process Goods Goods Sold

Mfg.
Overhead
 Cost Assignment Dilemma

Direct
Materials

Traceable
Mfg. Process Unit Cost
Direct
(Work in for Finished
Labor
Process)
Goods

Assigned
Problem Overhead

Costs must be assigned using some activity

base and a predetermined overhead rate
(POR)
 Cost Assignment Dilemma
Direct
Materials

Traceable
Mfg. Process Unit Cost
Direct
(Work in for Finished
Labor
Process)
Goods

Assigned
Problem Overhead
Solution?

Estimated Overhead
Rate= -------------------------------------------
Estimated Units in Activity Base
Simplify Why Timeliness
Record- 2 1
keeping
Allocate?

Avoid
Seasonal
Factors
Selecting an Allocation Base

Possible Criterion: Cause- POR

Drivers and-Effect
Relationship

Units produced Choice of

activity base
Direct Labor Hours used in the
Direct Labor $
calculation of
the
Machine Hours Predetermined
Overhead Rate
Direct Materials
 Basic Concept of Applied Overhead

Applied overhead = Overhead rate x Actual production activity

Two points to consider in

the application of MOH

 Applied overhead is the basis for computing per-

unit overhead cost.
 Applied overhead is rarely equal to a period's
actual overhead costs.
 Summary of Overhead Concepts

Estimated The amount of

Overhead Cost estimated overhead
costs.

The amount of
Actual overhead costs
Overhead Cost Difference
actually incurred. equals
Under- or Over-
The amount of applied
Applied Overhead.
Overhead Cost overhead costs
applied to WIP.