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# COST ACCOUNTING NORMAL JOB COSTING

## Types of Costing Systems

Job Costing System the cost object is a unit or multiple units of a distinct product or service called a job. Process Costing System the cost object is masses of identical or similar units of a product or service.

## Job Costing System

Actual Costing

Traces direct costs to a cost object by using the actual direct cost-rates times the actual quantities of the direct-cost inputs. Traces direct costs to a cost object by using the actual directcost rates times the actual quantities of the direct cost-inputs and that allocates indirect cost based on the budgeted indirect-cost rates times the actual quantities of the costallocation bases.

Normal Costing

## Job Costing System

Actual Costing Direct Costs Actual Direct Cost Rates x Actual Quantities of Direct Cost Inputs Actual Indirect Cost Rates x Actual Quantities of Cost Allocation Bases Normal costing Actual Direct Cost Rates x Actual Quantities of Direct Cost Inputs Budgeted Indirect Cost Rates x Actual Quantities of Cost Allocation Bases

Indirect Costs

## General Approach To Normal Job Costing

Step1

: Identify the Job That is Chosen Cost Object Step 2 : Identify the Direct Cost of the Object Step 3 : Select the Cost-Allocation Bases To Use For Allocating Indirect Costs to the Job Step 4 : identify the Indirect Costs Associated with Each Cost-Allocation Base

## General Approach To Normal Job Costing

Step5

: Compute the Rate per Unit of Each CostAllocation Base Used to Allocate Indirect Costs to the Job Step 6 : Compute the indirect costs Allocated To The Job Step 7 : Compute the Total Cost of the job by Adding All Direct and Indirect Costs Assigned To The Job

## Time period Used To Compute Indirect Cost Rates

There are two reasons for using longer periods, such as year, to calculate indirect cost rates. 1. The numerator reason(indirect-cost pool) : The shorter the period, the greater the influence of seasonal patterns on the amount of costs. 2. The denominator reason(quantity of the cost allocation base) : Some indirect costs may be variable each month with respect to the cost allocation base(for example, supplies).

## Budgeted Indirect Costs and End-ofAccounting Year Adjustments

Because of the numerator and denominator reasons, we do not expect actual overhead costs incurred each month to equal overhead costs allocated each month. Underallocated Indirect Costs occur when the allocated amount of indirect costs in an accounting period is less than the actual(incurred) amount. Overallocated Indirect Costs occur when the allocated amount of indirect costs in an accounting period is greater than the actual(incurred) amount.

## Budgeted Indirect Costs and End-ofAccounting Year Adjustments (Contd)

There

are three main approaches to accounting for the underallocated or overallocated overhead caused by underestimated or overestimated the quantity of cost allocation base. These are : 1. Adjusted Allocation-Rate Approach 2. Proration Approach 3. Write-off to Cost of Goods Sold Approach

Restates

all overhead entries in the general ledger and subsidiary ledgers using actual rates rather than budgeted cost rates. Yields the benefits of both the timeliness and convenience of normal costing during the year and the accuracy of actual costing at year-end.

2. Proration Approach

underallocated overhead or overallocated overhead among ending work in process, finished goods, and cost of goods sold. Based on ending balances is frequently justified as being an expedient way of approximating the moreaccurate results from using indirect costs allocated.

## 3. Write-Off to Cost of Goods Sold Approach

The

total under or overallocated overhead is included in this years Cost of Goods Sold.

## Example: Allocation of Costs (Direct Method)

SERVICE DEPARTMENTS
Department X, Building and Ground Maintenance
Total Budgeted Costs Allocated To Producing Departments A and B Balance after Allocation Factory Overhead Application Rates (per direct labor hour)

PRODUCING DEPARTMENTS
Department A, Machinery Department B, Assembly

\$10,000 (10,000)

\$7,500

(7,500) \$ 0 \$ 0

\$24.58 (5)

\$57.21 (6)

Allocation

## Square Feet x Rate Per Square Foot

(1)To Department A, Machinery (2)To Department B, Assembly Total

(1,000 (3,000

x \$2.50) x 2.50)

Allocation

## of Department Y, General Factory Administration:

Total Labor Hours x Rate Per Total Labor Hours (3)To Department A, Machinery (4)To Department B, Assembly Total

## \$5,250 (3) 2,250 (4) \$7,500

(2,800 (1,200

x \$1.875) x 1.875)

## Allocation of Costs (Direct Method) Contd

Factory

Overhead Application rate (on the basis of direct labor hours) for producing departments
Total Cost After Allocation / Direct Labor Hours

\$24.58/dlh

(44,250

/ 1,800)

\$57.21/dlh

(54,430

950)

## Example: Allocation of Actual Service Department Costs To Producing Departments (Contd)

Total

Actual Costs
\$11,000

Service Departments: Department X Building and Ground Maintenance Department Y General Factory Administration Producing Departments : Department A - Machinery Department B - Assembly

7,900

38,400 43,700

## Example: Allocation of Actual Service Department Costs To Producing Departments (Contd)

DEPARTMENT
X Building and Ground Maintenance Y General Factory Administration A Machinery B Assembly Total

Information
ACTUAL DIRECT LABOR HOURS ACTUAL SQUARE FEET ACTUAL TOTAL LABOR HOURS

Information
\$41,786*

## Factory overhead control - machinery

\$38,400 3,667 5,267 47,334

## Example: Allocation of Actual Service Department Costs To Producing Departments (Contd)

Information
*57.21/DLH x 1,000 actual DLH

## Example : Allocation of Actual Service Department Costs To Producing Departments(Contd)

Information
General Factory administration Cost Control \$7,900

## Example : Allocation of Actual Service Department Costs To Producing Departments(Contd)

SERVICE DEPARTMENTS
Department X, Building and Ground Maintenance
Total Actual Costs Allocated To Producing Departments A and B Balance after Allocation

PRODUCING DEPARTMENTS
Department A, Machinery Department B, Assembly

\$11,000 (11,000)

\$7,900 (7,900)

Allocation

## of Department X, Building and Ground Maintenance :

Square Feet x Rate Per Square Foot

(1,300 (2,600

x \$2.82) x 2.82)

Allocation

## Total Labor Hour x Rate Per Total Labor hours

(3)To Department A, Machinery (4)To Department B, Assembly Total

(3,000 (1,500

x \$1.75) x 1.75)

The

## Computation of under or overapplied factory overhead as follows:

MACHINERY ASSEMBLY \$53,666 \$47,334

End of period balance in factory overhead control after allocation End of period balance in factory overhead applied Underapplied factory overhead Overapplied factory overhead

41,786 5,548

57,210

3,544

The

## recording of underapplied factory overhead :

Factory overhead applied machinery.............. 41,786 Underapplied factory overhead machinery... 5,548 Factory overhead control machinery................ 47,334 (\$38,400 + \$3,667 + \$5,267 = \$47,334)

The

## recording of overapplied factory overhead :

3,544

Factory overhead applied assembly.............. 57,210 Overapplied factory overhead assembly... Factory overhead control assembly................ 53,666 (\$43,700 + \$7,333 + \$2,633 = \$53,666)

Accounting For the Difference Between Applied and Actual Factory Overhead
Assuming

## that we have the following information : Units sold.................................................... 1,000

Type A.... 750 & Type B..... 250

## Units in finished goods inventory............ 200

Type A.... 150 & Type B..... 50

## Units in Work-In process Inventory.........

Accounting For the Difference Between Applied and Actual Factory Overhead(Contd)
Prorating

## the underapplied factory overhead cost

DOLLARS PERCENTAG E of TOTAL 62,5% 12,5% PRORATION of \$5,548 \$3,467.5 693.5

\$5,548:
Cost of goods sold (750x \$24,58/dlh x 0.9dlh/unit) TA (250x \$24,58/dlh x 1.3dlh/unit) TB Finished Goods Inventory (150 x 24,58/dlh x 0.9dlh/unit) TA (50 x 24,58/dlh x 1.3dlh/unit) TB Work-In-Process Inventory (300x 24,58/dlh x 0.9dlh/unit) TA (100x 24,58/dlh x 1.3dlh/unit) TB TOTAL

\$24,580 4,916

9,832

25%

1,387

\$39,328

100%

\$5,548

Accounting For the Difference Between Applied and Actual Factory Overhead(Contd)

## After proration of underapplied factory overhead cost \$5,548 to machinery department:

BEFORE PRORATION PRORATION of \$5,548
\$3,467.5

AFTER PRORATION
\$28,047.5

\$24,580

## Finished Goods Inventory (150 x 24,58/dlh x 0.9dlh/unit) TA (50 x 24,58/dlh x 1.3dlh/unit) TB

Work-In-Process Inventory (300x 24,58/dlh x 0.9dlh/unit) TA (100x 24,58/dlh x 1.3dlh/unit) TB TOTAL

4,916

693.5

5609.5

9,832

1,387

11,219

\$39,328

\$5,548

\$44,876

Accounting For the Difference Between Applied and Actual Factory Overhead(Contd)
Prorating

## the overapplied factory overhead cost

DOLLARS PERCENTAGE of TOTAL 62,5% 12,5% PRORATION of \$3,544 \$2,215 443

\$3,544:
Cost of goods sold (750x \$24,58/dlh x 0.9dlh/unit) TA (250x \$24,58/dlh x 1.3dlh/unit) TB Finished Goods Inventory (150 x 24,58/dlh x 0.9dlh/unit) TA (50 x 24,58/dlh x 1.3dlh/unit) TB

\$24,580 4,916

## Work-In-Process Inventory (300x 24,58/dlh x 0.9dlh/unit) TA (100x 24,58/dlh x 1.3dlh/unit) TB

9,832

25%

886

TOTAL

\$39,328

100%

\$3,544

Accounting For the Difference Between Applied and Actual Factory Overhead(Contd)
So

## after proration of overapplied factory overhead cost \$3,544 to assembly department:

BEFORE PRORATION PRORATION of \$3,544 \$2,215 443 AFTER PRORATION \$22,365 4,473 \$24,580 4,916

Cost of goods sold (750x \$24,58/dlh x 0.9dlh/unit) TA (250x \$24,58/dlh x 1.3dlh/unit) TB Finished Goods Inventory (150 x 24,58/dlh x 0.9dlh/unit) TA (50 x 24,58/dlh x 1.3dlh/unit) TB

9,832

886

8,946

TOTAL

\$39,328

\$3,544

\$35,784

## Example : Allocation of Actual Service Department Costs To Producing Departments(Contd)

Information
Factory overhead applied - machinery \$41,786* 5,548** 47,334
* 24.58/DLH x 1,700 actual DLH ** Proration of Underapplied cost

## Factory overhead control - machinery

\$38,400 3,667 5,267 47,334