MPA 602: Cost and

Managerial Accounting

Cost Accounting Methods - Job Order

Costing, ABC, Process Costing
Building-Block Concepts of Costing Systems

Cost object

Direct costs
of a cost object
Indirect costs
of a cost object
4-2
 Cost Assignment

Direct Cost Tracing

Costs
Cost
Object
Indirect Cost Allocation
Costs
4-3
Cost pool

Cost allocation base

4-4
Job-Costing and
Process-Costing Systems

Job-costing Process-costing
system system

Distinct units Masses of identical

of a product or similar units of
or service a product or service
4-5
• Job order costing or job costing is a system for
assigning  manufacturing cost to an individual product
or batches of products. Generally, the job order costing
system is used only when the products manufactured
are sufficiently different from each other.
Seven-Step Approach to Job Costing

Step 1:
Identify the chosen cost object.
Step 2:
Identify the direct costs of the job.
Step 3:
Select the cost-allocation bases.
Step 4:
Identify the indirect costs.
4-7
Seven-Step Approach to Job Costing

Step 5:
Compute the rate per unit.
Step 6:
Compute the indirect costs.
Step 7:
Compute the total cost of the job.

4-8
General Approach to Job Costing

A manufacturing company is planning to sell

a batch of 25 special machines (Job 650) to a
retailer for $114,800.
Step 1:
The cost object is Job 650.
Step 2:
Direct costs are: Direct materials = $50,000
Direct manufacturing labor = $19,000
4-9
 Step 3:
The cost allocation base is machine-hours.
Job 650 used 500 machine-hours.
2,480 machine-hours were used by all jobs.
Step 4:
Manufacturing overhead costs were $65,100.

4 - 10
 Step 5:
Actual indirect cost rate is
$65,100 ÷ 2,480 = $26.25 per machine-hour.
Step 6:
$26.25 per machine-hour × 500 hours = $13,125

4 - 11
 Step 7:
Direct materials $50,000
Direct labor 19,000
Factory overhead 13,125
Total $82,125

4 - 12
General Approach to Job Costing

What is the gross margin of this job?

Revenues $114,800
Cost of goods sold 82,125
Gross margin $ 32,675
What is the gross margin percentage?
$32,675 ÷ $114,800 = 28.5%

4 - 13
Source Documents

Job cost record

Materials requisition record

Labor time record

4 - 14
Method of Valuation

Actual costing is a system that uses actual

costs to determine the cost of individual jobs.
It allocates indirect costs based on the actual
indirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).

4 - 15
Method of Valuation

Normal costing is a method that allocates

indirect costs based on the budgeted
indirect-cost rate(s) times the actual
quantity of the cost allocation base(s).

4 - 16
Method of Valuation
Cost Actual Normal Standard
accumulation
system
Job order Actual DM Actual DM Standard DM
Actual DL Actual DL Standard DL
Actual Applied O/H Applied O/H
O/H (using (using
predetermined predetermine
rate x actual d rate x std.
input) input)
Normal Costing

Assume that the manufacturing company budgets

$60,000 for total manufacturing overhead costs
and 2,400 machine-hours.
What is the budgeted indirect-cost rate?
$60,000 ÷ 2,400 = $25 per hour
How much indirect cost was allocated to Job 650?
500 machine-hours × $25 = $12,500
4 - 18
Normal Costing

What is the cost of Job 650 under normal costing?

Direct materials $50,000
Direct labor 19,000
Factory overhead 12,500
Total $81,500

4 - 19
Flow of costs in a job costing system

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods

4 - 20
Transactions

$80,000 worth of materials (direct and

indirect) were purchased on credit.
Materials Accounts Payable
Control Control
1. 80,000 1. 80,000

4 - 21
Transactions

Materials costing $75,000 were sent to the

manufacturing plant floor.
$50,000 were issued to Job No. 650 and
$10,000 to Job 651.
$15,000 of indirect materials were issued.
What is the journal entry?

4 - 22
Transactions

Work in Process Control:

Job No. 650 50,000
Job No. 651 10,000
Factory Overhead Control 15,000
Materials Control 75,000

4 - 23
Transactions

Materials Work in Process

Control Control
1. 80,000 2. 75,000 2. 60,000

Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
4 - 24
Transactions

Total manufacturing payroll for

the period was $27,000.
Job No. 650 incurred direct labor costs
of $19,000 and Job No. 651 incurred
direct labor costs of $3,000.
$5,000 of indirect labor was also incurred.
What is the journal entry?
4 - 25
Transactions

Work in Process Control:

Job No. 650 19,000
Job No. 651 3,000
Manufacturing Overhead Control 5,000
Wages Payable 27,000

4 - 26
Transactions
Wages Payable Work in Process
Control Control
3. 27,000 2. 60,000
3. 22,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
3. 5,000 3. 19,000
4 - 27
Transactions

Wages payable were paid.

Wages Payable Control 27,000
Cash Control 27,000

Wages Payable Cash

Control Control
4. 27,000 3. 27,000 4. 27,000

4 - 28
Transactions

Assume that depreciation for the

period is $26,000.
Other manufacturing overhead
incurred amounted to $19,100.
What is the journal entry?

4 - 29
Transactions

Manufacturing Overhead Control 45,100

Accumulated Depreciation
Control 26,000
Various Accounts 19,100
What is the balance of the Manufacturing
Overhead Control account?

4 - 30
Transactions

$62,000 of overhead was allocated to the

various jobs of which $12,500 went to Job 650.
Work in Process Control 62,000
Manufacturing Overhead Control 62,000
What are the balances of the control accounts?

4 - 31
Transactions

Manufacturing Overhead Work in Process

Control Control
2. 15,000 6. 62,000 2. 60,000
3. 5,000 3. 22,000
5. 45,100 6. 62,000
Bal. 3,100 Bal. 144,000

4 - 32
Transactions

The cost of Job 650 is:

Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500

4 - 33
Transactions

Jobs costing $104,000 were completed and

transferred to finished goods, including Job 650.
What effect does this have on the control accounts?

4 - 34
Transactions

Work in Process Finished Goods

Control Control
2. 60,000 7. 104,000 7. 104,000
3. 22,000
6. 62,000
Bal. 40,000

4 - 35
Transactions

Job 650 was sold for $114,800.

What is the journal entry?
Accounts Receivable Control 114,800
Revenues 114,800
Cost of Goods Sold 81,500
Finished Goods Control 81,500

4 - 36
Transactions

What is the balance in the Finished Goods

Control account?
$104,000 – $81,500 = $22,500
Assume that marketing and administrative
salaries were $9,000 and $10,000.
What is the journal entry?

4 - 37
Transactions

Marketing and Administrative Costs 19,000

Salaries Payable Control 19,000

4 - 38
Transactions

Direct Materials Used $60,000

+ Direct Labor and Overhead $84,000

– Cost of Goods Manufactured $104,000

= Ending WIP Inventory $40,000

4 - 39
Transactions

Cost of Goods Manufactured $104,000

– Ending Finished Goods Inventory $22,500

= Cost of Goods Sold $81,500

4 - 40
End-Of-Period Adjustments

Manufacturing Manufacturing
Overhead Control Overhead Applied
Bal. 65,100 Bal. 62,000

Underallocated indirect costs

Overallocated indirect costs

4 - 41
End-Of-Period Adjustments

How was the allocated overhead determined?

2,480 machine-hours × $25 budgeted rate = $62,000
$65,100 – $62,000 = $3,100 (underallocated)

4 - 42
End-Of-Period Adjustments

Actual manufacturing overhead costs of $65,100

are more than the budgeted amount of $60,000.
Actual machine-hours of 2,480 are more than
the budgeted amount of 2,400 hours.

4 - 43
End-Of-Period Adjustments

Approaches to disposing underallocated

or overallocated overhead:
1. Adjusted allocation rate approach
2. Proration approaches
3. Immediate write-off to Cost of Goods
Sold approach

4 - 44
Adjusted Allocation
Rate Approach

Actual manufacturing overhead ($65,100)

exceeds manufacturing overhead allocated
($62,000) by 5%.
3,100 ÷ 62,000 = 5%
Actual manufacturing overhead rate is $26.25
per machine-hour ($65,100 ÷ 2,480) rather
than the budgeted $25.00.
4 - 45
Adjusted Allocation
Rate Approach
The manufacturing company could increase
the manufacturing overhead allocated to
each job by 5%.
Manufacturing overhead allocated to Job 650
under normal costing is $12,500.
$12,500 × 5% = $625
$12,500 + $625 = $13,125, which equals
actual manufacturing overhead.
4 - 46
Proration Approach

Basis to prorate under- or overallocated overhead:

A– total amount of manufacturing overhead
allocated (before proration)
B– ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold

4 - 47
Proration Approach “A”

Assume the following manufacturing

overhead component of year-end
balances (before proration):
Work in Process $23,500 38%
Finished Goods 26,000 42%
Cost of Goods Sold 12,500 20%
Total $62,000100%
4 - 48
Proration Approach “A”

Manufacturing Overhead Finished Goods

65,100 62,000 22,500
3,100 1,302 0
23,802 Cost of Goods Sold Work in
Process 81,500 40,000
620
1,178 82,120 41,178

4 - 49
Proration Approach “B”

Ending balances of Work in Process,

Finished Goods, and Cost of Goods Sold
Work in Process $ 40,000 28%
Finished Goods 22,500 16%
Cost of Goods Sold 81,500 56%
Total $144,000 100%

4 - 50
Proration Approach “B”

Manufacturing Overhead Finished Goods

65,100 62,000 22,500
3,100 496 0
22,996 Cost of Goods Sold Work in
Process 81,500 40,000
1,736
868 83,236 40,868

4 - 51
Immediate Write-off to Cost of
Goods Sold Approach
Manufacturing Overhead
65,100 62,000
3,100 0

Cost of Goods Sold

81,500
3,100
84,600

4 - 52
Multiple Overhead Cost Pools

Activity based Costing

ABC is a cost accounting system that focuses on the various
activities performed in an organization and collects costs on
the basis of the underlying nature and extent of those
activities. This costing method focuses on attaching costs to
products and services based on the activities conducted to
produce, perform, distribute or support those products and
services.
Recognizing several level of costs that exist,
accumulating costs into related cost pools and
using multiple cost drivers to assign costs to
products and services are the three fundamental
components of ABC.
 Activity Analysis

An activity is defined as a repetitive action

performed in fulfillment of business functions.
Activities are either value-added or non-value-
added.
 Cost Driver Analysis

• Unit-level cost - resources sacrificed on activities

performed on each individual unit of a product
or service e.g. energy, machine dep. Repair etc.
• Batch-level cost - resources sacrificed on
activities that are related to a group of units of
products/services e.g. purchase order, setup,
inspection etc.
• Product-sustaining cost - resources sacrificed on
activities undertaken to support individual
product/service e.g. engineering change order, design
etc.
• Facility-sustaining cost - resources sacrificed on
activities that cannot be traced to individual
product/service but support the organization as a
whole e.g. building dep. Division manager’s salary,
advertising etc.
 Process Costing

• Process costing systems are used for costing

like or similar units o products which are often
mass produced. This units differ from the
custom-made or unique products costed under
job costing systems.
In a process costing system, the unit cost of a
product or service is obtained by assigning total
costs to many identical or similar units. In a
manufacturing process costing setting, each unit
is assumed to receive the same amount of direct
materials costs, direct labor costs & indirect
manufacturing costs. Unit costs are then
computed by dividing total costs by the number
of units.
The principal difference between process
costing and job costing is the extent of
averaging used to compute unit costs of
products or services. Process costing systems
separate costs into cost categories according to
the timing of when costs are introduced into
the process.
 Physical units & Equivalent units

• In process costing we tracks the physical units of

output. Where did the units come from? Where did the
units go? All physical units are not uniformly
completed, so we determine the equivalent units.
Equivalent units measure the output in terms of the
quantities of each of the factors of production that have
been used by the units i.e. an equivalent unit is a
collection of production factors necessary to produce
one complete physical unit of output.
 Steps in Process Costing

• Summaries the flow of physical units of output

• Compute output in terms of equivalent units
• Compute equivalent unit costs
• Summaries total costs to account for
• Assign total costs to units completed & to units in ending work in
process.
 Weighted-average method
The weighted average costing method focuses on
the total costs and total equivalent units
completed to date; no distinction is made
between work completed during the preceding
period & work completed during the current
period.
 FIFO method
The FIFO process costing method computes units
costs by confining equivalent units to work done
during the current period only; costs of the
current period are separately identified so that the
unit costs are related only to the current period’s
work.
Data for the assembly department
• Physical Units for January 2019
• Work in process, beginning inventory (January 1) 0 units
• Started during January 400 units
• Completed and transferred out during January 400 units
• Work in process, ending inventory (January 31) 0 units
• Total Costs for January 2019
• Direct material costs added during January Tk.32,000
• Conversion costs added during January Tk.24,000
• Total assembly department costs added during January Tk.56,000
• Physical Units for February 2019
• Work in process, beginning inventory (February 1) 0 units
• Started during February 400 units
• Completed and transferred out during February 175 units
• Work in process, ending inventory (60%) 225 units
• Total Costs for February 2019
• Direct material costs added during February Tk.32,000
• Conversion costs added during February Tk.18,600
• Total assembly department costs added during February Tk.50,600
• Physical Units for March 2019
• Work in process, beginning inventory (60%) 225 units
• Started during March 275 units
• Completed and transferred out during March 400 units
• Work in process, ending inventory (50%) 100 units
• Total Costs for March 2019
• Work in process cost – Direct material Tk.18000, conversion Tk.8100
• Direct material costs added during March Tk.19,800
• Conversion costs added during March Tk.16,380
Standard Costs and Process Costing
 Transferred In Costs in Process Costing
• Transferred-in costs (previous
department costs) are costs incurred in
a previous department that are carried
forward as part of the product’s cost as
it moves to a subsequent department
for processing.
Process Costing with Spoilage,
Rework and Scrap
 Spoilage
Unacceptable units of production
that are discarded or sold for net
disposal proceeds. Partially or fully
completed units may be spoiled.
 Normal Spoilage

It is the spoilage that arises under efficient

operating conditions i.e. it is an inherent result
of the particular process. Normal spoilage is
planned spoilage. Costs of normal spoilage are
viewed as a part of the costs of good units
produced. It is the average spoilage necessary
in the production process & will be included as
an inventoriable cost.
 Abnormal Spoilage

Abnormal spoilage is the spoilage that is not

expected to arise under efficient operating
conditions i.e. it is not an inherent part of the
selected production process most abnormal
spoilage is usually regarded as controllable.
Costs of abnormal are the cost of inferior
products that should be written off as losses of
the accounting period in which detection occurs.
Chipcity is a fast-growing manufacturer of computer chips. Direct materials are added at the start of the production
process. Conversion costs are added evenly during the process. Some units of this product are spoiled as a result of
defects not detectable before inspection of finished goods. Spoiled units are disposed of at zero net disposal value.
Chipcity uses the weighted-average method of process costing.
Summary data for September 2017 are as follows:
Physical Units
(Computer Chips) DirectMaterials ConversionCosts
Work in process, beginning inventory (September 1) 600 Tk. 96,000 Tk. 15,300
Degree of completion of beginning work in process 100% 30%
Started during September 2,550
Good units completed and transferred out during September 2,100
Work in process, ending inventory (September 30) 450
Degree of completion of ending work in process 100% 40%
Total costs added during September Tk.567,000 Tk.230,400
Normal spoilage as a percentage of good units 15%
Degree of completion of normal spoilage 100% 100%
Degree of completion of abnormal spoilage 100% 100%
 Reworked units
Unacceptable units of production that are
subsequently reworked and sold as acceptable
finished goods. Such units may be sold through
regular marketing channels or alternative channels.
 Scrap

Product that has minimal (frequently zero)

sales value compared with the sales value of
the main or joint products. Scrap may be
either sold, disposed of or reused.
Illustration 1: Opening WIP (25%) 500 units
Units started during the period 4000 units
Closing WIP (80%) 600 units
Direct material added at the beginning and the conversion cost
incurred evenly throughout the process. Inspection point is at 60%
level. Units that fail the inspection are returned to the 20% complete
point to go through the process again as rework. Normal rework is
considered to be 2% of the units that pass inspection. Units inspected
for rework 4650 units.
Costs: Opening WIP: Direct material Tk.3000 and conversion cost
Tk.1000.
Current period costs incurred for direct materials Tk.20625 and
conversion cost
Tk.33987.20
Illustration 2: Opening WIP (25%) 500 units
Units started during the period 4000 units
Closing WIP (80%) 600 units
Direct material added at the beginning and the conversion cost incurred evenly
throughout the process. Inspection point is at 60% level. Units that fail the
inspection are returned to the 20% complete point to go through the process again
as rework. Normal rework is considered to be 2% of the units that pass inspection.
Units inspected for rework 4650 units. Units are inspected again when they are at
75% complete point. Units failing this inspection are thrown away as spoilage.
Normal spoilage is 5% of the units inspected. 250 units were rejected as spoiled.
Costs: Opening WIP: Direct material Tk.3000 and conversion cost Tk.1000.
Current period costs incurred for direct materials Tk.20625 and conversion cost
Tk.33987.20
Illustration 3: Opening WIP (60%) 12000 units
Units started during the period 73000 units
Closing WIP (90%) 8000 units
Direct material added at the beginning and the conversion cost incurred
evenly throughout the process. The first inspection point is at 20% level.
Management expects 10% of the units inspected to be discarded. During the
period 9000 units were discarded. Units are inspected again at 75% level.
Rejected units are returned to the 50% complete point to go through the
process again as rework. Normal rework is considered to be 15% of the units
inspected. During the period 95000 units were inspected for rework.
Costs: Opening WIP: Direct material Tk50000 and conversion cost Tk.70000.
Current period costs incurred for direct materials Tk.375000 and
conversion cost Tk.706625.
Illustration 4: Opening WIP (40%) 1500 units
Units started during the period 40000 units
Closing WIP (70%) 2000 units
Direct material added at the beginning and the conversion cost incurred
evenly throughout the process. Units are inspected at 85% level.
Management considered 20% of units inspected to fail to meet
specification. Half of these units can usually be reworked. The other half
must be discarded. During the period 3500 units were discarded and
4200 units were reworked.
Costs: Opening WIP: Direct material Tk.4600 and conversion cost
Tk.2200.
Current period costs incurred for direct materials Tk.130275 and
conversion cost Tk.167375. It costs another Tk.14910 to operate the
rework station.