ACCT2112 Lecture Notes - Step One, Pro Rata, Finished Good
ONLINE ACCOUNTING LECTURE 2 (WEEK 4)
The main purpose of Week 4 online lecture materials is to assist students in their study on topic on
Job Costing (I). The online lecture materials are organized as follows.
•Lecture Notes: These are notes focus on important concepts/terms and techniques on the lecture
topic: Job Costing
•Lecture Illustration Examples: These are examples which reinforce the important management
accounting concepts and techniques. The lecture illustration examples are designed to clarify the
detailed subject matter and provide you with the practical applications.
•Self-assessment Quiz: Self-assessment quiz, which consists of multiple choice questions, is used to
assess your understanding of the key concepts/terms and techniques. It is a significant aid to your
learning.
The Learning objectives
•Re-visit the basic cost concepts/terms
•Distinguish job costing from process costing
•Distinguish actual costing from normal costing
•The seven-step approach is used to compute direct and indirect costs of a job
•Dispose of underallocated or overallocated manufacturing overhead costs at the end of the fiscal year
Learning Objective 1
Re-visit the basic cost concepts/terms
Because of the complexity of most manufacturing operations, companies need to establish a system to
track costs so they can properly determine product costs. Before moving into the details of these
systems, you should have a grasp of cost concepts/terms.
1A cost object is anything for which a measurement of costs is defined.
2The direct costs of a cost object are costs that are related to the cost object and can be traced to the
cost object in an economically feasible manner.
3The indirect costs of a cost object are costs that cannot be traced to the cost object in a cost-effective
manner and are allocated to the cost object.
4Cost assignment is a general term that includes cost tracing and cost allocation.
5New terms:
A cost pool is a grouping of individual indirect cost items
A cost-allocation base is the driver or activity that is used to allocate indirect costs from the cost pool
to the cost object.
Learning Objective 2
Distinguish job costing from process costing
2.1 Management uses two basic types of costing system to assign costs to products or services.
•A job-costing system, or job-order system, is used by a company that makes a distinct product or
service called a job. The product or service is often a single unit. The job is frequently the cost object.
Costs are accumulated separately for each job or service.
•A process-costing system is used by a company that makes a large number of identical products.
Costs are accumulated by department and divided by the number of units produced to determine the
cost per unit. It is an average cost of all units produced during the period. The cost object is masses of
similar units of a product or service.
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As noted above, a job-costing system provides for the accumulation of costs around an individual job
or order. Each job will differ in terms of the amount of material, labor and overhead costs incurred.
For example, each custom-made furniture (e.g., chair, table) by a furniture maker represents a
separate job. Each custom-made furniture will be different and incur different materials, labor and
overhead costs depending on the work that needs to be done.
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You should note that different raw materials were used and the number of hours put into the two
different jobs were also different.
Process Costing
Process costing is used where a manufacturer produces large volumes of similar products in a
continuous manner. For example, a car manufacturing firm that employ a mass production method. is
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There is a third costing system known as operating costing. This is a hybrid costing system which (1)
assigns direct material costs to individual batches based on job costing approach; and (2)
accumulated conversion costs (i.e. direct labor and overhead costs) by department (or operation
process), which are allocated to all units passing through the department relied on a process
costing approach.
IMPORTANT NOTE:
This unit focuses ONLY on job-costing system
Job-Costing System
The documents associated with job-costing system are:
1The job-cost record (See Exhibit 4-2, Horngren et al., 2015, p. 135) also called job-cost sheet,
records all costs incurred on a particular job. Note that there sections for direct material, direct labor,
and overhead. Click here for Exhibit 4.2 Job Cost Record.pdf.
2The material-requisition record is completed to obtain materials for a particular job from the
material storeroom. It must be completed and signed and forms the basis for the materials entry into
the job-cost record.
3The labor-time sheet is completed by employee to indicate what jobs were worked on. This forms the
basis for the direct labor entry into the job-cost record. Note that this is a separate document form the
clock card which indicates how many hours the employees worked. The labor-time record indicates
what work the employee performed.
4Click here for Exhibit 4.3 Material-Requisition Record & Labor-Time Sheet.pdf .
Learning Objective 3
Distinguish Actual Costing from Normal Costing
Actual costing is a costing system that traces direct costs to a cost object by using actual direct-cost
rates times the actual quantities of the direct-cost inputs. It allocates indirect costs based on the actual
indirect-cost rate times the actual quantities of the cost-allocation bases. An actual indirect-cost rate is
calculated as follows:
Actual indirect cost rate: Actual annual indirect costs ÷ Actual annual quantity of the cost
allocation base
So far, raw material and direct labors can be traced to specific jobs. The final cost component to
assign is manufacturing overheads (i.e., indirect costs). Recall that manufacturing overhead costs are
not directly traced a goods produced. For that reason, an indirect method of assigned overhead costs
to jobs is needed. The basic approach involves assigning overhead to jobs based on some
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characteristic that jobs share in common, such as direct labor hours or direct material costs. The
common characteristic is known as cost allocation base. A budgeted indirect-cost rate is computed as
follows:
Budgeted indirect-cost rate = Budgeted annual indirect costs ÷ Budgeted annual quantity of the
cost allocation base
Using budgeted indirect cost rate gives rise to normal costing. Normal costing is a costing system
that (1) traces direct costs to a cost object by using the actual direct-cost rates times the actual
quantities of the direct-cost inputs and (2) allocates indirect costs based on the budgeted indirect-cost
rates times the actual quantities of the cost-allocation bases.
Click here for Actual Costing vs Normal Costing Methods.pdf
Learning Objective 4
The Seven-Step Approach is Used to Compute Direct and Indirect Costs of a Job
A seven-step approach is used to assign costs to an individual job. This approach is used by
manufacturers, merchandisers, and companies in the service sector.
Step 1: Identify the Job that Is the Chosen Cost Object. The source documents (original
records that support journal entries in an accounting system) such as the job-cost sheet, the material-
requisition record, and the labor- time record assist managers in gathering information about the costs
incurred on a job.
Step 2: Identify the Direct Costs of the Job. Most manufacturing operations have two direct-
cost categories—direct materials and direct manufacturing labor. Direct materials are ordered by
means of a materials requisition. Quantities needed are based upon engineering specifications. As
previously indicated, the labor-time record indicates the amount of time an employee spends on a
particular job.
Step 3: Select the Cost-Allocation Bases to Use for Allocating Indirect Costs to the Job.
Because these costs cannot be traced to the job, they must be allocated in a systematic manner.
Step 4: Identify the Indirect Costs Associated with Each Cost-Allocation Base. Hopefully,
a cause-and-effect relationship can be established between the costs incurred and the cost-allocation
base (or cost driver).
Step 5: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate
Indirect Costs to the Job. Budgeted manufacturing overhead rate = Budgeted manufacturing
overhead costs / Budgeted total quantity of cost allocation base.
Step 6: Compute the Indirect Costs Allocated to the Job. Multiply the actual quantity of
each different allocation base by the indirect cost rate for each allocation base.
Step 7: Compute the Total Cost of the Job by Adding All Direct and Indirect Costs
Assigned to the Job.
You should NOW attempt the Lecture Illustration Example 1.
LECTURE ILLUSTRATION EXAMPLE 1
Crawley Manufacturing Company operates two production departments. Indirect materials and
indirect labour costs for the coming years are expected to be:
Indirect Materials Indirect Labour
Production Department 1 (PD1) $10,000 $12,000
Production Department 2 (PD2) $14,000 $16,000
Heating and lighting expenditure for the same period is budgeted at $9,000 and management has
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