COMMERCE 2AB3 Lecture Notes - Lecture 4: Pro Rata, Activity-Based Costing

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CHAPTER 4 – DESIGNING PRODUCT COSTING SYSTEMS
JOB ORDER COSTING
PRODUCT COSTING SYSTEMS
Ch 4: Job Order Costing – Normal Costing (MIDTERM 2)
Unique Products: each product is different from the next.
Ch 5: Activity Based Costing (MIDTERM 2)
Complex services (Hospitals) - What is the cost of the patient?
Ch 17: Process Costing (FINAL EXAM)
Identical products (Water Bottle), many processes
Same material, labour, and overhead costs.
Ch 18: Process Costing + Spoilage + Scrap + Rework (FINAL EXAM)
Looking at wastage.
The Difference Between: (Know These 4 Differences – Midterm 2)
Ch 4 - Job Order Costing Ch 17/18 – Process Costing
Unique Product
Use different amounts of DM, DL, MOH
Cost Object: Job (cost of making the oil
change, making a ring)
One WIP per job
Identical Product
Use identical amounts of DM, DL,
MOH
Cost Object: The Process (ex. Creating
the bottle, putting water in it, putting on
label).
One WIP per process
FEBRUARY 12, 2016
Ch 4 - Job Order/Normal/Single-Rate/Plant-Wide-Rate/Traditional Costing
Indirect (Overhead) – cannot be traced to the job (i.e. Electricity), but they have to be charged to
the job.
EX LUNCH:
Person 1 Orders: $25 worth of food. (Premium Product)
Person 2 Orders: $5 worth of food. (Lite Product)
You divide it: $15 per person.
Lite Product Premium Product
Cost $15 $15
Selling Price $16.5 $16.5
With 10% profit
This is called: Product Cost Subsidization (Peanut Butter Costing)
Taking every cost and spreading it across the jobs equally:
This results in one product being over costed and another being under costed, resulting
in over pricing and underpricing respectively, disaster!
You should divide it based on labour hours and machine hours.
Under Normal/Job Order Costing:
The DM on a job is actual, DL spent on the job is also actual. However, OH is applied or
charged or assigned or allocated
Applied OH (What you charge for OH) = Application Rate x Actual Usage of Cost Driver
Application Rate = Total Estimated or Budgeted Overhead
Total Estimated or Budgeted Cost Driver.
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Document Summary

Ch 4: job order costing normal costing (midterm 2) Unique products: each product is different from the next. Ch 18: process costing + spoilage + scrap + rework (final exam) The difference between: (know these 4 differences midterm 2) Use different amounts of dm, dl, moh. Cost object: job (cost of making the oil change, making a ring) Creating the bottle, putting water in it, putting on label). Indirect (overhead) cannot be traced to the job (i. e. electricity), but they have to be charged to the job. Person 1 orders: worth of food. (premium product) Person 2 orders: worth of food. (lite product) This is called: product cost subsidization (peanut butter costing) Taking every cost and spreading it across the jobs equally: This results in one product being over costed and another being under costed, resulting in over pricing and underpricing respectively, disaster! You should divide it based on labour hours and machine hours.

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