ACCOUNTG 331 Lecture 4: Chapter 4

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21 Feb 2017

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Elements of a costing system: a) cost accumulation: job costing and process costing, b) cost measurement: actual costing, normal costing, c) manufacturing overhead allocation using normal costing: volume-based costing and abc costing. Job costing system direct materials, direct labor, and factory overhead designed to specific job or product. Process costing system manufacturing companies continuously product identical products in large quantities. Examples of companies that use job costing system (produced to customer specifications: custom-built house manufacturers, aircraft manufacturers, ship manufacturers, service companies accountants, lawyers, doctors, dentists (each client/patient is a separate job) Examples of companies that use process costing system: mass-producing clothing companies, car manufacturers (sometimes use job costing, computer companies (when purchased in-store) When computers are purchased online, they are customized, and therefore companies use job costing system. In big companies manufacturing overhead includes hundreds or thousands of items: from supervisor salaries to cleaning supplies, normal costing.

Related Questions

Identify each statement as true or false. If false, indicate howto correct the statement.

1. Process cost systems are used to apply costs to similarproducts that are mass-produced in a continuous fashion.
2. A process cost system is used when each finished unit isindistinguishable from another.
3. Companies that produce soft drinks, motion pictures, andcomputers chips would all use process cost accounting.
4. In a process cost system, costs are tracked by individualjobs.
5. Job order costing and process costing track differentmanufacturing costs elements.
6. Both job order costing and process costing account for directmaterials, direct labor, and manufacturing overhead.
7. Costs flow through the accounts in the same basic way for bothjob order costing and process costing.
8. In a process cost system, only one work in process account isused.
9. In a process cost system, costs are summarized in a job costsheet.
10. In a process cost system, the unit cost is total manufacturingcosts for the period divided by the units produced during theperiod.

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AirComp Corporation produces component parts for the aircraftindustry. In prior years, they maintained a job-costing systemconsisting of direct materials and direct labor cost andmanufacturing overhead. Manufacturing overhead was allocated toproduction jobs using a single-indirect cost allocation rate, whichwas $115 per direct labor hour.

For 20x1, the Company decided to change the method of allocatingmanufacturing overhead to production jobs from the single-indirectcost allocation approach to the activity-based costing (âABCâ)indirect cost allocation approach. For purposes of developing theABC allocation rates, AirCompâs cost accounting team prepared thefollowing analysis:

Activity	Cost Driver	Allocation Rate
Material handling	Parts handled	$0.40
Lathe work	No. of lathe turns	$0.20
Milling	Machine hours	$20.00
Grinding	No. of parts ground	$0.80
Testing	No. of units tested	$15.00

For 20x1, AirCompâs cost accountant team prepared the followinganalysis of the direct costs and indirect cost activities for Job100 and Job 200, the only production jobs in process for theperiod:

	Job 100	Job 200
Direct materials cost	$9,700	$59,900
Direct labor cost	$750	$11,250
No. of direct manufacturing labor hours	25	375
No. of parts ground	500	2,000
No. of lathe turns	20,000	60,000
Machine hours	150	1,050
No. of units produced during period (all are tested)	10	200

Required

1.For each job, determine total per unit cost using direct laborhours to allocate manufacturing overhead to each job.

2.For each job, determine total per unit cost using anactivity-based costing approach to allocate manufacturing overheadcost to job.

3.Compare the per unit cost figures for each job computed instep a. and step b., above. Why do the new ABC approach differ fromthe single-indirect cost allocation systems differ in the amount ofthe per unit indirect cost allocated to each job (i.e. what was theimplications of the cost allocation method change on the amount ofper unit cost allocated to each job and what factors caused theobserved changes).

4.How might AirComp Corporation use the information from ABCallocation approach to better manage its business, i.e. what arethe advantages of using an activity-based costing approach?

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Characteristics of Production Process, Cost Measurement

Vince Melders, of EcoScape Company, designs and installs customlawn and garden irrigation systems for homes and businessesthroughout the state. Each job is different, requiring differentmaterials and labor for installing the systems. EcoScape estimatedthe following for the year:

Number of direct labor hours	6,720
Direct labor cost	$67,200
Overhead cost	$50,400

During the year, the following actual amounts wereexperienced:

Number of direct labor hours	6,045
Direct labor incurred	$66,495
Overhead incurred	$50,500

Vince Melders, owner of EcoScape, noticed that the wateringsystems for many houses in a local subdivision had the same layoutand required virtually identical amounts of prime cost. Vince metwith the subdivision builders and offered to install a basicwatering system in each house. The idea was acceptedenthusiastically, so Vince created a new company, IrrigationSpecialties, to handle the subdivision business. In its first threemonths in business, Irrigation Specialties experienced thefollowing:

	June	July	August
Number of systems installed	48	68	88
Direct materials used	$13,248	$18,768	$24,288
Direct labor incurred	$8,832	$12,512	$16,192
Overhead	$7,948.80	$8,758.40	$9,715.20

Required:

1. Should Irrigation Specialties use processcosting or job-order costing?

Job-order costing

2. If Irrigation Specialties uses an actualcosting system, what is the cost of a single system installed inJune? In July? In August? Round your answers to the nearestdollar.

June	$ per system
July	$ per system
August	$ per system

3. Now assume that Irrigation Specialties usesa normal costing system. Estimated overhead for the year is$45,900, and estimated production is 540 watering systems. What isthe predetermined overhead rate per system?

$ per system installed

What is the cost of a single system installed in June? In July?In August?

June	$ per system
July	$ per system
August	$ per system

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ACCOUNTG 331 Lecture 4: Chapter 4

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