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Chapter 6

COMM-2016EL Chapter Notes - Chapter 6: Cost Driver, Board Foot, Print Job


Department
Commerce and Administration
Course Code
COMM-2016EL
Professor
Kayla Levesque
Chapter
6

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Chapter 6 Job Costig Systes
Distinction Between Job Costing & Process Costing
Job Costing the method of allocating costs to products that are readily identified by individual units or
batches, each of which receives varying degrees of attention and skill
Used whenever the cost object is a distinct unit or batch (ex. construction, printing, furniture, etc.)
Breadth of the denominator is small (one painting, one special machine, one print job)
Any item that is custom-made and is unique will require the accountants to use “job costing”
Process Costing the method of allocating costs to products by averaging costs over large numbers of nearly
identical products
Used for mass produced objects (ex. nails, soup cans, paper clips, etc.)
Breadth of the denominator is large (thousands of kilograms, litres, or board feet)
Large quantities of identical units are costed using “process costing”
The most important point is that product costing is an averaging process. The unit cost used for inventory
purposes is the result of taking some accumulated cost that has been allocated and dividing it by some measure
of production
Job costing and process costing are extremes along a continuum of potential costing systems
Illustration of Job-Order Costing
BASIC RECORDS
Job-Cost Record (or Sheet/Order) a document that shows all costs for a particular product, service, or batch
of products. As each job begins, a job-cost record is prepared. As units are worked on, entries are made on the
record
A file of these records for partially completed jobs provides supporting details for the Work-in-Progress
Inventory account (WIP)
A file of completed job-cost records comprises the Finished Goods Inventory account
The job-cost record summarizes information contained on source documents such as:
Materials Requisitions records of materials issues to particular jobs
Labour Time Tickets the record of the time a particular direct labourer spends on each job
Three classes of costs are applied to the units as they pass through the departments:
Material requisitions are the source of direct material costs
Time tickets provide direct labour costs
Budgeted overhead rates are used to apply factory overhead to products
SUMMARY OF TRANSACTIONS
The costs of direct material used, direct labour, and factory overhead applied to products are brought into work-
in process… In turn, the cost of completed goods is transferred from work-in-progress to finished goods… As
goods are sold, their costs become expenses in the form of COGS
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Accounting for Factory Overhead
Few companies wait until the actual factory overhead is finally known before computing the cost of products.
Instead, they compute a budgeted (pre-determined) overhead rate at the beginning of the fiscal year and use it to
apply overhead costs as products are manufactured
Most managers want a close approximation of the costs of various products continuously, not just at the end of a
year. Managers desire those costs for various ongoing uses, including:
Which products to emphasize or de-emphasize
Pricing products
Producing interim financial statements
Managing inventories
BUDGETED OVERHEAD APPLICATION RATES
The following steps summarize how to account for factory overhead:
1. Select one or more cost drivers to serve as a bade for applying overhead costs
o The cost driver should be an activity that is the common denominator for systematically relating
a cost or group of costs, such as factory overhead, with products
o The cost driver or drivers should be the best available measure of the cause-effect relationships
between overhead costs and production volume
2. Prepare a factory overhead budget for the planning period, ordinarily a year… The 2 key items are
budgeted overhead and budgeted volume of the cost driver
3. Compute the budgeted factory overhead rate, which is the total budgeted overhead divided by the
budgeted cost-driver activity
o There could be a separate budgeted overhead rate for each cost component of the total overhead
Budgeted Factory Overhead Rate = Total Budgeted Overhead / Budgeted Cost-Driver Activity
4. Obtain actual cost-driver data (such as machine-hours) as the year unfolds
5. Apply the budgeted overhead to the jobs by multiplying the budgeted rate by the actual cost-driver data
6. At the end of the year, account for any differences between the amount of overhead actually incurred
and overhead applied to products
CHOOSING COST DRIVERS
Factory overhead is a conglomeration of manufacturing costs that, unlike direct material or direct labour, cannot
conveniently be applied on an individual job basis, but such overhead is an integral part of a product’s total cost
As we have noted earlier in the text, no one cost driver is right for all situations, the goal is to find a driver that
best links cause and effect
For instance, the cost of labour may be used as a base OR the hours of labour depending on the situation
(ex. if the hourly labour rates differ greatly for individuals performing identical tasks, hours of labour
might be a better base)
Sometimes, however, direct labour cost is the best overhead cost driver even if wage rates vary within a
department
The selected cost driver or drivers should be the ones that cause most of the overhead costs
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