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Chapter 5

Chapter 5


Department
Accounting
Course Code
ACC 410
Professor
Maurizio Di Maio
Chapter
5

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Chapter 5: Job Costing
Product Costs and Cost Flows
Product costs: are costs involved in either making or purchasing a product, and
they are called manufacturing or inventoriable costs
Costs are accumulated on balance sheet as inventory until sale occurs
Example: Direct materials, direct labour
Period costs: are the operating costs that are not part of making or purchasing a
product, such as sales and administrative expenses
costs are expensed as incurred
Service companies provide services or intangible products and thus do not incur
product costs and do not have inventory
Merchandising companies purchase merchandise for resale as a part of their
business operations. They incur merchandise costs, and they may have leftover
inventory (if all the merchandise purchased during the period was not sold by the
end of the accounting period
Manufacturing companies purchase raw materials and components and process
them and make them into finished goods. Therefore, manufacturing companies have
left over inventory in the raw materials account, the work-in-process (partially
finished products) account, and the finished goods account at the end of the
accounting period
What goes into making a product consists of three main components
1)Direct materials that become part of a product (cost object)
2)Direct labour that includes the wages paid to the operator or assembly workers
3)Manufacturing overhead, which includes all indirect expenses that go into
making the product such as utilities, machine amortization, plant insurance,
maintenance and repair, indirect materials, indirect labour etc
Prime cost: Direct materials and direct labour combined
Conversion cost: Direct labour and manufacturing overhead combined
EXHIBIT 5.1 Cost of Goods Sold Calculation for Merchandise Companies (Retail
Stores)
Beginning merchandise inventory + Purchases Ending merchandise inventory = Cost of
goods soldwww.notesolution.com

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EXHIBIT 5.2 Cost of Goods Sold Calculation for Manufacturing Companies
(Factories)
Beginning finished goods inventory + COG manufactured Ending finished goods
inventory = COGS
Cost of Goods Manufactured = 1) Direct materials used + 2) Direct labour + 3)
Manufacturing overhead (indirect expenses such as indirect labour and materials, utilities
and rent for the plant, etc)
To calculate Direct Materials used:
Beginning raw materials + raw materials purchases ending raw materials
Direct Labour: obtained from company general ledger
Manufacturing overhead: obtained from company general ledger
Job Costing vs. Process Costing
Job costing: is best used when products can be distinguished from one another
oWhen goods or services are customized, many costs are easily traced to
individual products
Example: Shaquille ONeils customized car to accommodate his size,
in addition, measuring suits, dress. Designed specifically to an
individual and costs are incurred based on the customization
Discrete, only one of this specific unit exists unless duplicated
Cost of Goods Manufactured
change
What was not consumed
or used
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Process costing: allocates both direct and overhead costs to continuous-flow
processing lines
oDirect and indirect costs are traced and allocated to production departments
and then allocated to units
oExample: industries that use process costing include: food and beverage
manufacturers. Petroleum refiners, and plastic and metal manufacturers
In many companies. Hybrid costing systems are used that include characteristics
of both job and process costing
Overhead allocation: something that causes cost for instance, architects, blue
prints for a home, its what drives cost (Design hours direct labour | Lights on and
internet utilized while drawing blue print for home these costs should be incurred)
Job costing: is the process of assigning costs to custom products or services
oDirect materials and direct labour are traced to individual jobs, and
production overhead is allocated
oExample: manufacturers that use job costing include: aircraft builders,
customer motorcycle and automobile manufacturers, and custom jewellers,
service industry organizations, such as hospitals, accounting firms, and
repair shops
Assigning Costs to Jobs
Cost
Object
(Job)
Cost TracingDirect
Costs
Cost Assignment
Indirect Costs
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