Seven Steps to assigning costs to an individual job
1. identify the job that is the chosen cost object
2. Identify the direct costs of the job: DM DL
3. Select the cost-allocation bases to use for allocating indirect costs to the job
4. Identify the indirect costs associated with each cast-allocation base.
5. Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job
6. Compute the indirect costs allocated to the job
7. compute the total cost of the job by adding all direct and indirect costs assigned to the job
Steps toAllocating Manufacturing Overhead
•Step 1: Estimate total manufacturing overhead costs for the coming period (year).
•Step 2: Select an allocation base and estimate the total amount that will be used during the period (year).
•Step 3: Calculate the predetermined manufacturing overhead (MOH) rate
•consists of defective units that arise as part of regular operations.
•is spoilage that is not part of everyday operations.
•consists of spoiled units that are repaired and sold as if they were originally produced correctly.
•consists of the bits of direct material left over from normal manufacturing processes.
Process cost systems
•are used to apply costs to similar products that are mass produced in a continuous fashion.
Similarities/ differences in Job Order and Process Cost Systems
Job cost sheets
Cost of each job / units produced for the job
Production cost reports
total manufacturing costs / units produced during the period
This method considers the degree ofcompletion (weighting) of the units completed and transferred out and theending work in process.
–This method considers the sum of the work performed to: •(1) Finish the units of beginning work in process inventory (if any);
•(2) complete the units started into production during the period; and
•(3) start, but only partially complete, the units in ending work in process inventory.
The Five Steps of Process Costing
1.Summarize the flow of physical units (of output).
2.Compute output in terms of equivalent units.
3.Summarize total costs to account for.
4.Compute cost per equivalent unit.
5.Assign total costs to units completed and to units in ending work in process.
Equivalent units of production
•measure the work done during the period, expressed in fully completed units.•This amount is used to determine the cost per unit of completed product.
Equivalent Units Under FIFO
•Under the FIFO method, computation of equivalent units is done on a first-in, first-out basis.
•It is assumed that the beginning work in process is completed before new work is started.
•The physical unit schedule is modified to ensure that the beginning work in process and the units started and completed are reported.
Accounting for Scrap
- recognizing scrap at the time of its production
- assigns an inventory cost to scrap at a conservative estimate of its net realizable value
Journal entry to account for scrap
Dr. Material control
Cr. WIP control
(return scrap to storeroom)
Dr. WIP control
Cr. Materials control
(Reuse of scrap)
used when companies expand their product offerings and the products use different amounts of resources
•describes a particular costing approach that uses broad averages for assigning the cost of resources uniformly to cost objects when the individual products or services use those resources in non-uniform ways.
•A product consumes a high level of resources but is reported to have a low cost per unit.
•A product consumes a low level of resources but is reported to have a high cost per unit.
•If a company undercosts one of its products, then it will overcost at least one of its other products or if a company over costs one of its products, it will undercost at least one of its other products.
refined costing system
•reduces the use of broad averages for assigning the cost of resources to cost objects and provides better measurement of the costs of indirect resources used by different cost objects.
•Why a refined costing system?
–Increase in product diversity.
–Increase in indirect costs.
–Advances in information technology.
–Competition in product markets.
Identify and Classify Activities and Allocate Overhear to Cost Pools
1.Identify and classify the major activities involved in the manufacture of specific products, and allocate manufacturing overhead costs to the appropriate activity cost pools.
2.Identify the cost driver that has a strong correlation to the costs accumulated in the activity cost pool.
3.Compute the activity-based overhead rate per cost driver.
4.Assign manufacturing overhead costs for each activity cost pool to products, using the activity-based overhead rates (cost per driver).