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CHAPTER 4: JOB COSTING

Document Type

: Book Summary

Source

: Cost Accounting: A Managerial Emphasis 15th Edition by Charles T
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Datar, and Madhav V
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

Direct costs of a cost object are costs related to a particular cost object that can be
traced to that cost object in an economically feasible (cost-effective) way
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The relationship among these three concepts can be graphically represented as below
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Cost pools are often organized
in conjunction with cost-allocation bases
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A cost-allocation base can be either financial or nonfinancial
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Learning Objective 2

: Distinguish Job Costing from Process Costing

Management accountants use two basic types of costing systems to assign costs to
products or services
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In a job-costing system, the cost object is a unit or multiple units
of a distinct product or service called a job
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

Process-costing system
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In each period, process costing

systems divide the total costs of producing an identical or similar product or service
by the total number of units produced to obtain a per-unit cost
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Learning Objective 3

: Describe the Approaches to Evaluating and Implementing
Job-Costing Systems

One form of a job-costing system is actual costing, which is a costing system that traces
direct costs to a cost object based on the actual direct-cost rates times the actual
quantities of the direct-cost inputs used
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An actual
indirect-cost rate is calculated by dividing actual annual indirect costs by the actual
annual quantity of the cost-allocation base
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Yet actual costing systems are not commonly
found in practice because actual costs cannot be computed in a timely manner
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The shorter the period, the greater is the
influence of seasonal patterns on the amount of costs
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Another reason for
longer periods is to avoid spreading monthly fixed indirect costs over fluctuating
levels of monthly output and fluctuating quantities of the cost-allocation base
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Learning Objective 4

: Outline the Seven-Step Approach to Normal Costing



Identify the job that is the chosen cost object;



Identify the direct costs of the job;



Select the cost-allocation bases to use for allocating indirect costs to the job;



Identify the indirect costs associated with each cost-allocation base;



Compute the rate per unit of each cost-allocation base used to allocate indirect costs
to the job;



Compute the indirect costs allocated to the job;



Compute the total cost of the job by adding all direct and indirect costs assigned to the
job
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Learning Objective 6

: Track the Flow of Costs in a Job-Costing System

The upper part of the figure above shows the flow of inventoriable costs from the
purchase of materials and other manufacturing inputs to their conversion into work-inprocess and finished goods, to the sale of finished goods
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They become part of work-in-process
inventory on the balance sheet because direct manufacturing labor transforms direct
materials into another asset, work-in-process inventory
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The overhead
costs, however, cannot be easily traced to individual jobs
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As manufacturing overhead costs are allocated, they become part of
work-in-process inventory
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Only when finished
goods are sold is the expense of cost of goods sold recognized in the income statement
and matched against revenues earned
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These costs do not create any
assets on the balance sheet because they are not incurred to transform materials into a
finished product
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Learning Objective 7

: Dispose of Under- or Overallocated Manufacturing Overhead
Costs at the End of the Fiscal Year using Alternative Methods

There are 3 approaches for disposing under- or overallocated manufacturing overhead
costs at the end of the fiscal year:


Adjusted allocation-rate approach
The adjusted allocation-rate approach restates all overhead entries in the general
ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates
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Then the manufacturing overhead costs allocated to every job during the year are
recomputed using the actual manufacturing overhead rate
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The result is that at year-end, every job-cost record and
finished goods record represent actual manufacturing overhead costs incurred
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Each individual job-cost record and the
end-of-year account balances for inventories and cost of goods sold are adjusted to
actual costs
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Knowing the
actual profitability of individual jobs after they are completed provides managers with
accurate and useful insights for future decisions about which jobs to undertake, how
to price them, and how to manage their costs
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Materials inventory is not included in this proration because no manufacturing
overhead costs have been allocated to it
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When choosing which approach to use, managers should consider the amount of
underallocated or overallocated overhead and the purpose of the adjustment, as the
following table indicates
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