Week 3: Basic cost assignment to MOH and job costing systems

Why do we assign costs to cost objects

Helps with

1. management decisions

   1. pricing, product mix, customers, cost reduction

2. motivating employees

   1. rewards performance, building cost awareness

3. forecasting and planning

4. external reporting

   1. inventory valuation

5. Justifying costs and reimbursement

How to assign direct costs to cost objects

direct material: actual quantity used x actual material cost per unit

direct labour: actual hours worked x actual hourly rate

How can you allocate MOH if you only have one product vs multiple products

divide total MOH/by total quantity of product

if there are multiple lines/products you can choose an allocation base that reflects the main cost driver of the cost item or choose an allocation base that reflects the objects ability to bear the indirect cost or just not allocate at all

What is a cost driver vs cost item/object vs cost pool

Cost driver: is the reason the cost occurred ie. due to machine hours, complexity of machine, size of machine.

Cost item: anything you want a separate measure of cost for

cost pool: a collection of costs for items that share the same cost driver

What is an allocation base and how do you pick a good quality alllocation base

allocation base is a cost driver that is used to allocate indirect costs to cost items

• allocation base should be the most appropriate cost driver

• should be measurable and traceable to cost object

• should be most important cost driver of cost item

Steps to allocating indirect costs using actual costing

• choose allocation base for indirect cost/cost pool

• record actual indirect costs

• record actual quantity of allocation base

• allocation rate= total actual indirect costs/total allocation base quantity

• to get allocation cost= allocation rate x actual quantity of allocation base

When using actual costing, indirect costs are only allocated at the end of the period once total indirect costs are known and quantities produced are known

How many cost pools should you use

• simplest approach is just have one cost pool

• however if theres multiple cost drivers you should have as many cost pools are needed to encompass the cost drivers

Why does actual costing wait to allocate MOH at the end of the period

• since we don’t want prices to fluctuate too much Bc. you can’t predict when MOH will happen eg. monthly rent supports whole month, don’t know when maintenance cost will happen

What is the solution for actual costing and how does it work

• use normal costing

• for directly traceable costs eg. direct material and direct labour you use actual costing

• for indirect costs you use a predetermined MOH rate and adjust rate at period end.

STEPS

1. predict indirect MOH costs and allocation base quantity at period start

2. calc predetermined MOHR= budgetted indirect mfg costs/budgetted allocation base quantity

3. allocate costs throughout period using actual quantities

4. adjust rate at end of period

Actual vs normal costing