Chapter 4: Job Costing

Job Costing

helping business uncover the true cost of their products. It involves tracking all expenses related to a specific job, from materials and labor to overhead costs.

Why is job costing essential for businesses, regardless of their industry?

 it helps in determining the exact cost of producing each product.

Cost pool

It's a clever way to group individual indirect cost items, making it easier to allocate them to cost objects.

Cost- allocation base

a bridge connecting indirect costs to cost objects. a systematic way to link costs, like the operating costs of metal-cutting machines, to the products manufactured on them.

What is the ideal cost-allocation base for indirect costs?

The cost driver of the indirect costs.

Criteria's that might be used to allocate costs when the cause-and-effect relationship is unclear:

benefits received, and ability to bear the cost

job-costing systems

accumulate costs separately for each product or service, ensuring precision in cost allocation.

Process-Costing System

where the cost object is masses of identical or similar units of a product or service.

Hybrid Costing Systems

are tailored to fit the unique operations of a business.

Take Kellogg Corporation, for example. They use job costing to determine the total cost of manufacturing distinct products like Corn Flakes and Froot Loops. Simultaneously, they apply process costing to calculate the per-unit cost of each identical box of cereal. This hybrid approach allows for flexibility and precision in cost management.

five-step decision-making process

Step 1: Identify the Problems and Uncertainties - Just like a sailor assessing the weather, Robinson's management must evaluate the uncertainties of cost and competitor pricing to decide on their bid.

Step 2: Obtain Information - Gathering data is akin to charting a course. Robinson's managers ensure the project aligns with their strategic goals and assess their competitive edge.

Step 3: Make Predictions About the Future - Forecasting costs and evaluating risks is like predicting the tides. Robinson estimates material, labor, and overhead costs while considering qualitative factors.

Step 4: Make Decisions by Choosing Among Alternatives - With a map of potential routes, Robinson evaluates different bid strategies, ultimately deciding on a $15,000 bid with a healthy markup.

Step 5: Implement the Decision, Evaluate Performance, and Learn - As the journey unfolds, Robinson tracks costs and compares them to predictions, learning from the experience to improve future voyages.

Actual Costing

It involves tracing direct costs to a job using the actual direct-cost rates and allocating indirect costs based on actual indirect-cost rates.

Why is actual costing not commonly used in practice?

It requires a full year's data to calculate indirect costs accurately.

Normal Costing

traces direct costs using actual rates and allocates indirect costs with budgeted rates, providing a timely approximation of job costs. It's the perfect recipe for businesses needing to price jobs, manage costs, and prepare financial statements without waiting for year-end data. Imagine a chef preparing a dish with a recipe that requires both precise measurements and a dash of intuition.

Indirect-Cost Rates

The Numerator Reason - Seasonal patterns can skew monthly costs, like heating expenses in winter. By using an annual period, businesses incorporate all seasons into a single rate, much like a baker ensuring the dough rises evenly.

The Denominator Reason - Monthly output levels can vary, affecting cost allocation. An annual period averages these fluctuations, providing a more stable cost base, akin to a baker ensuring consistent dough texture.

What is one reason for using longer periods to calculate indirect-cost rates?

To incorporate seasonal patterns into a single rate.

What is the primary purpose of the seven-step approach in job costing?

To compute the direct and indirect costs of a job.

Electronic Data Interchange (EDI)

It's a tech-driven symphony that keeps the job costing process running smoothly.

Job Costing System

a method that tracks the flow of costs from the moment materials are purchased to the sale of finished goods.

General Ledger

is like the library's catalog, summarizing all the unfinished jobs. But the general ledger is more than just a record-keeper. It's a tool for managers, helping them plan and control operations.

What is the role of the Work-in-Process Control account in a job-costing system?

To summarize the costs of all unfinished jobs.

How is manufacturing overhead typically allocated to individual jobs in a job-costing system?

Using a predetermined rate tied to direct labor hours.

The write-off approach

adjusts the cost of goods sold, treating the discrepancy as a one-time adjustment, much like discarding the extra flour altogether.

the proration approach

spreads the cost discrepancies across work-in-process, finished goods, and cost of goods sold, akin to evenly distributing extra flour across multiple cakes.

adjusted allocation-rate approach

recalculates all overhead entries using actual rates, ensuring every job reflects true costs. It's like recalculating the ingredients for each cake to match the actual recipe.

Three main methods to three adjust for under- or overallocated costs:

the adjusted allocation-rate approach, the proration approach, and the write-off to cost of goods sold approach.

Because companies use budgeted rates to allocate cost throughout the year…

At the end of the year, adjustments are necessary to align the financial statements with reality, ensuring they reflect actual costs as required by Generally Accepted Accounting Principles (GAAP).

Over allocated Costs

happen when the estimates exceed the actual costs, similar to having too much flour.

Under allocated Costs

when the estimated costs fall short of the actual costs, like not having enough flour.

If the goal is to accurately reflect financial statements and the discrepancy is significant, the _____ is preferred for its precision.

proration method

For smaller discrepancies or when inventory levels are low, the _________ offers a simpler solution, providing a close approximation to proration without the complexity.

write-off approach

if the focus is on understanding job profitability and managing costs, the ___________ is ideal, as it updates individual job records, offering insights for future decision-making.

adjusted allocation-rate method

budgeted direct-labor cost rate

dividing the total budgeted direct-labor costs by the total budgeted direct labor-hours

budgeted indirect-cost rate

is calculated using the total costs in the indirect cost pool divided by the total quantity of the cost-allocation base.

End of Year Adjustments

for under- or overallocated direct costs. These adjustments ensure that the costs traced to jobs using budgeted rates align with the actual costs incurred.

Seven Step Approach to Job Costing using Normal Costing

1. Identify the job that is the chosen cost object.
2. Identify the direct costs of the job.
3. Select the cost-allocation base(s) to use for allocating indirect costs
to the job.
4. Identify the indirect costs associated with each cost-allocation base.
5. Compute the Rate per Unit of each cost-allocation base used to
allocate indirect costs to the job (normal costing uses budgeted (Pre-
determined) values):
Budgeted Manufacturing Overhead Rate (BOHR)= Budgeted Overhead Manufacturing Costs/ Budgeted Total Quantity of cost- allocation base
6. Compute the indirect costs allocated(Applied) to the job: Budgeted Manufacturing Overhead Rate × Actual Base Activity For the Job
7. Add all the three type of Manufacturing Costs.