Pricing and Costing Lesson 3

JOB COSTING

involves the accumulation of the costs of:

• Materials

• Labor

• Overhead

JOB COSTING

it accumulate costs for each specific job.

MATERIALS

The cost of components is accumulated and assigned to a product or project when the components are used.

LABOR

Employees charge their time to specific jobs.

OVERHEAD

are accumulated into cost pools and then allocated to jobs.

MONITORING LONG-TERM JOBS

Job Costing → Track costs → Compare with budget → Detect overruns → Take action

Cost-plus contract

The customer pays:

All Costs Incurred + Profit

Materials → Warehouse → Picked from stock → Issued to specific job

JOB COSTING ALLOCATION OF MATERIALS

• charged to an overhead cost pool for later allocation

If spoilage or scrap occurs in Normal amounts

charged directly to Cost of Goods Sold (COGS)

If spoilage or scrap occurs in abormal amounts

Work-in-Process Inventory → Finished Goods Inventory

When the job is completed:

Finished Goods Inventory → Cost of Goods Sold

When the goods are sold:

Direct Labor

Labor that can be directly traced to an individual job.

Indirect Labor

Manufacturing-related labor that cannot be directly traced to a specific job.

Standard Overhead Rate × Units of Activity = Overhead Allocated

STANDARD OVERHEAD COST ALLOCATION FORMULA

Charge to cost of goods sold

Allocate the Variance

Charge to Jobs

3 DISPOSAL METHOD OF THE REMAINING OVERHEAD VARIANCE

• Finished Goods

• Work-in-Process

• Cost of Goods Sold

where to allocate the remaining overhead variance based on the 2nd method of disposal of the remaining overhead variance

associated with a specific job.

The allocation of an overhead cost pool is inherently inaccurate because the underlying costs cannot be directly ____

ACTIVITY-BASED MANAGEMENT

ABM MEANING

ACTIVITY-BASED MANAGEMENT

is a way of analyzing and evaluating a company's business activities through:

• Activity-Based Costing (ABC)

• Value-chain analysis

ACTIVITY-BASED MANAGEMENT

analyzes the cost of an activity in relation to the value added by the activity.

Identification and Analysis

Evaluation and Value-Chain Analysis

Identifying Opportunities to Improve

Process of Activity-Based Management

Cost Drivers

is a factor that causes the cost of an activity to vary.

EVALUATION AND VALUE-CHAIN ANALYSIS

A process where the manager calculates the cost of each activity by considering the direct and indirect costs related to that activity.

Identification and Analysis

A process where the company finds and list a company's significant business activities.

VALUE-CHAIN ANALYSIS

By identifying the value generated by each activity, it allows management to compare:

Cost of Activity ↔ Value Generated

VALUE-CHAIN

value generated by each activity

OPERATIONAL ABM

focuses on improving operational efficiency.

• Enhancing value-generating activities

• Eliminating unnecessary costs

• Eliminating non-value-generating activities

• Identifying anomalies in the costing process

• Investigating unusual results

Using operational abm helps in:

STRATEGIC ABM

uses activity-based costing to analyze the profitability of an activity.

• Improve the economic efficiency of operations

• Support strategic decision-making

• Enhance value-generating activities

• Potentially improve customer experience

• Increase profitability in the long run

• Provide costing information useful for forecasting

• Help determine financial information for future fiscal years

• Support more accurate budgeting

ABM — ADVANTAGES

may ignore intrinsic or non-quantifiable value of an activity

ABM — DISADVANTAGES / RISK