Job Costing and Activity-Based Costing Summary

Job Costing Steps

• Identify the job that is the chosen cost object.
• Identify direct costs of the job.
• Select cost allocation base(s) to allocate indirect costs.
• Match indirect costs to respective cost allocation base(s).
• Calculate overhead allocation rate.
• Allocate overhead costs to the job.
• Compute total job costs by summing all direct and indirect costs.

Problem 4.21 Overview

• Actual and Budgeted MOH Rates for 2020:
  • Budgeted (Predetermined) MOH Rate:
    $\text{Budgeted MOH Rate} = \frac{\text{Budgeted MOH}}{\text{Budgeted DL}} = \frac{3,060,000}{1,700,000} = 1.80 \text{ per DL}$
  • Actual MOH Rate:
    $\text{Actual MOH Rate} = \frac{\text{Actual MOH}}{\text{Actual DL}} = \frac{3,217,500}{1,650,000} = 1.95 \text{ per DL}$

Problem 4.21 Job Costing

• For Job 626 in March:
  • Direct materials used: $55,000
  • Direct labor cost: $45,000
• Cost Calculation Using Different Costing Methods:
  • Normal Costing:
    $\text{MOH (Normal)} = 45,000 \times 1.80 = 81,000$
    $\text{Cost of Job 626 (Normal)} = 81,000 + 55,000 + 45,000 = 181,000$
  • Actual Costing:
    $\text{MOH (Actual)} = 45,000 \times 1.95 = 87,750$
    $\text{Cost of Job 626 (Actual)} = 87,750 + 55,000 + 45,000 = 187,750$

Under- or Overallocated MOH

• Normal Costing:
  • Allocated MOH:
    $\text{Allocated MOH (Normal)} = 1,650,000 \times 1.80 = 2,970,000$
  • Underallocated MOH:
    $\text{Actual MOH} - \text{Allocated MOH} = 3,217,500 - 2,970,000 = 247,500$
• Actual Costing:
  • No under- or overallocated overhead because it equals actual manufacturing overhead costs.

Managerial Preferences for Normal Costing

• Reasons Managers Prefer Normal Costing:
  • Timeliness: Enables cost estimation upon job completion using budgeted rates, facilitating decisions on pricing, monitoring costs, evaluating success, and interim financials.
  • Actual Costing Limitation: Costs known only at year-end when all actual overheads are calculated.

Additional Problems

• Problem 1 - Marietta Co.:

  • Predetermined Overhead Rate:
    $\text{Predetermined Rate} = \frac{950,000}{125,000} = 7.60 /\text{hour}$
  • Allocated Overhead:
    $\text{Allocated OH} = 7.60 \times 130,000 = 988,000$
  • Overhead Variance:
    $\text{Overhead Variance} = 988,000 - 970,000 = 18,000 \text{ overallocated}$

• Problem 2 - Panther Co.:

  • Allocated Overhead Rate:
    $\text{Allocated Rate} = \frac{30,000}{5,000} = 6 \text{ OH allocated to WIP}$
    \text{Overhead} = 6 \times 6,400 = 38,400 \text{ (actual < allocated)}
  • Amount of Over/Underallocated:
    $38,400 - 33,000 = 5,400 \text{ overallocated OH}$

Cost Structure for Job 127

• Direct Materials and Labor Instances:
  • Department A & B Costs:
  • Dept A: Direct Materials: $34,000; Direct Labor: $21,000; Allocated MOH: $8,400.
  • Dept B: Direct Materials: $7,600; Direct Labor: $21,400; Allocated MOH: $5,000.
• Total Costs for Job 127:
  $\text{Cost} = DM + DL + Allocated MOH$
  $= (34,000 + 7,600) + (21,000 + 21,400) + (8,400 + 5,000) = 97,400$
• Cost per Unit:
  $\text{Cost per Unit} = \frac{97,400}{3,000} = 32.47$

Overhead Allocation Principles in Activity-Based Costing (ABC)

• Definition of ABC:
  • Measures cost and performance of process-related activities and cost objects.
  • Assigns costs based on resource usage and recognizes the causal relationship of cost drivers.
• Cost Pools and Hierarchy of Costs:
  • Unit-Level, Batch-Level, Product-Level, Facilities-Level Integrating non-linear costs through ABC.

Advantages and Disadvantages of ABC

• Advantages:
  • More accurate costing for better decisions.
  • Highlights activities causing costs.
  • Identifies process inefficiencies.
• Disadvantages:
  • Difficult data collection and potentially costly system updates.
  • Non-GAAP compliant.

Implications of Over and Undercosting

• Overcosting: Product appears less profitable due to high allocated costs.
• Undercosting: Product appears more profitable due to low allocated costs.
• Cross-subsidization occurs when one product absorbs excess costs, affecting overall profitability assessments.