Week 2 Job Costing
Job costing vs Process costing
Job-‐costing system : in this system, costs are assigned to a distinct unit, batch or lot of a product or service. A job is a task for which resources are expended in bringing a distinct product or service to market. The product or service is often custom-‐made.
Process-‐costing system: the cost object is masses of identical or similar units. The cost of a product or services is obtained by using broad averages to assign costs to masses of identical or similar units.
Actual costing vs Normal costing
A normal costing method traces direct costs to a cost object by using the actual direct cost rate times the actual quantity of the direct-‐cost input and allocates indirect costs based on the budgeted indirect-‐cost rate times the actual quantity of the cost-‐allocation base.
Direct cost=actual direct cost rate x actual quantity of direct-‐cost input
Indirect cost= budgeted indirect-‐cost rate x actual quantity of the allocation base
A actual costing method:
Direct cost=actual direct cost rate x actual quantity of direct-‐cost input Indirect cost= actual indirect-‐cost rate x actual quantity of the allocation base
Both actual costing and normal costing trace direct costs to jobs in the same way.
The difference between them is that actual costing uses an actual indirect-‐cost rate while normal costing uses a budgeted indirect-‐cost rate to cost jobs.
Advantage of budged rate
Indirect costs, by definition, cannot be traced to jobs. Moreover, actual indirect costs are less predictable and not known until the end of the year. Normal costing uses budgeted rates to estimate or approximate the actual indirect costs of a job soon after the job is completed.
End of period Adjustments
• Adjust allocation rate approach: this approach involves restating all entries in the general and subsidiary ledgers by using actual cost rates rather than budgeted rates. -‐-‐-‐>Most accurate record of individual job costs.
• Proration Approach:
1. Proration based on the total amount of indirect costs allocated in the closing balance of WIP, Finished goods and COGS.
2. Proration based on the total closing balance in WIP, Finished goods and COGS.
-‐à 1&2 Most accurate stock and COGS figures.
Dr.Work-‐in-‐Progress Dr. Finished Goods Dr. COGS
Dr. Manufacturing overhead allocated
Cr. Manufacturing overhead control
3. Direct write-‐off to COGS.-‐-‐> The simplest method.
Dr. COGS
Dr.Manufacturing overhead allocated
Cr. Manufacturing overhead control
