3. Building-Block Concepts
of Costing Systems
Cost object
Direct costs
of a cost object
Indirect costs
of a cost object
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4. Building-Block Concepts
of Costing Systems
Cost Assignment
Direct Cost Tracing
Costs
Cost
Object
Indirect Cost Allocation
Costs
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5. Building-Block Concepts
of Costing Systems
Cost pool
Cost allocation base
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6. Learning Objective 2
Distinguish between job
costing and process costing.
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7. Job-Costing and
Process-Costing Systems
Job-costing Process-costing
system system
Distinct units Masses of identical
of a product or similar units of
or service a product or service
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8. Learning Objective 3
Outline a seven-step
approach to job costing.
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9. Seven-Step Approach
to Job Costing
Step 1:
Identify the chosen cost object.
Step 2:
Identify the direct costs of the job.
Step 3:
Select the cost-allocation bases.
Step 4:
Identify the indirect costs.
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10. Seven-Step Approach
to Job Costing
Step 5:
Compute the rate per unit.
Step 6:
Compute the indirect costs.
Step 7:
Compute the total cost of the job.
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11. General Approach to Job Costing
A manufacturing company is planning to sell
a batch of 25 special machines (Job 650) to a
retailer for Rs114,800.
Step 1:
The cost object is Job 650.
Step 2:
Direct costs are: Direct materials = Rs50,000
Direct manufacturing labor = Rs19,000
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12. General Approach to Job Costing
Step 3:
The cost allocation base is machine-hours.
Job 650 used 500 machine-hours.
2,480 machine-hours were used by all jobs.
Step 4:
Manufacturing overhead costs were Rs65,100.
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13. General Approach to Job Costing
Step 5:
Actual indirect cost rate is
Rs65,100 ÷ 2,480 = Rs26.25 per machine-hour.
Step 6:
Rs26.25 per machine-hour × 500 hours = Rs13,125
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14. General Approach to Job Costing
Step 7:
Direct materials Rs50,000
Direct labor 19,000
Factory overhead 13,125
Total Rs82,125
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15. General Approach to Job Costing
What is the gross margin of this job?
Revenues Rs114,800
Cost of goods sold 82,125
Gross margin Rs 32,675
What is the gross margin percentage?
Rs32,675 ÷ Rs114,800 = 28.5%
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16. Source Documents
Job cost record
Materials requisition record
Labor time record
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18. Costing Systems
Actual costing is a system that uses actual
costs to determine the cost of individual jobs.
It allocates indirect costs based on the actual
indirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).
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19. Costing Systems
Normal costing is a method that allocates
indirect costs based on the budgeted
indirect-cost rate(s) times the actual
quantity of the cost allocation base(s).
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20. Normal Costing
Assume that the manufacturing company budgets
$60,000 for total manufacturing overhead costs
and 2,400 machine-hours.
What is the budgeted indirect-cost rate?
Rs60,000 ÷ 2,400 = Rs25 per hour
How much indirect cost was allocated to Job 650?
500 machine-hours × Rs25 = Rs12,500
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21. Normal Costing
What is the cost of Job 650 under normal costing?
Direct materials Rs50,000
Direct labor 19,000
Factory overhead 12,500
Total Rs81,500
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22. Learning Objective 5
Track the flow of costs
in a job-costing system.
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23. Transactions
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods
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24. Transactions
Rs80,000 worth of materials (direct and
indirect) were purchased on credit.
Materials Accounts Payable
Control Control
1. 80,000 1. 80,000
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25. Transactions
Materials costing Rs75,000 were sent to the
manufacturing plant floor.
Rs50,000 were issued to Job No. 650 and
Rs10,000 to Job 651.
Rs15,000 of indirect materials were issued.
What is the journal entry?
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26. Transactions
Work in Process Control:
Job No. 650 50,000
Job No. 651 10,000
Factory Overhead Control 15,000
Materials Control 75,000
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27. Transactions
Materials Work in Process
Control Control
1. 80,000 2. 75,000 2. 60,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
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28. Transactions
Total manufacturing payroll for
the period was Rs27,000.
Job No. 650 incurred direct labor costs
of Rs19,000 and Job No. 651 incurred
direct labor costs of Rs3,000.
Rs5,000 of indirect labor was also incurred.
What is the journal entry?
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29. Transactions
Work in Process Control:
Job No. 650 19,000
Job No. 651 3,000
Manufacturing Overhead Control 5,000
Wages Payable 27,000
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30. Transactions
Wages Payable Work in Process
Control Control
3. 27,000 2. 60,000
3. 22,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
3. 5,000 3. 19,000
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31. Transactions
Wages payable were paid.
Wages Payable Control 27,000
Cash Control 27,000
Wages Payable Cash
Control Control
4. 27,000 3. 27,000 4. 27,000
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32. Transactions
Assume that depreciation for the
period is Rs26,000.
Other manufacturing overhead
incurred amounted to Rs19,100.
What is the journal entry?
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33. Transactions
Manufacturing Overhead Control 45,100
Accumulated Depreciation
Control 26,000
Various Accounts 19,100
What is the balance of the Manufacturing
Overhead Control account?
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34. Transactions
Rs62,000 of overhead was allocated to the
various jobs of which Rs12,500 went to Job 650.
Work in Process Control 62,000
Manufacturing Overhead Control 62,000
What are the balances of the control accounts?
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35. Transactions
Manufacturing Overhead Work in Process
Control Control
2. 15,000 6. 62,000 2. 60,000
3. 5,000 3. 22,000
5. 45,100 6. 62,000
Bal. 3,100 Bal. 144,000
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36. Transactions
The cost of Job 650 is:
Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500
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37. Transactions
Jobs costing Rs104,000 were completed and
transferred to finished goods, including Job 650.
What effect does this have on the control accounts?
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38. Transactions
Work in Process Finished Goods
Control Control
2. 60,000 7. 104,000 7. 104,000
3. 22,000
6. 62,000
Bal. 40,000
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39. Transactions
Job 650 was sold for Rs114,800.
What is the journal entry?
Accounts Receivable Control 114,800
Revenues 114,800
Cost of Goods Sold 81,500
Finished Goods Control 81,500
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40. Transactions
What is the balance in the Finished Goods
Control account?
Rs104,000 – Rs81,500 = Rs22,500
Assume that marketing and administrative
salaries were Rs9,000 and Rs10,000.
What is the journal entry?
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42. Transactions
Direct Materials Used Rs60,000
+ Direct Labor and Overhead Rs84,000
– Cost of Goods Manufactured Rs104,000
= Ending WIP Inventory Rs40,000
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43. Transactions
Cost of Goods Manufactured Rs104,000
– Ending Finished Goods Inventory Rs22,500
= Cost of Goods Sold Rs81,500
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44. Learning Objective 6
Account for end-of-period
underallocated or overallocated
indirect costs using
alternative methods.
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46. End-Of-Period Adjustments
How was the allocated overhead determined?
2,480 machine-hours × Rs25 budgeted rate = Rs62,000
Rs65,100 – Rs62,000 =Rs$3,100 (underallocated)
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47. End-Of-Period Adjustments
Actual manufacturing overhead costs of Rs65,100
are more than the budgeted amount of Rs60,000.
Actual machine-hours of 2,480 are more than
the budgeted amount of 2,400 hours.
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48. End-Of-Period Adjustments
Approaches to disposing underallocated
or overallocated overhead:
1. Adjusted allocation rate approach
2. Proration approaches
3. Immediate write-off to Cost of Goods
Sold approach
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49. Adjusted Allocation
Rate Approach
Actual manufacturing overhead (Rs65,100)
exceeds manufacturing overhead allocated
(Rs62,000) by 5%.
3,100 ÷ 62,000 = 5%
Actual manufacturing overhead rate is Rs26.25
per machine-hour (Rs65,100 ÷ 2,480) rather
than the budgeted Rs25.00.
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50. Adjusted Allocation
Rate Approach
The manufacturing company could increase
the manufacturing overhead allocated to
each job by 5%.
Manufacturing overhead allocated to Job 650
under normal costing is Rs12,500.
Rs12,500 × 5% = Rs625
Rs12,500 + Rs625 = Rs13,125, which equals
actual manufacturing overhead.
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51. Proration Approach
Basis to prorate under- or overallocated overhead:
– total amount of manufacturing overhead
allocated (before proration)
– ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold
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52. Proration Approach “A”
Assume the following manufacturing
overhead component of year-end
balances (before proration):
Work in Process Rs23,500 38%
Finished Goods 26,000 42%
Cost of Goods Sold 12,500 20%
Total Rs62,000 100%
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53. Proration Approach “A”
Manufacturing Overhead Finished Goods
65,100 62,000
22,500 3,100
1,302 0
23,802 Cost of Goods Sold
Work in Process
81,500 40,000
620
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41,178
54. Proration Approach “B”
Ending balances of Work in Process,
Finished Goods, and Cost of Goods Sold
Work in Process Rs 40,000 28%
Finished Goods 22,500 16%
Cost of Goods Sold 81,500 56%
Total Rs144,000 100%
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55. Proration Approach “B”
Manufacturing Overhead Finished Goods
65,100 62,000
22,500 3,100
496 0
22,996 Cost of Goods Sold
Work in Process
81,500 40,000
1,736
868
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40,868
56. Immediate Write-off to Cost of
Goods Sold Approach
Manufacturing Overhead
65,100 62,000
3,100
0
Cost of Goods
Sold
81,500
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3,100
57. Learning Objective 7
Apply variations
from
normal costing.
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58. Variations of Normal Costing
Home Health budget includes the following:
Total direct labor costs: Rs400,000
Total indirect costs: Rs96,000
Total direct (professional) labor-hours: 16,000
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59. Variations of Normal Costing
What is the budgeted direct labor cost rate?
Rs400,000 ÷ 16,000 = Rs25
What is the budgeted indirect cost rate?
Rs96,000 ÷ 16,000 = Rs6
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60. Variations of Normal Costing
Suppose a patient uses 25 direct labor-hours.
Assuming no other direct costs, what is the
cost to Home Health?
Direct labor: 25 hours × Rs25= Rs625
Indirect costs: 25 hours × Rs 6 = 150
Total Rs775
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