MPA 604: Cost and

Managerial Accounting

Cost Accounting Methods - Job Order

Costing, ABC, Process Costing
 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
4-2
• Job order costing or job costing is a system for assigning manufacturing cost to an
individual product or batches of products. Generally, the job order costing system is
used only when the products manufactured are sufficiently different from each other.
 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. 4-4
 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.
4-5
General Approach to Job Costing
A manufacturing company is planning to sell
a batch of 25 special machines (Job 650) to a
retailer for $114,800.
Step 1:
The cost object is Job 650.
Step 2:
Direct costs are: Direct materials = $50,000
Direct manufacturing labor = $19,000 4-6
 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 $65,100.
4-7
 Step 5:
Actual indirect cost rate is
$65,100 ÷ 2,480 = $26.25 per machine-hour.
Step 6:
$26.25 per machine-hour × 500 hours = $13,125

4-8
 Step 7:
Direct materials $50,000
Direct labor 19,000
Factory overhead 13,125
Total $82,125

4-9
General Approach to Job Costing
What is the gross margin of this job?
Revenues $114,800
Cost of goods sold 82,125
Gross margin $ 32,675
What is the gross margin percentage?
$32,675 ÷ $114,800 = 28.5%
4 - 10
Method of Valuation
 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?
$60,000 ÷ 2,400 = $25 per hour
How much indirect cost was allocated to Job 650?
500 machine-hours × $25 = $12,500
4 - 12
 Normal Costing
What is the cost of Job 650 under normal costing?
Direct materials $50,000
Direct labor 19,000
Factory overhead 12,500
Total $81,500

4 - 13
 Flow of costs in a job costing system
Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods

4 - 14
 Transactions
$80,000 worth of materials (direct and
indirect) were purchased on credit.
Materials Accounts Payable
Control Control
1. 80,000 1. 80,000

4 - 15
 Transactions
Materials costing $75,000 were sent to the
manufacturing plant floor.
$50,000 were issued to Job No. 650 and
$10,000 to Job 651.
$15,000 of indirect materials were issued.
What is the journal entry?
4 - 16
 Transactions

Work in Process Control:

Job No. 650 50,000
Job No. 651 10,000
Factory Overhead Control 15,000
Materials Control 75,000

4 - 17
 Transactions
Materials Work in Process
Control Control
1. 80,000 2. 2. 60,000
75,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000 4 - 18
 Transactions
Total manufacturing payroll for
the period was $27,000.
Job No. 650 incurred direct labor costs
of $19,000 and Job No. 651 incurred
direct labor costs of $3,000.
$5,000 of indirect labor was also incurred.
What is the journal entry?
4 - 19
 Transactions

Work in Process Control:

Job No. 650 19,000
Job No. 651 3,000
Manufacturing Overhead Control 5,000
Wages Payable 27,000

4 - 20
 Transactions
Wages Payable Work in Process
Control Control
3. 2. 60,000
27,000 3. 22,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
3. 5,000 3. 19,000 4 - 21
 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
4 - 22
 Transactions
Assume that depreciation for the
period is $26,000.
Other manufacturing overhead
incurred amounted to $19,100.
What is the journal entry?

4 - 23
 Transactions
Manufacturing Overhead Control 45,100
Accumulated Depreciation 26,000
Various Accounts 19,100

What is the balance of the Manufacturing

Overhead Control account?
4 - 24
 Transactions

$62,000 of overhead was allocated to the

various jobs of which $12,500 went to Job 650.
Work in Process Control 62,000
Manufacturing Overhead Control 62,000
What are the balances of the control accounts?

4 - 25
 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

4 - 26
 Transactions
The cost of Job 650 is:

Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500
4 - 27
 Transactions
Jobs costing $104,000 were completed and
transferred to finished goods, including Job 650.
What effect does this have on the control accounts?

4 - 28
 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

4 - 29
 Transactions
Job 650 was sold for $114,800.
What is the journal entry?
Accounts Receivable Control 114,800
Revenues 114,800
Cost of Goods Sold 81,500
Finished Goods Control 81,500
4 - 30
 Transactions
What is the balance in the Finished Goods
Control account?
$104,000 – $81,500 = $22,500
Assume that marketing and administrative
salaries were $9,000 and $10,000.
What is the journal entry?
4 - 31
 Transactions
Marketing and Administrative Costs 19,000
Salaries Payable Control
19,000

4 - 32
 End-Of-Period Adjustments
Manufacturing Manufacturing
Overhead Control Overhead Applied
Bal. 65,100 Bal. 62,000

Underallocated indirect costs

Overallocated indirect costs
4 - 33
 End-Of-Period Adjustments

How was the allocated overhead determined?

2,480 machine-hours × $25 budgeted rate = $62,000

$65,100 – $62,000 = $3,100 (underallocated)

4 - 34
 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
4 - 35
 Adjusted Allocation
Rate Approach
Actual manufacturing overhead ($65,100)
exceeds manufacturing overhead allocated
($62,000) by 5%.
3,100 ÷ 62,000 = 5%
Actual manufacturing overhead rate is $26.25
per machine-hour ($65,100 ÷ 2,480) rather
than the budgeted $25.00. 4 - 36
 The manufacturing company could increase
the manufacturing overhead allocated to
each job by 5%.
Manufacturing overhead allocated to Job 650
under normal costing is $12,500.
$12,500 × 5% = $625
$12,500 + $625 = $13,125, which equals
actual manufacturing overhead. 4 - 37
 Proration Approach
Basis to prorate under- or overallocated overhead:
A– total amount of manufacturing overhead
allocated (before proration)
B– ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold

4 - 38
 Proration Approach “A”
Assume the following manufacturing
overhead component of year-end
balances (before proration):
Work in Process $23,500 38%
Finished Goods 26,000 42%
Cost of Goods Sold 12,500 20%
Total $62,000 100%
4 - 39
 Proration Approach “B”

Ending balances of Work in Process,

Finished Goods, and Cost of Goods Sold
Work in Process $ 40,000 28%
Finished Goods 22,500 16%
Cost of Goods Sold 81,500 56%
Total $144,000 100%
4 - 40
 Immediate Write-off to Cost of
Goods Sold Approach
Manufacturing Overhead
65,100 62,000
3,100

Cost of Goods Sold

81,500
3,100 84,600
4 - 41
Robinson Company: Job-Cost Record
Multiple Overhead Cost Pools

Activity based Costing

 ABC is a cost accounting system that focuses on the various
activities performed in an organization and collects costs on the
basis of the underlying nature and extent of those activities. This
costing method focuses on attaching costs to products and services
based on the activities conducted to produce, perform, distribute or
support those products and services.
 Recognizing several level of costs that exist,
accumulating costs into related cost pools and
using multiple cost drivers to assign costs to
products and services are the three fundamental
components of ABC.
 Activity Analysis

An activity is defined as a repetitive action performed in

fulfillment of business functions.
Activities are either value-added or non-value-added.
 Cost Driver Analysis

• Unit-level cost - resources sacrificed on activities performed on each

individual unit of a product or service e.g. energy, machine dep.
Repair etc.
• Batch-level cost - resources sacrificed on activities that are related to
a group of units of products/services e.g. purchase order, setup,
inspection etc.
• Product-sustaining cost - resources sacrificed on activities undertaken to
support individual product/service e.g. engineering change order, design
etc.
• Facility-sustaining cost - resources sacrificed on activities that cannot be
traced to individual product/service but support the organization as a
whole e.g. building dep. Division manager’s salary, advertising etc.
Process Costing
 Process Costing

• Process costing systems are used for costing like or similar units of
products which are often mass produced. This units differ from the
custom-made or unique products costed under job costing systems.
In a process costing system, the unit cost of a product or service
is obtained by assigning total costs to many identical or similar
units. In a manufacturing process costing setting, each unit is
assumed to receive the same amount of direct materials costs,
direct labor costs & indirect manufacturing costs. Unit costs are
then computed by dividing total costs by the number of units.
 The principal difference between process costing and
job costing is the extent of averaging used to compute
unit costs of products or services. Process costing
systems separate costs into cost categories according to
the timing of when costs are introduced into the process.
 Physical units & Equivalent units

• In process costing we tracks the physical units of output. Where did

the units come from? Where did the units go? All physical units are
not uniformly completed, so we determine the equivalent units.
Equivalent units measure the output in terms of the quantities of
each of the factors of production that have been used by the units i.e.
an equivalent unit is a collection of production factors necessary to
produce one complete physical unit of output.
 Steps in Process Costing

• Summaries the flow of physical units of output

• Compute output in terms of equivalent units
• Compute equivalent unit costs
• Summaries total costs to account for
• Assign total costs to units completed & to units in ending work in process.
 Weighted-average method
The weighted average costing method focuses on the total
costs and total equivalent units completed to date; no
distinction is made between work completed during the
preceding period & work completed during the current
period.
 FIFO method
The FIFO process costing method computes units costs
by confining equivalent units to work done during the
current period only; costs of the current period are
separately identified so that the unit costs are related only
to the current period’s work.
Data for the assembly department
Conversion costs are added evenly during the
Assembly department’s process. At the beginning
of the process direct materials are added.
• Physical Units for January 2019
• Work in process, beginning inventory (January 1) 0 units
• Started during January 400 units
• Completed and transferred out during January 400 units
• Work in process, ending inventory (January 31) 0 units
• Total Costs for January 2019
• Direct material costs added during January Tk.32,000
• Conversion costs added during January Tk.24,000
• Total assembly department costs added during January Tk.56,000
• Physical Units for February 2019
• Work in process, beginning inventory (February 1) 0 units
• Started during February 400 units
• Completed and transferred out during February 175 units
• Work in process, ending inventory (60%) 225 units
• Total Costs for February 2019
• Direct material costs added during February Tk.32,000
• Conversion costs added during February Tk.18,600
• Total assembly department costs added during February Tk.50,600
• Physical Units for March 2019
• Work in process, beginning inventory (60%) 225 units
• Started during March 275 units
• Completed and transferred out during March 400 units
• Work in process, ending inventory (50%) 100 units
• Total Costs for March 2019
• Work in process cost – Direct material Tk.18000, conversion Tk.8100
• Direct material costs added during March Tk.19,800
• Conversion costs added during March Tk.16,380
Standard Costs and Process Costing
 Transferred In Costs in Process Costing

• Transferred-in costs (previous department costs) are costs

incurred in a previous department that are carried
forward as part of the product’s cost as it moves to a
subsequent department for processing.
 Data for the testing department Conversion costs are added evenly during the
testing department’s process. At the end of the
process in testing, units receive additional direct
• Physical Units for March 2019 materials, including crating and other packing
materials to prepare units for shipment.

• Work in process, beginning inventory (62.5%) 240 units

• Transferred-in during March 400 units
• Completed and transferred out during March 440 units
• Work in process, ending inventory (80%) 200 units
• Total Costs for March 2019
• Work in process cost: TI- Tk.33600, DM 0, conversion Tk.18000
• Direct material costs added during March Tk.13,200
• Conversion costs added during March Tk.48,600
• Transferred-in costs ?
Process Costing with Spoilage,
Rework and Scrap
 Spoilage
Unacceptable units of production that are discarded or sold for net
disposal proceeds. Partially or fully completed units may be
spoiled.
 Normal Spoilage

It is the spoilage that arises under efficient operating conditions

i.e. it is an inherent result of the particular process. Normal
spoilage is planned spoilage. Costs of normal spoilage are viewed
as a part of the costs of good units produced. It is the average
spoilage necessary in the production process & will be included
as an inventoriable cost.
 Abnormal Spoilage
Abnormal spoilage is the spoilage that is not expected to arise
under efficient operating conditions i.e. it is not an inherent part
of the selected production process most abnormal spoilage is
usually regarded as controllable. Costs of abnormal are the cost
of inferior products that should be written off as losses of the
accounting period in which detection occurs.
Chipcity is a fast-growing manufacturer of computer chips. Direct materials are added at the start of the production
process. Conversion costs are added evenly during the process. Some units of this product are spoiled as a result of defects
not detectable before inspection of finished goods. Spoiled units are disposed of at zero net disposal value. Chipcity uses
the weighted-average method of process costing.
Summary data for September 2017 are as follows:
Physical Units
(Computer Chips) DirectMaterials ConversionCosts
Work in process, beginning inventory (September 1) 600 Tk. 96,000 Tk. 15,300
Degree of completion of beginning work in process 100% 30%
Started during September 2,550
Good units completed and transferred out during September 2,100
Work in process, ending inventory (September 30) 450
Degree of completion of ending work in process 100% 40%
Total costs added during September Tk.567,000 Tk.230,400
Normal spoilage as a percentage of good units 15%
Degree of completion of normal spoilage 100% 100%
Degree of completion of abnormal spoilage 100% 100%
 Reworked units

Unacceptable units of production that are subsequently

reworked and sold as acceptable finished goods. Such units
may be sold through regular marketing channels or
alternative channels.
 Scrap

Product that has minimal (frequently zero) sales value

compared with the sales value of the main or joint products.
Scrap may be either sold, disposed of or reused.
Illustration 1: Opening WIP (25%) 500 units
Units started during the period 4000 units
Closing WIP (80%) 600 units
Direct material added at the beginning and the conversion cost incurred evenly throughout the
process. Inspection point is at 60% level. Units that fail the inspection are returned to the 20%
complete point to go through the process again as rework. Normal rework is considered to be
2% of the units that pass inspection. Units inspected for rework 4650 units.
Costs: Opening WIP: Direct material Tk.3000 and conversion cost Tk.1000.
Current period costs incurred for direct materials Tk.20625 and conversion cost
Tk.33987.20
Illustration 2: Opening WIP (25%) 500 units
Units started during the period 4000 units
Closing WIP (80%) 600 units
Direct material added at the beginning and the conversion cost incurred evenly throughout the
process. Inspection point is at 60% level. Units that fail the inspection are returned to the 20%
complete point to go through the process again as rework. Normal rework is considered to be 2%
of the units that pass inspection. Units inspected for rework 4650 units.
Units are inspected again when they are at 75% complete point. Units failing this inspection are
thrown away as spoilage. Normal spoilage is 5% of the units inspected. 250 units were rejected as
spoiled.
Costs: Opening WIP: Direct material Tk.3000 and conversion cost Tk.1000.
Current period costs incurred for direct materials Tk.20625 and conversion cost
Tk.33987.20
Illustration 3: Opening WIP (60%) 12000 units
Units started during the period 73000 units
Closing WIP (90%) 8000 units
Direct material added at the beginning and the conversion cost incurred evenly throughout
the process. The first inspection point is at 20% level. Management expects 10% of the units
inspected to be discarded. During the period 9000 units were discarded.

Units are inspected again at 75% level. Rejected units are returned to the 50%
complete point to go through the process again as rework. Normal rework is
considered to be 15% of the units inspected. During the period 95000 units were
inspected for rework.

Costs: Opening WIP: Direct material Tk50000 and conversion cost Tk.70000.
Current period costs incurred for direct materials Tk.375000 and conversion cost
Tk.706625.
Illustration 4: Opening WIP (40%) 1500 units
Units started during the period 40000 units
Closing WIP (70%) 2000 units
Direct material added at the beginning and the conversion cost incurred evenly
throughout the process. Units are inspected at 85% level. Management considered 20%
of units inspected to fail to meet specification. Half of these units can usually be
reworked. The other half must be discarded. During the period 3500 units were discarded
and 4200 units were reworked.

Costs: Opening WIP: Direct material Tk.4600 and conversion cost Tk.2200.
Current period costs incurred for direct materials Tk.130275 and conversion cost
Tk.167375.
It costs another Tk.14910 to operate the rework station.