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Ch 4 Rdg Part 1

by: Shannon Panagopoulos

Ch 4 Rdg Part 1 ACC

Marketplace > DePaul University > ACC > Ch 4 Rdg Part 1
Shannon Panagopoulos
GPA 3.52

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Building-Block Concepts of Costing Systems Job-Costing and Process-Costing Systems Actual Costing General approach to job costing
Managerial Accounting
Nancy Hill
Class Notes
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This 4 page Class Notes was uploaded by Shannon Panagopoulos on Monday January 4, 2016. The Class Notes belongs to ACC at DePaul University taught by Nancy Hill in Winter 2016. Since its upload, it has received 15 views.


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Date Created: 01/04/16
­Making a profit depends on pricing it right ­Labor is a key element of job costing  Cost object= anything for which a measure of costs is desired (ex: 1) Service: product  cost of repairing 2) Product: computer, etc Direct cost of a cost object= costs related to a particular cost object that can be traced to that cost object in a cost­effective way  Indirect costs of a cost object= costs related to a particular cost object that can NOT be  traced to that cost object in a cost effective way     ­Indirect costs are allocated to the cost object using a costing allocation method Cost assignment vs cost tracing: Cost assignment= general term for assigning costs, whether direct or indirect, to a cost  object Cost tracing= specific term for assigning direct costs Cost allocation refers to assigning indirect costs  diagram pg. 98:                 cost assignment:     Direct Costs   →    Cost Tracing        →    Cost Object     Indirect Costs →     Cost Allocation    →    Cost Object 1. Cost pool= a grouping of individual indirect cost items     ­can range from broad, such as manufacturing costs, to narrow, such as the cost of  operating metal­cutting machines         ­are often organized in conjunction with cost­allocation bases 2. Cost­Allocation Base= a systematic way to link an indirect cost or group of indirect  costs (such as operating costs) to a cost object     ­When the cost object is a job, product, or customer, the cost­allocation base is also  called a cost­application base Managers and management accountants choose cost objects to help them make  decisions One major type of cost object of an accounting system is a product or service     ­another is a responsibility center ­responsibility center= part, segment, or subunit of an organization whose manager is  accountable for specified activities      ­the most common responsibility center is a department         ­identifying departments, divisions, and geographic territories      ­this process also allows seniors managers to evaluate the performance of their  subordinates and the performance of subunits as economic investments  1. Job­Costing system= cost object is a unit or multiple units of a distinct product  or service called a job ­each job generally uses different amounts of resources the product or service is often a single unit      2.  Process­costing system= the cost object is masses of identical or similar units  of a product or service     ­in each period, process­costing systems divide the total costs of producing an  identical unit or similar product by the total number of units produced to obtain a per­unit cost Diagram pg. 99              Job­Costing System         →     Process­Costing System       Distinct units of a product/service (ps)     →    Masses of identical or similar units of a p/s *many companies have costing systems that are neither pure job costing nor pure  process costing, but rather have elements of both     ­costing systems, therefore, need to be tailored to the underlying operations  Job Costing: 1. Identify the problems and uncertainties 2. Obtain information 3. Make predictions about the future 4. Make decisions by choosing among alternatives 5. Implement the decision, evaluate performance, and learn  Actual Costing= a costing system that traces direct costs to a cost object by using the  actual direct­cost rates times the actual quantities of the direct­cost inputs     ­allocates indirect costs based on the actual indirect­cost rates times the actual  quantities of the cost­allocation bases Actual Costing: Step 1. Identify the job that is the chosen cost object: a. a source document is an original record that supports journal entries in an  accounting system b. a job­cost record/job­cost sheet records and accumulates all the costs assigned  to a specific job, starting when the work begins     Step  2.  Identify the direct costs of the job: a. on the basis of engineering specifications and drawings provided by WPP, a  manufacturing engineer orders materials from the storeroom b. Materials­requisition form= the order is placed using this basic source document  which contains information about the cost of direct materials used on a specific  job in a specific department.     3. Direct manufacturing labor= the accounting for direct manufacturing labor is similar to the accounting described for direct materials a. Labor time record=source document for direct manufacturing labor, contains info  about the amount of labor time used for a specific job in a specific department.     Step 3. Select the cost­allocation bases to use the allocating indirect costs to the job a. indirect manufacturing costs are costs that are necessary to do a job but that  cannot be traced to a specific job  b. because they can’t be traced to a specific job, they must be allocated to all jobs  in a systematic way; different jobs require different quantities of indirect  resources c. *the objective is to allocate the costs of indirect resources in a systematic way to  their related jobs d. companies often use multiple cost­allocation bases to allocate indirect costs  because different indirect costs have different cost drivers Step 4. Identify the indirect costs associated with each cost­allocation base  a. managers first identify cost­allocation bases and then identify costs related to  each cost­allocation base, not the other way around b. ^ that is because managers must first understand the cost driver, the reasons  why costs are being incurred, before they can determine the costs associated  with each cost driver  c. the reason for not doing step 4 before step 3 is that there is nothing to guide the  creation of the cost pools; as a result, the cost pools created may not have cost­ allocation bases that are cost drivers of the costs in the cost pool *steps 3 and 4 can be done almost simultaneously      Step 5: Compute the rate per unit of each cost­allocation base used to allocate  indirect costs to the job a. for each cost pool, the actual indirect­cost rate is calculated by dividing the total  actual indirect costs in the pool by the actual quantity of the cost­allocation base    actual MOH rate= (actual MOH costs / actual total quantity of cost­allocation  base)         Step 6: Compute the indirect costs allocated to the job a. the indirect costs of a job are computed by multiplying the actual quantity of each different allocation base associated with the job by the indirect cost rate of each  allocation base (one allocation for each cost pool)        Step 7: Compute the total cost of the job by adding all direct and indirect costs  assigned to the job a. manufacturing managers and sales managers can use the gross­margin and  gross­margin percentage calculations to compare the profitability of different jobs b. Job­cost analysis provides the information needed for judging the performance of manufacturing and sales managers for making future decisions i. (have DM been wasted? was DML too high? etc) The five building blocks of job­costing system: cost object, direct costs of a cost object,  indirect­cost pool, and cost­allocation base  Triangle identifies a direct cost (direct materials [DM] and direct manufacturing labor  [DML] ) Rectangle represents the indirect cost pool  Octagon describes the allocation base


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