7/23/2019 Horngren Chapter 4 Outline http://slidepdf.com/reader/full/horngren-chapter-4-outline 1/30 CHAPTER 4 JOB COSTING LEARNING OBJECTIVES 1. Describe the building-block concepts of costing systems 2. Distinguish between job costing and process costing 3. Outline a seven-step approach to job costing 4. Distinguish actual costing from normal costing 5. Track the flow of costs in a job-costing system 6. Account for end-of-period underallocated or overallocated indirect costs using alternative methods
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A. Cost-benefit approach is essential in designing and choosing costing systems
A
1. Costing system is a commodity that has a cost
2. Costing system provides beneficial information
B. Costing system should be tailored to the underlying operations/ operations should not be tailored to fitthe costing system
1. 0tudy how the underlying operations are conducted
2. Design costing system to provide information for underlying operations
C. Costing systems accumulate costs to facilitate decisions
1. 1ather for general desires that are common among most managers
2. 2se for product costing in particular to be used for making decisions and develop strategy( planning and control( cost management( and inventory valuation
c. Conversion process5 7anufacturing overhead or indirect costs = two journal entries
i. Accumulation of actual costs @actual costs
ii. Allocation*Debit ,)
(a) Actual costs for actual costing system
(b) 3udgeted-indirect rate . actual !uantity of cost-allocation base for normal costing
system
T:AC#);1 T)5 The use of two journal entries for each of the inputs to the manufacturing process is a
helpful way to remember the specific entries One entry of each set of two is a debit to ,ork in rocess
,ork in rocess has the three debits( one for each element of manufacturing cost
2. Completion of conversion of raw material <out of ,)? to finished good = one journal entry( ami.ture of actual and normal costs in a normal costing system
3. 0ale of finished good = one journal entry( a mi.ture of actual and normal costs in a normalcosting system
B. ;onmanufacturing costs can be accounted for in similar manner to manufacturing costs by use ofindividual jobs
Do multiple choice ! / &. Assign Exercises 4-24 02! and 4-2"( Problems 4-3)( 4-3"( and 4-3&.
ii. :ach job has indirect costs recomputed with actual rate
iii. 3enefit of both timeliness and convenience during year and accuracy of actual costing at
end of year
iv. After-the-fact analysis provides useful insights for future decisions
b. Proration approach <theoretical approach?
i. 2nderallocated or overallocated overhead cost divided between work in process( finishedgoods( and cost of goods sold
ii. Division of cost based upon overhead amounts <before proration? in work in process(finished goods( and cost of goods sold @or on ending balances rather than overheadamounts in ending balances
iii. 3enefit of less comple.ity
c. )mmediate write-off to cost of goods sold approach <practical approach?
4. Choice among approaches
a. Decision should be guided by use of resulting information
1. De!ri"e the "#i$%i&'("$)!* !)&!ept )+ !)ti&' ,te-
Who determines the cost-allocation base and how do the do this! The accountants are involved in thedetermination of the cost-allocation base but are not alone in the process The need for costing systems to betailored to the underlying operations re!uires that the accountants understand the process and system forwhich they are accounting The design of the costing system should have begun with careful study of howoperations are conducted and what information is needed for reports Also( from performing the functions ofscorekeeping and attention directing( the accountants would develop information useful for suggesting cause-and-effect relationships between costs and other activities Those who work in the system <the line managers?would have a different kind of knowledge of relationships providing insight about the suggestions of theaccountants Through teamwork( effective cost-allocation bases could be developed Careful observationfrom a variety of perspectives is helpful in recogni+ing relationships Continued study and observation areneeded to understand if the relationships persist 7ost relationships change somewhat over time and use
2. Diti&'#ih "etwee& .)" !)ti&' a&% pr)!e !)ti&'
Compare and contrast job costing to process costing by focusing on the underlyingstructure of a company’s operations. Costing systems are developed according to the underlyingstructure of operations for a company :.hibit 4- is helpful in considering the type of structure in place foreither job costing or process costing )n the service sector( the jobs are assigned to particular people orspecialists who spend their time working on that particular job 7uch of the operational structure wouldcenter on the persons involved Kor process costing types of environments( the emphasis would be more on
the process rather than the people
0ource documents would differ between the two types of operations Operations conducive to job costingwould probably re!uire attention to more detail about the product( whereas operations suited for processcosting would detail the process
Should there be an eight-step approach, another step to consider profitability? ;otice that in
the te.t( the discussion following the computation of step seven is that of profitability( relating the cost of the job to revenue that the job would generate The last stage in job costing is "0ale of Kinished 1oods% because
that is the reason for manufacturing a product( its sale
The te.t defines cost <Chapter ? as a resource sacrificed or forgone to achieve a specific objective The
double entry system of accounting re!uires that sacrifices be matched to benefits <rights to responsibilities?(
the give-and-take of each transaction Costs are incurred to generate revenue A !uestion to ask about each
cost object5 #ow is this "object% providing benefit in proportion to the amount of cost assigned$
How did the term “normal costing originate? ;ormal costing differs from actual costing in that the
indirect costs are allocated using a predetermined allocation rate rather than the actual rate Calculating a rate
or average re!uires division( often displayed as numerator*denominator The numerator is the budgeted cost
when using a predetermined rate because the actual costs are not yet known The choice of the allocation base re!uires thoughtful judgment )n the early stages of using predetermined rates( the concept of "normal%
capacity was most prevalent ;ormal capacity <introduced in Chapter I? is the amount of average demand
over several time periods( two to five years( that would consider seasonal( cyclical( and trend factors 2se of a
"normal% amount would yield a rate that would be useful over a longer period of time because it would not be
so affected by short-term conditions ;ormal capacity as the denominator in the predetermined rate8that
which differentiated this type of costing from actual8became known as "normal costing% as opposed to
actual costing
5. Tra!* the +$)w )+ !)t i& a .)"(!)ti&' ,te-
!"plain the underlying operations structure of a manufacturing company by e"plaining the journal entries, in order and in detail, of a jo- costing system. "Costing systems should be tailoredto the underlying operations/ the operations should not be tailored to fit the costing systems% )n laterchapters( even more different accounting systems for the manufacturing process are illustrated because themanufacturing process differs from what has been illustrated or described thus far
The "story% or accounting of the manufacturing process described in this chapter5
7aterials
<1? urchase of raw materials <pay the <2? 2se of raw materials to begin the work ofsupplier of materials? conversion into a finished good that can be sold
,ork in rocess
<2? )ntroduction of materials<3? urchase and use of labor to work on <&? Completion of the conversion process intomaterial to convert into a finished good finished goods now available for salethat can be sold @4-aying the workers<"? 2se-allocation of many varied goods
and services to enable the conversion process to occur <!-buying the goods andservices?
#ecause normal costing uses budgeted rates rather than actual rates in computing amountsused in the accounting system, won’t financial statements prepared from that system beinaccurate? Accuracy is used in the te.t to refer to the use of actual cost( so the term is appropriate in!uestioning the financial statements The end-of-period treatment of underallocated or overallocated indirectcosts is done for the purpose of appro.imating actual costs 3y definition( underallocated or overallocatedindirect costs are the difference computed in comparing allocated costs to actual cost The disposing of thatdifference results in the "use% of actual costs The approaches to disposing of the differences range fromsubstituting the actual indirect cost for the allocated indirect cost <adjusted allocation rate approach? toappro.imating actual cost <immediate write-off to cost of goods sold?
7. App$, variati)& +r)- &)r-a$ !)ti&'
$he use of budgeted or predetermined rates allows decision ma%ers to ha&e more timelyinformation. 'oes the use of budgeted rates afford the decision ma%er any other benefit?
Timeliness is a key reason for the use of budgeted indirect cost rates in normal costing Their use( however(
does re!uire adjustment at the end of the period to appro.imate or substitute actual costs for allocated costs
A decision maker can benefit from knowing the reasons for the differences that have occurred re!uiring the
adjustment Comparisons are created between the allocated and the actual costs( the predictions used for the
budgeted numbers and the actualities behind the actual numbers( and the way in which a relationship was
thought to e.ist and how it actually did work After-the-fact analysis of actual versus allocated provides
managers with useful insights for future decisions( a primary role of feedback :.tending the use of budgeted
or predetermined rates through variations of normal costing e.tends the feedback available to managers
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