1. Copyright © 2003 Pearson Education Canada Inc. Slide 4-43 Chapter 4 Job Costing

2. Copyright © 2003 Pearson Education Canada Inc. Slide 4-44 Costing System Terminology Cost Object anything for which a separate measurement of costs is desired Direct Cost costs that are related to a particular cost object in an economically feasible (Cost-effective) manner Cost Pool a grouping of individual cost items Cost Allocation Base a factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object Pages 108 - 109

3. Copyright © 2003 Pearson Education Canada Inc. Slide 4-45 Costing Systems Job-Costing System Costs are assigned to a distinct unit or batch Resources are expended to bring a distinct product or service to market for a specific customer advertising campaign, audit, aircraft assembly Process-Costing System Costs are assigned to a mass of similar units Resources are used to mass-produce a product or service and not for any specific customer Postal delivery, oil refining Pages 109 - 110

4. Copyright © 2003 Pearson Education Canada Inc. Slide 4-46 Job Costing Approach 1.Identify the cost object(s) Pages 110- 111 2.Identify the direct costs for the cost object(s) 3.Select cost-allocation bases to use in allocating the indirect costs to the cost object(s) 4.Identify the indirect costs associated with each cost-allocation base 5.Compute the rate per unit of each cost-allocation base to allocate indirect costs to the cost object(s) 6.Compute the indirect costs allocated to the cost object(s) 7.Determine the cost of the cost object(s) by adding the direct and indirect costs

5. Copyright © 2003 Pearson Education Canada Inc. Slide 4-47 Job Costing Overview Indirect Cost Pool Manufacturing Overhead $1,215,000 $45 per direct Manufacturing Labour Hours Cost Object: Direct + Indirect Costs Direct Material Direct Labour Pages 111 - 112 Cost Allocation Base 27,000 Direct Manufacturing Labour-Hours

6. Copyright © 2003 Pearson Education Canada Inc. Slide 4-48 Time Period for Indirect-Cost Rates Usually calculate indirect-cost rates once each year Use a yearly rate because using a shorter period of time (such as monthly or quarterly) would cause the rate to be higher or lower at different times during the year due to Seasonality of costs (higher heating costs in the winter months) Fluctuating volumes (units produced in low volume months would be charged a greater cost) Pages 115 - 116

7. Copyright © 2003 Pearson Education Canada Inc. Slide 4-49 Normal Costing Normal costing is a method that traces direct costs to a cost object Budgeted indirect-cost rate Budgeted total cost in indirect-cost pool Budgeted total quantity of the cost-allocation base Pages 116 - 117 = Example: A company budgets for manufacturing overhead of $1,280,000 and direct manufacturing labour-hours of 32,000 Budgeted indirect-cost rate = $1,280,000 / 32,000 = $40 per direct manufacturing labour-hour

8. Copyright © 2003 Pearson Education Canada Inc. Slide 4-50 Job Costing System in Manufacturing Cost of Goods Sold Finished Goods Inventory Work-In-Process Inventory Materials Inventory Buy Materials Use Materials Incur Labour Costs Incur Overhead Costs Complete Production Sell Goods Pages 118 - 124

9. Copyright © 2003 Pearson Education Canada Inc. Slide 4-51 Indirect Costs and End-of-Period Adjustments At the end of the period, there is usually a difference between indirect costs incurred and indirect costs allocated to work-in-process during the year Pages 124 - 125 > = = < Indirect costs allocated =Indirect cost allocation rate x actual volume of work Indirect costsIndirect costsUnder-allocated IncurredAllocatedindirect costs Indirect costsIndirect costsOver-allocated IncurredAllocatedindirect costs

10. Copyright © 2003 Pearson Education Canada Inc. Slide 4-52 Under and Overallocated Indirect Costs Indirect Costs AllocatedActual $1,080,000Indirect Costs [$40 x 27,000 hours]$1,215,000 Under-allocated indirect costs $135,000 Most companies write-off over or under-allocated overhead to cost of goods sold at the end of the year Prorating the difference among the ending inventory and cost of goods sold accounts can be done if the amount is material Pages 125 - 198

11. Copyright © 2003 Pearson Education Canada Inc. Slide 4-53 Job Costing in the Service Industry Example: Total budgeted direct labour costs$14,400,000 Total budgeted indirect costs$12,960,000 Total direct professional labour-hours288,000 Pages 128 - 129 Budgeted direct labour rate = $14,400,000 / 288,000 = $50 per hour Budgeted indirect-cost rate = $12,960,000 / 288,000 = $45 per hour Cost of an Audit Direct labour ($50 per hour x 800 hours)$40,000 Indirect costs ($45 per hour x 800 hours)36,000 Total cost$76,000