Job Order Costing, Process Costing, and ABC Costing

3. JOB-ORDER COSTING

4. • For manufactured batches of unique products or specialized
services
• Jobs built to customer order and specification
• Many different jobs are worked on during each period, with
each job having different production requirements
• Costs are accumulated by individual job
• Unit costs are computed by job on the job order cost sheet

6. To determine
the
profitability
of the job
To make
data-driven
decisions
To monitor
machine
usage
Importance of Job-Order Costing

7. Documents used:
a document that specifies the
type and quantity of
materials to be drawn from the
storeroom and identifies the
job that will be charged for
the cost of the materials.

8. A form prepared for a job that
records the materials, labor,
and manufacturing overhead
costs charged to that job.

9. an hour-by-hour summary of the employee’s activities
throughout the day where the time they spend on each
job and task are recorded

10. - all indirect costs incurred during the production process -
✓ Depreciation on equipment used in the production process
✓ Property taxes on the production facility
✓ Rent on the factory building
✓ Salaries of maintenance personnel
✓ Salaries of manufacturing managers
✓ Salaries of the materials management/quality control staff
✓ Supplies not directly associated with products (such as manufacturing forms)
✓ Utilities for the factory

11. Allocation Base
• the basis upon which an entity allocates its overhead costs
• a measure such as direct labor hours (DLH) or machine-hours (MH) that is used to
assign overhead costs to products and services.
• should be a cause, or driver, of the cost being allocated
• A good indicator that an allocation base is appropriate is when changes in the
allocation base roughly correspond to changes in the actual cost.
• Computer services dept. = no. of computers used
• Janitorial dept. = sq. footage occupied by each dept.
• HR dept. = no. of employees working in each dept.

13. Predetermined Overhead Rate
=
$𝟒𝟗𝟎, 𝟎𝟎𝟎
𝟏𝟐, 𝟎𝟎𝟎 𝒎𝒂𝒄𝒉𝒊𝒏𝒆 𝒉𝒐𝒖𝒓𝒔
= $𝟒𝟎 𝒑𝒆𝒓 𝒎𝒂𝒄𝒉𝒊𝒏𝒆 𝒉𝒐𝒖𝒓
Job A: 1,000 hours
Total OH cost = 1,000 hrs. x $40/mh
= $40,000

14. OVER-APPLIED
UNDER-APPLIED

17. PROCESS COSTING

18. • used when a company produces a continuous flow of units that
are indistinguishable from one another.
• accumulates costs by department (rather than by order) and
assigns these costs uniformly to all units that pass through the
department during a period
• compute unit costs by department

20. Flexibility
and ease
of operations
Standardization Managerial
Control
Advantages of Process Costing

21. Cash Flows in Process Costing
• performed uniformly on all of the units passing through it
• the output of the processing department is homogeneous

24. Equivalent Units of Production
Weighted-Average Method
FIFO Method

25. Weighted-Average Method
A process costing method that blends together units
and costs from both the current and prior periods.

27. FIFO Method
A process costing method in which equivalent units and unit
costs relate only to work done during the current period.

28. FIFO Method
A process costing method in which equivalent units and unit
costs relate only to work done during the current period.

30. Method Assumption
Income
Statement Effect
Balance Sheet
Effect
Benefit
Average Cost
The average cost
of all inventory is
used for both cost
of sales and
inventory
Both cost of sales
and income will be
between the levels
recorded under
LIFO or FIFO
Inventory asset
will be between
the levels
recorded under
LIFO or FIFO
A “middle ground”
solution for reporting
income and paying taxes
FIFO
When a company
sells an item from
inventory, the
oldest one is sold
The older
inventory was
cheaper, so the
cost of sales is less
and income is
higher
The remaining
inventory carried
on the balance
sheet is the
newest and most
valuable
-Most closely matches
actual flow of goods
- Maximizes net income
which attracts investors
and creditors
Comparison between Costing Methods

32. JOB-ORDER PROCESS

34. ABC COSTING

35. • First traces costs to activities then to products
• used as a supplement to a company’s usual costing system.
• Nonmanufacturing as well as manufacturing costs may be
assigned to products
• Numerous overhead cost pools are used
• Best used in: multiple product firms with multiple processing
steps
• OH costs remains the same and simply spread over to products
differently
• Goal: to better and accurately assign OH costs to products

36. Business Functions Cost Drivers
Production
• Number of units
• Number of set-ups
Marketing
• Number of sales personnel
• Number of sales orders
Research & Development
• Number of research projects
• Personnel hours spent on a
project
Customer Service
• Number of service calls
• Number of products serviced
• Hours spent on servicing products

37. Identify
activities and
activity pools
Directly trace
or estimate
costs to
activities and
cost objects
Assign costs
to activity
cost pools
Calculate
activity cost
driver’s rates
Assign costs
to cost
objects
Prepare
reports
• Seeks to improve the quality of the calculation by using
the amount of activity involved in making an item as a
basis for absorbing the overheads.
• It keeps a close connection between the activity that
drives the cost and the cost itself.

38. • Better profitability measures due to
more accurate costs
• Identification of value-added vs. non-
value-added activities and associated
costs
• Information for process improvement
• Improved cost estimation
• Helps identify and control the cost of
unused capacity
• Some costs may require allocations to
departments and products based on
arbitrary volume measures
• Some costs that can be identified with
specific products are omitted
• Expensive and time-consuming to
develop and implement
• Possible managerial resistance to ABC
results