JOB COSTING

BASIC COSTING TERMINOLOGY…

• Several key points from prior chapters:
• Cost Objects - including responsibility centers, departments,
customers, products, etc.
• Direct costs and tracing – materials and labor
• Indirect costs and allocation - overhead
…LOGICALLY EXTENDED
• Cost Pool – any logical grouping of related cost objects
• Cost-allocation base – a cost driver is used as a basis upon which to build a
systematic method of distributing indirect costs.
• For example, let’s say that direct labor hours cause indirect costs to change. Accordingly,
direct labor hours will be used to distribute or allocate costs among objects based on
their usage of that cost driver
COSTING SYSTEMS
• Job-Costing: system accounting for distinct cost objects called
Jobs. Each job may be different from the next, and consumes
different resources
• Wedding announcements, aircraft, advertising
• Process-Costing: system accounting for mass production of
identical or similar products
• Oil refining, orange juice, soda pop
SEVEN-STEP JOB COSTING

1. Identify the Job that is the Chosen Cost Object

2. Identify the Direct Costs of the Job
3. Select the Cost-Allocation base(s) to use for allocating Indirect Costs to the
Job
4. Match Indirect Costs to their respective Cost-Allocation base(s)
SEVEN-STEP JOB COSTING (CONTINUED)

5. Calculate an Overhead Allocation Rate:

• Actual OH Costs ÷ Actual OH Allocation Base

6. Allocate Overhead Costs to the Job:

• OH Allocation Rate x Actual Base Activity For the Job

7. Compute Total Job Costs by adding all direct and indirect costs together
SAMPLE
JOB
COST
DOCUMENT
JOB COSTING
OVERVIEW
FLOW OF COSTS ILLUSTRATED
 UNDER/OVER ABSORPTION OF OVERHEADS

• Meaning :- a rate of absorption is computed and then the overheads are

charged to the products.
• The rate of absorption may be either predetermined or historical.
• The main advantage of the historical rate is that there is no possibility of
under/over absorption of overheads.
• If predetermined rate is used, there is every possibility of under or over
absorption of overheads.

• Illustration :- A manufacturing company uses direct material cost as the basis for
absorption of overheads. The absorption rate is worked out as follows.
• Budgeted Overheads– Rs. 50,000/ Budgeted Material Cost Rs. 1,00,000 *
100 i.e. 50%
• Now if the actual overheads are Rs. 70,000 and the actual direct material cost
is Rs. 1,20,000, the overheads absorbed will be Rs. 60,000 i.e. 50% of the
direct material cost and there will be under absorption of Rs. 10,000 as the
actual overheads incurred are Rs. 70,000.
THANK YOU