Great Lakes Lakes Institute of Management Gurgaon Post Graduate Diploma in Management 2016-18 Cost and Management Aounting 16 !o"em#er 2016 $%& C%'(I!G
In a job-costing system, cost costs s ar are e assi assign gned ed to a dist distin inct ct unit, unit, batch, or lot of a product or service. In a process-costing system, the the cost cost of a prod produc uctt or serv servic ice e is obta obtain ined ed by usin using g broa broad d averages to assign costs to masses of identical or similar units. • •
•
•
Cost pool––a grouping of individual cost items. Cost Cost traci tracing ng––the –the assi assig gning ning of direct ect cost costs s to the the chosen cost object. Cost allocation––the assigning of indirect costs to the chosen cost object. Cost-allocation base––a factor that links in a systematic way an indirect cost or group of indirect costs to a cost object.
'teps in $o# Costing
The seven steps in job costing are: (! identify the job that is the chosen cost object, ("! identify the direct costs of the job, (#! select the cost$allocation bases to use for allocating indirect costs to the job, (%! identify the indirect costs associated with each cost$allocation base, (&! compute the rate per unit of each cost$ allo alloca cati tion on base base used used to allo alloca cate te indi indire rect ct cost costs s to the the job, job, ('! ('! compute the indirect costs allocated to the job, and (! compute the total cost of the job by adding all direct and indirect costs assigned to the job. Two Two major cost objects that managers focus on in companies using job costing are (! products or jobs, and ("! responsibility centers or departments. Three major source source documents used in job$costing job$costing systems are: are: (! job cost record or job cost sheet, a document that records and accumulates all costs assigned to a speci)c job, starting when
work begins: ("! ("! mate materia rials ls re*uis e*uisit itio ion n recor ecord, d, a docu docume ment nt that that cont contai ains ns information about the cost of direct materials used on a speci)c job and in a speci)c department+ department+ and (#! labor labor$ti $time me re recor cord, d, a docume document nt that that contai contains ns infor informat mation ion about the labor time used on a speci)c job and in a speci)c department. The main concern with the source documents of job cost records is the accuracy of the records. roblems occurring in this area incl includ ude e inco incorrrect ect recor ecordi ding ng of *uan *uanti tity ty or rupe rupee e amou amount nts, s, mate materia rials ls re reco cord rded ed on one job job bein being g -bor -borro rowe wed d and and used used on othe otherr jobs obs, and and er errrone oneous ous job job num numbers bers being eing ass assigne igned d to materials or labor inputs. /ctual costing and normal costing di0er in their use of actual or budgeted indirect cost rates: Atual
!ormal
&udgeted
Diret
/ctual
/ctual
1udgeted
Indiret
/ctual
1udgeted
1udgeted
2ach costing method uses the actual *uantity of the direct$cost input budgeted budgeted *uantity *uantity of of direct direct cost input and the the actual actual and budgeted *uantity of the cost$allocation base. 3nder allocation or over allocation of indirect (overhead! costs can can ar aris ise e beca becaus use e of (a! (a! the the 4ume 4umera rato torr rea easo son– n––t –the he actu actual al overhead costs di0er from the budgeted overhead costs, and (b! the the 5enom enomin inat ator or reason ason–– ––th the e act actual ual *uant uantiity used used of the the allocation base di0ers from the budgeted *uantity. Indust Industrie ries s which which will fall fall into
catego categorie ries s of costing costing 6 o# order
osting) Proess osting *+#rid Costing A CA ,irm An
$o# Costing %il Proess
'oftare
$o# Costing
Costing Cold Dr Drink Proess
.e/ner+ Custom
$o# Costing
Produer Mo"ie 'tudio
,urniture
Costing
Manufaturer (+re Proess Manufaturin g (et
Costing Proess
La ,irm
$o# Costing
Costing
&ook $o# Costing
Air
Craft $o# Costing
Pu#liser
Manufaturin
Parmaeuti Proess
g Management $o# Costing
al Compan+
Consulting
Ad"ertising
Costing $o# Costing
,irm &isuit Mfg
Agen+
Proess Costing *+#rid $o# Costing
,lour Mill
Proess
Catering
Paint
Costing Proess
'er"ie Paper Mill
Manufaturer Costing *ospital $o# Costing
Proess Costing $o# Costing
.epair Garage
Pro#lem 3 aras roducts uses a job$costing system with two
direct$cost categories (direct materials and direct manufacturing labor! and one manufacturing overhead cost pool. aras allocates manufacturing overhead costs using direct manufacturing labor costs. aras provides the following information: Partiulars
&udget for 4ear 1
Atual results for 4ear 1
5irect materials costs 5irect manufacturing labor costs 5irect manufacturing overhead costs
7s ,&8,888 &,88,888
7s ,"&,888 %,98,888
,&,888
9,#,888
.e5uired 1 ;ompute the actual and budgeted manufacturing overhead
rates for
following information: a. 5irect materials used
7s "8,888
b. 5irect manufacturing labor costs
7s &,888
;ompute the cost of 6ob '"' using (a! actual costing and (b! normal$costing. 7 /t the end of
manufacturing overhead under normal costing. >hy is there no under or overallocated overhead under actual costing? 'olution 1 /ctual manufacturing overhead rate @ /ctual manufacturing
overhead costsA/ctual direct manufacturing labor costs @ 7s 9,#,888A7s %,98,888 @ .9 or 98B 1udgeted
manufacturing
manufacturing
overhead
overhead
rate
@
costsA1udgeted
1udgeted direct
manufacturing labor costs @ 7s ,&,888A7s &,88,888 @ .& or &B 2 ;ost of 6ob '"' under actual and normal costing below: Partiular Atual !ormal Costing Costing 5irect materials 7s "8,888 7s "8,888
5irect manufacturing labor costs =anufacturing overhead costs 7s &,888 C .9+ &,888 C .& Total manufacturing costs of 6ob '"' 7 Total
manufacturing
&,888
&,888
",&88
"',"&8
'#,&88
',"&8
overhead
allocated
under
normal
costing @ /ctual manufacturing labor costs C 1udgeted overhead rate @ 7s %,98,888 C .& @ 7s ,&,&88 3nder$allocated
manufacturing
overhead
@
/ctual
manufacturing overhead costs – =anufacturing overhead allocated @ 7s 9,#,888 – 7s ,&,&88 @ 7s #,&88 There is no under or over allocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course e*uals the actual manufacturing overhead costs. /ll actual overhead costs are allocated to products. Dence, there is no under or overallocated overhead.
*ospital
ni"ersit+
'oftare
'o
Compan+
for
&usiness
9ngineering
'ool .oom Coaing 'elling College
(rators
College Call Centre like
,I($99
Pro#lem3 The =aruti ;o. uses a job$costing system at its
Eurgaon plant. The plant has a =achining 5epartment and an /ssembly 5epartment. Its job$costing system has two direct$cost categories (direct materials and direct manufacturing labor! and two
manufacturing
overhead
cost
pools
(the
=achining
5epartment overhead, allocated to jobs based on actual machine$ hours, and the /ssembly 5epartment overhead, allocated to jobs based on actual direct manufacturing labor cost!. The
=anufacturing overhead 5irect manufacturing labor cost 5irect manufacturing labor$hours =achine$hours
Maining Department 7s #',88,888
Assem#l+ Department 7s ",88,888
",88,888
%8,88,888
",88,888
%,88,888
,88,888 %,88,888 .e5uired . resent an overview diagram of =arutiFs job$costing system. ;ompute the budgeted manufacturing over$head rate for each department.
". 5uring Gebruary, the job$cost record for 6ob %9% contained the following: Partiulars Maining Assem#l+ Depart Department ment 5irect materials used 7s 98,888 7s ,%8,888 5irect manufacturing ",888 #8,888 labor cost 5irect manufacturing ",888 #,888 labor$hours =achine$hours %,888 ",888 #. /t the end of
COST ALLOCATION BASE
COST OBJECT PROD!CT
DIRECT
Machining Department Manufacturing Overhead
A""em#$% Department Manufacturing Overhead
Machine &'ur"
Direct Manufacturing La#'r C'"t
Indirect C'"t" Direct C'"t"
1udgeted COST manufacturing overhead divided by allocation base: =achining overhead: 7s #',88,888A,88,888 @ 7s #' per Direct Manufacturing La#'r Direct machine hour Materia$" /ssembly overhead: 7s ",88,888A%8,88,888 @ 8 B direct manufacturing labor costs 2
=achining department, %,888 hours C 7s #' /ssembly department 8B C #8,888 Total manufacturing overhead allocated to 6ob %9% 7 Partiular
/ctual manufacturing overhead =anufacturing overhead allocated, ,8,888 C 7s #' 8B C 7s %%,88,888 3nderallocated (overallocated!
7s ,%%,888 &%,888 ,9,888 Main Assem#l ing + %",88,8 %,88,888 88
#9,'8,8 88 9,"8,888 ",%8,88 (7s 8 &,"8,888!
Pro#lem3 ;omputing indirect$cost rates, job$costing. Hanjay Iyer, the president of TaC /ssist, is eCamining alternative ways to compute indirect$cost rates. De collects the following information from the budget for
6anuary$=arch /pril$6une 6uly$Heptember ctober$5ecember
"8,888 hours 8,888 %,888 ',888
Hanjay pays all taC professionals employed by TaC /ssist on an hourly basis (7s '8 per hour, including all fringe bene)ts!. TaC /ssistFs job$costing system has a single direct$cost category (professional labor at 7s '8 per hour! and a single indirect$cost pool (oJce support that is allocated using professional labor$hours!. TaC /ssist charges clients 7s #8 per professional labor$hour.
.e5uired . ;ompute the budgeted indirect$cost rate per professional labor$hour using a. Kuarterly budgeted billable hours as the denominator b. /nnual budgeted billable hours as the denominator ". ;ompute the operating income for the following four customers using a. Kuarterly indirect$cost rates b. /n annual indirect$cost rate • /ashish: "8 hours in Gebruary • /mit: " hours in =arch and hours in /pril • 4itin: hours in 6une and " hours in /ugust • Hudhir: 8 hours in 6anuary, % hours in Heptember, and ' hours in 4ovember. #. ;omment on your results in re*uirement ".
'olution 1:a;
&udgete &udg d /ed eted indiret ours osts
6an$ =arch /pril$ 6une 6uly$ Hep ct$ 5ec 1:#;
7s ,88,88 8 ,88,88 8 ,88,88 8 ,88,88 8
&udgete d /ed indiret ost rate per our
&udgeted "aria#le indiret ost rate per our
&udget ed total indiret ost rate per our 7s "&
"8,88 8
7s &
7s "8
8,88 8 %,888
8
"8
#8
"&
"8
%&
"8
#'.'
',888
7s %,88,888
'.' %8,88 8
7s 8
7s "8
7s #8
2:a; /ll four jobs use "8 hours of professional labor time. The only di0erence in job costing is the indirect cost rate. The *uarterly based indirect job costs are: /ashish: ("8 C 7s "&! 7s &88 /mit: (" C 7s "&! L ( C 7s #8! &%8 4itin: ( C 7s #8! L " C 7s %&! 8 Hudhir: (8 C 7s "&! L (% C 7s %&! L (' C 7s #'.'! '&8 Partiulars
7evenues, 7s #8 C "8 5irect costs, 7s '8 C "8 Indirect costs Total costs perating income
Aasis 7s ",'88
,"88 &88 ,88 7s 988
Amit
!itin
'udir
7s ",' 88 ,"88 &%8 ,%8 '8
7s ",'88
7s ",'88
,"88 8 ,98 '"8
,"88 '&8 ,&8 &8
2:#; 3sing annual based indirect job$cost rates, all four customers will have the same operating income: 7evenues, 7s #8 C "8 7s ",'88 5irect costs, 7s '8 C "8 ,"88 Indirect costs, 7s #8 C "8 '88 Total costs ,88 perating income 7s 88
#. /ll four jobs use "8 hours of professional labor time. 3sing the *uarterly$based indirect$cost rates, there are four di0erent operating incomes because the work done on them is completed in di0erent *uarters. In contrast, using the annual indirect$cost rate, all four customers show the same operating income. /ll these di0erent operating income )gures for jobs with the same number of professional labor$hours are due to the allocation of )Ced indirect costs. /n overview of the TaC /ssist job$costing system is:
INDIRECT COST
}
Office Supp'rt
POOL COST ALLOCATION
}
Pr'fe""i'na$ La#'r(&'ur"
BASE
COST BJECT JOB
}
DIRECT
}
COST
Indirect C'"t" Direct C'"t"
Pr'fe""i'na$
La#'r Aounting for manufaturing o"eread. ;onsider the following selected cost data for the 1harat Gorge co. for the current year 1udgeted manufacturing 7s 8,88,888 overhead 1udgeted machine$hours ",88,888 /ctual manufacturing 7s ',88,888 overhead /ctual machine$hours ,9&,888
The company uses normal costing. Its job$costing system has a single manufacturing overhead cost pool. ;osts are allocated to jobs using a budgeted machine$hour rate. /ny amount of under or over allocation is written o0 to cost of goods sold .e5uired . ;ompute the budgeted manufacturing overhead rate.
". prepare the journal entries to record the allocation of manufacturing overhead.
)*
compute the amount of under
or over allocation of
manufacturing overhead. Is the amount signi)cant? repare a journal entry to dispose of this amount. 'olution . 1udgeted manufacturing overhead rate @ 7s 8,88,888A",88,888 @ 7s #& per machine hour
". >ork$in$process control
7s ',"&,888
To manufacturing overhead allocated 7s ',"&,888 (, 9&,888 machine hours C 7s #& per machine hour @ 7s ',"&,888! #. 7s ',"&,888 – ',88,888 @ 7s "&,888 over allocated, an insigni)cant amount =anufacturing overhead allocated
',"&, 888
=anufacturing department overhead control ',88, 888 ;ost of goods sold
"&,888
Pro#lem3 The Dero Donda =otors uses a job$costing system at
its Eurgaon plant. The plant has a =achining 5epartment and a Ginishing 5epartment. Dero Donda uses normal$costing with two direct$cost categories (direct materials and direct machine$hours as the allocation base, and the Ginishing 5epartment, with direct manufacturing labor costs as the allocation base!. The current year budget for the plant is as follows: Partiulars
=anufacturing overhead 5irect manufacturing
Maining department 7s ,88,88,888
,inising department 7s 8,88,888
7s 9,88,888
7s 8,88,888
labor costs 5irect manufacturing labor$hours =achine$hours
#8,888
,'8,888
",88,888
##,888
.e5uired . resent an overview diagram of Dero Donda =otorFs job$
costing system ". >hat is the budgeted overhead rate that should be used in the machining 5epartment? In the Ginishing 5epartment? #. 5uring the month of 6anuary, the job$cost record for 6ob %# shows the follows: Partiulars Maining ,inising departmen departm t ent 5irect materials used 7s %,888 7s #,888 5irect manufacturing 7s '88 7s ,"&8 labor costs 5irect manufacturing #8 &8 labor$hours =achine$hours #8 8 ;ompute the total manufacturing overhead allocated to 6ob %#. %. /ssuming that 6ob %# consisted of "88 units of product, what is the unit product cost of 6ob %#? &. /mounts at the end of current year are as follows: Partiulars Maining ,inising department department =anufacturing overhead 7s 7s 9,88,888 incurred ,",88,888 5irect manufacturing 7s 9,&8,888 7s %,88,888 labor costs =achine$hours ","8,888 #",888 ;ompute the under or allocated manufacturing overhead for each department and for the Eurgaon plant as a whole.
'. >hy might Dero Donda use two di0erent manufacturing overhead cost pools in its job$costing system? 'olution . /n overview of the job$costing system is:
}
I NDI RECT COST POOL
}
COST ALLOCATI ON BASE
Ma c h i n i n gDe p a r t me n t Ma n uf a c t u r i n gOv e r h e ad
Ma c h i n e Ho u r s i nMa c hi n i n gDe pt .
} }
Di r e c tMa nu f a ct u r i n g L a bo rCo s t s i nFi ni s hi n gDep t .
I n d i r e c t Co s t s
COSTOBJ ECT: PRODUCT
DI RECT COST
Fi n i s h i n gDe pa r t me nt Ma n uf a c t u r i n gOv e r h e ad
Di r e c t Co s t s
Di r e ct Ma nu f a ct u r i n g Labor
Di r e ct Mat e r i a l s
". 1udgeted manufacturing overhead divided by allocation base: a. =achining department: 7s ,88,88,888A",88,888 @ 7s &8 per machine hour b. Ginishing department: 7s
8,88,888A%8,88,888
@
"88B
of
direct
manufacturing labor costs #. =achining department overhead, 7s &8 C #8 hours @ 7s ',&88 Ginishing department overhead, "88 per cent of 7s ,"&8 @ ",&88 Total manufacturing overhead allocated 9,888 < (otal osts of $o# <713 Diret osts 5irect materials
$
=achining
7s %,888
department $ Ginishing department 5irect manufacturing labor $ =achining department $ Ginishing department
#,888 '88
,"&8 ,&8
Indiret osts =achining department overhead, 7s &8 C #8 Ginishing department overhead, "88B of 7s ,"&8
',&88 ",&88
9,888 Total costs 7s ",&8 The per unit product cost of job %# is 7s ",&8A"88 units @ 7s #9."& per unit The point of this part is (a! to get the de)nitions straight multiplying the actual amount of the allocation base by the budgeted rate. = Partiulars
Mainin ,inisin g g =anufacturing overhead incurred 7s 9,88,88 (actual! ,",88,8 8 88 =anufacturing overhead allocated ","8,888 hours C 7s &8 ,8,88,8 88 "88B of 7s %,88,888 ",88,88 MMMMMMMMM 8 3nderallocated manufacturing 7s overhead ",88,88 MMMMMMMMM 8 verallocated manufacturing 7s overhead #,88,8 88 Total overallocated overhead @ 7s #,88,888 – 7s 7s ",88,888 ,88,888
'. / homogeneous cost pool is one where all costs have the same or a similar cause$and$e0ect or bene)ts$received relationship with the cost$allocation base. Dero Donda =otors likely assumes that all its manufacturing overhead cost items are not homogeneous.
Hpeci)cally, those in the =achining
5epartment
cause$and$e0ect
have
a
relationship
with
machine$hours, while those in the Ginishing 5epartment have a cause$and$e0ect relationship with direct manufacturing labor costs. Dero Donda =otors believes that the bene)ts of using two cost pools (more accurate product costs and better ability to manage costs! eCceeds the costs of implementing a more compleC system.
Pro#lem3
/nsal ;onstruction assembles residential houses. It
used a job$costing system with two direct$cost categories (direct materials and direct labor! and one indirect$cost pool (assembly support!. 5irect labor$hours is the allocation base for assembly support costs. In 5ecember
Gurgaon Model Geb$6une "88%
!oida Model =ay$ct. "88%
7s ",",988 7s ",&&" ,88
7s ",&&,"8 7s ","8 ",8"8
5irect materials and direct labor are paid for on a contract basis. The costs of each are known when direct materials are used or direct labor$ hours are worked. The
;ompute the (a! budgeted and (b! actual indirect$cost rates. >hy do they di0er?
".
>hat is the job cost of the Eurgaon =odel and the 4oida =odel using (a! normal costing and (b! actual costing?
#.
>hy might /nsal construction prefer normal costing over actual costing?
. 1udgeted
indirect
'olution cost rate
@
1udgeted
indirect
costsA1udgeted direct labor hours @ 7s %8,88,888A7s 8,888 @ 7s &8 per direct labor hour /ctual indirect cost rate @ /ctual indirect costsA/ctual direct labor hour @ 7s ,#,',888A#,",888 7s %" per direct labor hour These rates di0er because both the numerator and the denominator in the two calculations are di0erent – one based on budgeted numbers and the other based on actual numbers. 2:a; !ormal osting Partiulars
Gurgaon !oida Model Model
Direct costs
5irect materials 5irect labor
7s ",",988 ",&&" ",&,%&"
",&&,"8 ","8 #,#,8"
Indirect costs
/ssembly support (7s &8 C ,88+ &8 C "8"8! Total costs
98,888
,8,888
#,&,%&"
%,#9,8"
2:#; Atual osting Direct costs
5irect materials 5irect labor
7s ",",988 ",&&" ",&,%&"
",&&,"8 ","8 #,#,8"
&,'88
%,%8
#,',8&"
%,"",'
Indirect costs
/ssembly support (7s %" C ,88+ %" C "8"8! Total costs
7 4ormal costing enables /nsal to report a job cost as soon as
the job is completed assuming that both the direct materials and direct costs are known at the time of useAwork. nce the 88 direct labor$hours are known for the Eurgaon =odel (6une
INDIRECT COST
A""em#$% Supp'rt POOL
COST ALLOCATION BASE
COST OBJECT RESIDENTIAL &OME
Direct La#'r(&'ur"
Indirect C'"t" Direct C'"t"
DIRECT COSTS
Direct Manufacturing La#'r Direct Materia$"
Pro#lem3 6ob$costing, consulting )rm. Oaish and /ssociates, a consulting )rm, has the following condensed budget for
7evenues Total ;osts: 5irect rofessional Indirect ;onsulting Hupport perating Income
%8888888 8888888 "'888888
#'888888 %888888
Oaish has a single direct$cost category (professional labor! and a single indirect$cost pool (client support!. Indirect costs are allocated to jobs on the basis of professional labor costs. .e5uired . resent an overview diagram of the job$costing system.
;ompute the
Oaish bid for the job if it is to earn its target operating income of
INDIRECT 8 perCOST cent POOL
of revenues? C'n"u$ting Supp'rt 'olution
COST ALLOCATION BASE
. 1udgeted indirect$cost rate @ 7s ",'8,88,888A,88,88,888 @ Pr'fe""i'na$ La#'r(C'"t"
"' per cent of professional labor costs COST OBJECT JOB +OR CONS!LTIN, CLIENT
Indirect C'"t" Direct C'"t"
DIRECT COSTS Pr'fe""i'na$ La#'r
". /t the budgeted revenues of 7s %,88,88,888, OaishFs operating income of 7s %8,88,888 e*uals 8 per cent of revenues =ark up rate @ 7s %8,88,888A,88,88,888 @ %88 per cent of direct professional labor costs. 7 &udgeted osts Diret osts 5irector, 7s ",888 C # artner, 7s ,888 C ' /ssociate, 7s &88 C %8 /ssistant, 7s #88 C '8 Indiret osts ;onsulting support, "'8B C 98,888
7s ',888 ',888 "8,888 %,888
98,888
",#%,8 88 Total costs 7s #,"%,888 1id price to earn target operating income to revenue margin of 8 per cent can be calculated as follows: Qet 7 @ revenue to earn target income 7 – 8.87 @ 7s #,"%,888 8.987 @ 7s #,"%,888 7 @ 7s #,"%,888A8.98 @ 7s #,'8,888 r
5irect costs Indirect costs ro)t (8.%8 C 98,888! 1id price
7s 98,888 ",#%,888 #',888 #,'8,888
