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Study Guide 1 Strat
Study Guide 1 Strat
JOB COSTING
Costing- is the process of accumulating, classifying, and assigning direct materials, direct labor,
and factory overhead costs to cost objects, which most commonly are products, services, or
projects.
In developing the particular costing system to fit a specific firm, the management
accountant must make three choices, one for each of the three following characteristics of
costing methods: (1) the cost accumulation method—job costing or process costing; (2) the cost
measurement method—actual, normal, or standard costing; and (3) the overhead application
method—volume-based or activity-based.
Cost Accumulation: Job or Process Costing?
Costs can be accumulated by tracing costs to a specific product or service or by
accumulating costs at the department level and then allocating these costs from the departments
to the products or services. The first type is called job costing and the latter is process costing. In
a job costing system, the jobs consist of individual products or batches of products or services.
Job costing system- is appropriate when most costs incurred for the job can be readily identified
with a specific product, batch of products, customer order, contract, or project.
Types of companies that use job costing include those in construction, printing, special
equipment manufacturing, shipbuilding, custom furniture manufacturing, professional services,
medical services, advertising agencies, and others.
Examples of companies that could use job costing systems include FedEx , Paramount
Pictures ,Jiffy Lube International and Accenture
In job costing, the job might consist of a single product or multiple products in a batch.
Process costing - is likely to be found in a firm that primarily produces homogenous products or
services. These firms often have continuous mass production.
. Industries where process costing is common include the chemical industry, bottling
companies, plastics, food products, and paper products.
Examples of companies using process costing systems include The CocaCola Company and
International Paper
Cost Measurement: Actual, Normal, or Standard Costing?
Costs in either a job or process costing system can be measured in their actual, normal, or
standard amount.
Actual costing system- uses actual costs incurred for all product costs, including direct materials,
direct labor, and factory overhead.
Normal costing system- uses actual costs for direct materials and direct labor, and normal costs
for factory overhead. Normal costing involves estimating a portion of overhead to be assigned to
each product as it is produced. A normal costing system provides a timely estimate of the cost of
producing each product or job.
A costing process that uses actual costs for direct materials and direct labor and applies
factory overhead to various jobs using a predetermined application rate.
Standard costing system- uses standard costs and quantities for all three types of manufacturing
costs: direct materials, direct labor, and factory overhead. Standard costs are expected costs the
firm should attain. Standard costing systems provide a basis for cost control, performance
evaluation, and process improvement.
Overhead Application under Normal Costing: Volume-Based or Activity-Based?
Volume-based product costing systems - allocate overhead to products or jobs using only
volume-based cost drivers, such as units produced. This approach relies heavily on the
assumption that each product uses the same amounts of overhead because each product is
charged the same amount.
Activity-based costing (ABC) systems - allocate factory overhead costs to products using cause-
and-effect criteria with multiple cost drivers. ABC systems use both volume-based and non-
volume-based cost drivers to more accurately allocate factory overhead costs to products based
on resource consumption during various activities.