ADVANCED MANAGEMENT ACCOUNTING

COST ASSIGNMENT AND ACCOUNTING ENTRIES

FOR JOB COSTING SYSTEM

GROUP 5

Name :
Ni Putu Erlin Cahyani Putri (17)
Ngurah Surya Maotama (18)
Luh Gde Pasek Puspa Dewi (19)
A.A. Sagung Ani Pradnyadewi Krisna (20)

PROGRAM STUDI MAGISTER AKUNTANSI

FAKULTAS EKONOMI DAN BISNIS
UNIVERSITAS UDAYANA
2023
A. COST ASSIGNMENT
1. Assignment Of Direct And Indirect Costs
Cost allocation is the process of assigning costs when the quantity of resources
consumed by a particular cost object cannot be measured directly. The basis used to
allocate costs to cost objects is called the allocation basis or cost driver. If the allocation
base is a significant cost determinant, then the terms causal allocation or driver tracking
are used. If the cost allocation basis used is not a significant determinant of costs, the term
arbitrary allocation is used. Direct costing systems (also known as marginal or variable
costing systems) assign only direct costs to cost objects whereas absorption costing
systems assign both direct and indirect costs to cost objectives.
2. Different Costs For Different Purposes
Manufacturing organizations assign costs to products for two purposes: first, for
internal profit measurement and external financial accounting requirements to allocate
production costs incurred during a period between cost of goods sold and inventory;
secondly, to provide useful information for managerial decision making needs.
For example, when calculating the price of a product on a cost-plus basis, management
would need to ensure that all costs, both fixed and variable, are charged to the product. On
the other hand, in determining whether or not additional units of a product should be
produced, only the variable costs would be relevant to that decision. If the cost system
does not accurately enough capture resource consumption by product, the reported product
costs will be distorted, and there is a danger that managers may discontinue profitable
products or continue production of unprofitable products.
3. Cost–Benefit Issues And Cost Systems Design
Until the 1990s most organizations relied on traditional costing systems designed
primarily to meet external financial accounting requirements. In the 1990s the ABC
system was promoted as a mechanism for assigning indirect costs to cost objects more
accurately. Improvements must be made at a level of sophistication of the costing system
to the point where the marginal/incremental cost of the improvement equals the
marginal/incremental benefit of the improvement.
The optimal cost system for an organization can be influenced by several factors. For
example, an optimal costing system would be placed on the far left for an organization
whose indirect costs are a low percentage of total costs and also has a fairly standardized
product range, all of which consume the organization's resources in equal proportions. In
these circumstances, a simplified system may not result in inaccurate cost reporting. In
contrast, the optimal costing system for an organization with a high proportion of indirect
costs, whose products consume the organization's resources in different proportions, will
be placed in the rightmost group.
4. Plant-Wide (Blanket) Overhead Rates
Both simple and sophisticated systems accurately assign costs directly to cost objects.
Cost assignment simply involves applying appropriate data processing procedures to
identify and record the resources consumed by a cost object. For direct materials, the
source document is the materials request. Details of materials issued for the manufacture
of a product, or the provision of a particular service, are recorded on the materials
requisition list. The customer account number, job number or product code is also entered
and the items listed in the requisition are priced according to their cost. Material
requisition details represent source information for assigning material costs to the
appropriate cost objects.
5. The Two Stages Allocation Process
The two-stage allocation process is a method used to assign indirect costs to cost
objects, applicable in both traditional and activity-based costing (ABC) systems. In the
first stage, overheads are assigned to cost centres (or cost pools), which may consist of
departments or smaller segments. In the second stage, costs accumulated in these cost
centres are allocated to cost objects using selected allocation bases or cost drivers. In
traditional costing systems, a small number of allocation bases like direct labour hours or
machine hours are commonly used in the second stage, assuming significant influence on
overhead expenditure. Other methods include direct labour cost, direct materials cost, and
units of output. ABC systems, however, utilize a greater variety of cost centres and a
broader range of cost drivers in the second stage, leading to more accurate measurement of
activity resource consumption.
The decision on the number of cost centres to establish should ensure homogeneity of
activities within each centre and accurate measurement of indirect costs consumed by cost
objects. Generally, increasing the number of cost centres enhances accuracy in measuring
indirect costs. A survey indicated varying practices in the number of cost centres, with
organizations basing this choice on cost-benefit criteria and design principles. Applying
the two-stage allocation process requires the following four steps:
a. Step 1 - Assigning all Manufacturing Overheads to Production and Service Cost
Centers
 In this step, all manufacturing overheads are allocated to production and service cost
centers. Direct costs, such as indirect labor and indirect material costs, are directly
assigned to cost centers, while other costs are allocated using appropriate allocation
bases. For instance, utility costs can be measured directly using meters in each
department, allowing for precise allocation to user departments.
b. Step 2 - Reallocating Costs from Service Cost Centers to Production Cost Centers
The costs assigned to service cost centers are reallocated to production cost centers.
This ensures that the overhead costs associated with support services are appropriately
distributed to the production units.
c. Step 3 - Computing Separate Overhead Rates for Each Production Cost Center
After reallocating costs, separate overhead rates are calculated for each production
cost center. These rates help in attributing overhead costs accurately to products or
other cost objects associated with each specific production cost center.
d. Step 4 - Assigning Cost Center Overheads to Products or Chosen Cost Objects
Finally, the overheads allocated to the cost centers are assigned to products or selected
cost objects. This step allows for a precise calculation of product costs, which is
essential for inventory valuation and profit measurement.
These steps ensure a systematic and accurate allocation of overheads, enabling
organizations to understand and allocate indirect costs effectively across various cost
centers and products.
6. An Illustration Of The Two-stage Process For An ABC System
Overheads in the ABC system are assigned to each activity and not departments.
Activities are composed from various tasks, events, or units that lead to consumption of
resources. The costs that are accumulated by activities called activity cost centers or
activity cost pools. A homogeneous cost pool is important because it enables to obtained
more accurate product, service, and customer. Production process activities covers
machine products and assembly products. Activity cost centers are sometimes similar to
the cost centers used by traditional cost systems. [ilustrasi]
7. Extracting Relevant Costs for Decision-Making
Non-manufacturing costs should be calculated too for decision-making. For instance,
the property taxes, machine depreciation, and insurance of buildings already charged to
cost centers, therefore included in the costs assigned to products for ABC or traditional
systems. In determining selling prices, the costs may need to be charged to products to
ensure the selling prices covers a fair share of all organizational costs. Consequently it is
important to ensure that the costs in overhead analysis are correctly coded in order that
different overhead rates can be extracted for different combinations of cost.
8. Budgeted Overhead Rates
Budgeted overhead rates are preferable based on annual estimated overhead
expenditure and activity. It is because a large amount of overhead expenditure is fixed in
the short term while activity will differ from each month and will give large fluctuations in
the overhead rates. An average rate based on the connection of total annual overhead to
total annual activity is more representative of the typical connection between total costs
and volume than a monthly rate.
9. Under-and Over-Recovery of Overheads
When a company uses standard costing, it derives a standard amount of overhead cost
that should be incurred in an accounting period, and applies it to cost objects (usually
produced goods. The effect of calculating overhead rates based on budgeted annual
overhead expenditure and activity is that it will be most unlikely that the overhead
allocated to products manufactured during the period will be the same as the actual
overhead incurred. If the actual amount of overhead turns out to be different from the
standard amount of overhead, then the overhead is said to be either under absorbed or over
absorbed. If overhead is under absorbed, this means that more actual overhead costs were
incurred than expected, with the difference being charged to expense as incurred. This
usually means that the recognition of expense is accelerated into the current period, so that
the amount of profit recognized declines. If overhead is over recovery, this means that
fewer actual overhead costs were incurred than expected, so that more cost is applied to
cost objects than were actually incurred.This under- or over-recovery of fixed overheads
arising from actual activity differing from budgeted activity is also called a volume
variance and any under-or over-recovery arising from actual fixed overhead expenditure
differing from budget is also called a fixed overhead expenditure variance.
10. Non-Manufacturing Overhead
Non-manufacturing overhead costs, also known as administrative or operating
expenses, refer to the costs that are not directly tied to the manufacturing or production
process in a business. Unlike manufacturing overheads, which include costs like raw
materials, direct labor, and factory overheads, non-manufacturing overhead costs are not
associated with the creation or production of goods or services. For external reporting, it is
therefore unnecessary to allocate non-manufacturing overheads to products. However, for
decision-making, it may be necessary to assign non-manufacturing costs to products.
 For example, in many organizations, it is not uncommon for selling prices to be based
on estimates of total cost or even actual cost. Housing contractors and garages often
charge for their services by adding a percentage profit margin to actual cost. Some non-
manufacturing costs may be a direct cost of the product. Delivery costs, sales people’s
salaries, commission and traveling expenses may be directly identifiable with the product,
but it is likely that many non-manufacturing overheads cannot be allocated directly to
specific products.
11. Cost Assignment In Non-Manufacturing Organizations
For profit reporting, The primarily focused on cost assignment for allocating 65 costs
between inventory costs and cost of goods sold. A job-order costing system is also used by
many service organizations. Accounting, legal, printing, automotive, and appliance repair
businesses, for instance, provide distinct services to customers, necessitating cost tracking
for each customer.
The prices of the services that have been provided are frequently determined using the
costs that have been assigned to each customer. At the conclusion of the accounting
period, these businesses may also have inventories that consist of work that has only been
partially completed (WIP).For profit reporting, we have primarily focused on cost
assignment for allocating 65 costs between inventory costs and cost of goods sold.
A job-order costing system is also used by many service organizations. Accounting,
legal, printing, automotive, and appliance repair businesses, for instance, provide distinct
services to customers, necessitating cost tracking for each customer. The prices of the
services that have been provided are frequently determined using the costs that have been
assigned to each customer. At the conclusion of the accounting period, these businesses
may also have inventories that consist of work that has only been partially completed
(WIP). However, a job-order costing system as described above is inappropriate for many
non-manufacturing organizations for the following reasons:
a. They do not provide unique services for specific customers. Instead, they provide
similar services for a large number of customers. Consider a bank whose principal
activities include mortgage lending, personal lending, variable interest and fixed
interest savings accounts, insurance, foreign currency, etc. It is not feasible or useful
to track the costs of undertaking these activities to individual customers. Instead, costs
are assigned to each activity so that the total costs incurred can be deducted from sales
revenue to periodically determine the profits/losses of each activity.
 b. They do not need to assign costs to individual customers to determine prices of the
services provided because prices are determined by market forces rather than cost.
c. They do not convert purchased materials into finished products or have work in
progress. Therefore, there is no legal requirement to assign indirect costs to cost
objects for inventory valuation.
12. The Indirect Cost Assignment Process
The following is a summary of the process of assigning indirect costs to cost objects for
a job-order traditional costing system:
a. Identify the production departments (or their equivalent in service organizations) that
are responsible for creating the products of services that are sold.
b. Identify the support departments that provide essential support services for the
production departments.
c. Assign all indirect (overhead) costs in the firm to a producing (or customer-facing) or
support department.
d. Reallocate the support department costs to the production departments.
e. Calculate predetermined overhead rates for each producing department.
f. Allocate the departmental overhead costs to the units of the individual products or
services using the predetermined overhead rates
Thus, for profitability analysis purposes the assignment of costs can end at the fourth
stage since the costs assigned to the departments also represents the costs of undertaking
the principal activities. We can conclude that the nature of the business, the organization
structure, its strategy, etc.
B. Accounting Entries for a Job Costing System
The accounting system that is the focus of our attention is a system that combines cost
and financial accounts in a single set of accounts; This is known as an integrated cost
accounting system. An alternative system, in which cost and financial accounts are
managed independently, is known as an interlinked cost accounting system.
1. Materials Recording Procedure
When the goods are received, the goods are inspected and details of the quantity of
each type of goods received are included in the goods receipt note. Formal authorization
for release of materials is at the store's request. The type and quantity of materials issued
are listed on the requisition list. This document also contains details of the job number,
product code, or overhead account that requires the raw material.
2. Pricing The Issues Of Materials
 One of the difficulties that arises regarding material issues is the costs associated with
each issue. This is because the same type of material may be purchased at several different
prices. Actual costs can have several different values, and several material issue pricing
methods must be selected. FIFO seems to be the most logical method in the sense that it
makes the same assumptions as the physical flow of materials through an organization.
This means that items received first are assumed to be issued first. During periods of
inflation, the earliest materials that have the lowest purchase price will be released first.
This assumption results in a lower cost of goods sold calculation, and therefore a higher
profit than using either of the other methods. Also note that closing inventory will be
carried out later so the price is higher. With the LIFO method, the latest and highest price
is charged to the cost of goods sold so that the reported profit is lower than using FIFO or
average cost.
Under the average cost method, cost of goods sold and closing inventory will be
between the values recorded for the FIFO and LIFO methods. LIFO is not an acceptable
pricing method for tax purposes in the UK, although this does not preclude its use
provided that the accounts are adjusted for tax purposes. In addition, the International
Accounting Standard (IAS 2) regarding inventory valuation states that LIFO does not
contain a reasonable relationship to the actual costs obtained during the period. FIFO or
average cost method is preferred for external financial accounting purposes.
3. Control Accounts
Control accounts serve as summary accounts in the cost accumulation recording
system. Transactions for a specific period are totaled and recorded in these accounts. For
instance, the stores ledger control account maintains a summary of entries, which are
substantiated by detailed stores ledger accounts for each item in the store. These individual
accounts collectively reconcile with the total in the stores ledger control account. In
essence, a system of control accounts allows for meticulous verification of accounting
accuracy by comparing the total of individual entries in various ledger accounts with the
corresponding control account total, reinforcing precise financial management and
accountability.
4. Recording the Purchase of Raw Materials
The key entries for these transactions are as follows:
Purchase of Materials (Transaction 1). This entry indicates the creation of a short-term
liability (Creditors Control Account) and the acquisition of a current asset (Stores Ledger
Control Account) in the form of raw material inventory. Materials Returned to Suppliers
(Transaction 2). This entry records the return of materials to suppliers, adjusting the
liabilities (Creditors Control Account) and the raw material inventory (Stores Ledger
Control Account) accordingly.
5. Recording the Issue of Materials
Issue of Direct Materials (Transaction 3). This entry signifies the conversion of raw
material inventory into work in progress (WIP) inventory, as direct materials are
transferred from stores to production.
Issue of Indirect Materials (Transaction 4). This entry records the issuance of indirect
materials and the corresponding cost allocation to the factory overhead. In summary, these
accounting entries accurately capture the movement of materials from the stores
department, enabling precise cost tracking and allocation within the production process.
6. Accounting Procedure for Labour Costs
Divided into two distinct phases. The first one is payroll accounting, which is
computations of the gross pay for each employee and calculation of payments to be made
to employees, government, pension funds, etc. The second one is labour cost accounting,
that is allocation of labour costs to job, overhead accounting and capital accounts. The
labour cost will be charged to the individual job accounts for additional to the total entry
in the work in progress control account.
7. Accounting Procedure for Manufacturing Overheads
Manufacturing overheads accounting involves inserting details of the actual amount of
manufacturing overhead that took place on the debit side of the factory overhead control
account. Total overheads that are charged to productions is recorded in the factory
overhead account on the credit side. Subsidiary entries will be made in individual accounts
for the part that is not included in the double entry system.
8. Non-Manufacturing Overheads
Non-manufacturing costs are considered as period costs, and non-manufacturing
overheads are not charged to the work in progress control account. Non-manufacturing
overheads will be transferred to the profit and loss account as a period costs at the end of
the period. Control accounts include all the non-manufacturing overheads.
9. Accounting Procedures For Jobs Completed And Products Sold
When jobs have been completed, they are transferred from the factory floor to the
finished goods store. The total of the job accounts for the completed jobs for the period is
recorded as a transfer from the work in progress control account to the finished goods
inventory account. The cost of those goods that have been delivered to customers must
therefore be matched against the revenue due from delivery of the goods so that the gross
profit can be calculated. Any goods that have not been delivered to customers will be
included as part of the finished inventory valuation.
10. Costing Profit And Loss Account
At frequent intervals management may wish to ascertain the profit to date for the
particular period. The accounting procedure outlined in this chapter provides a database
from which a costing profit and loss account may easily be prepared. The costing profit
and loss account for AB Ltd based on the information given in Example 4.2 is set out in
Exhibit 4.3. Alternatively, management may prefer the profit statement to be presented in
a format similar to that which is necessary for external reporting. Such information can
easily be extracted from the subsidiary records.
11. Job-Order Costing In Service Organizations
The major difference is that service organizations do not have finished goods inventory
so a finished goods inventory account is not required. The costs incurred will be initially
debited to stores ledger, wages and service overhead control accounts. The individual
customer accounts will be charged with the labour, material and overhead costs incurred
and the total allocated to the work in progress account.
12. interlocking accounting
With an interlocking accounting system the cost and financial accounts are maintained
independently of one another and in the cost accounts no attempt is made to keep a
separate record of the financial accounting transactions. Examples of financial accounting
transactions include entries in the various creditors, debtors and capital accounts. To
maintain the double entry records, an account must be maintained in the cost accounts to
record the corresponding entry that, in an integrated accounting system, would normally
be made in one of the financial accounts (creditors, debtors accounts, etc.). This account is
called a cost control or general ledger adjustment account.
13. accounting entries for a just-in-time manufacturing system
There is also a high velocity of WIP movement throughout the cell, and so it is
extremely difficult to trace actual costs to individual products. Adopting a JIT philosophy
also results in a substantial reduction in inventories so that inventory valuation becomes
less relevant. Therefore, simplified accounting procedures can be adopted for allocating
costs between cost of sales and inventories. This simplified procedure is known as
backflush costing. Backflush costing aims to eliminate detailed accounting transactions
and the need to follow products through all the stages of a manufacturing process.
 References
Bhimani, A., Horngren, C. T., Datar, S. M., & Rajan, M. V. (2019). Management and Cost
Accounting (7th ed.). Pearson.
Drury, C., & Tayles, M. (2020). Management and Cost Accounting. Cengage Learning.
Brierley, J.A. (2015) An examination of the factors influencing the inclusion of non-
manufacturing overhead costs in product costs. International Journal of Managerial
and Financial Accounting, 7 (2). 134 -150. ISSN 1753-671
https://www.oxfordreference.com/display/10.1093/oi/authority.20110803095717702