Cost Accounting Week 4 & 5 Assignment

Rizky Fadillah Salam

2206067265
Week 4
• How does a job-costing system differ from a process-costing system?
• Why might an advertising agency use job costing for an advertising campaign by PepsiCo,
whereas PepsiCo might use process costing to determine the cost of their products?
• What is the cost object when we use a job-costing system and explain how the use of a job
cost record.
• Describe the source documents used in job-costing systems.
• Describe the difference between normal costing and actual costing systems, and why
normal costing system is usually more recommended?
• Describe how to compute the predetermined overhead rate.
• Describe the flow of costs in a normal job-costing system
• Describe what how under-or over-allocated indirect costs incurred.
• Why we need to do an adjustment for under-or over-allocated indirect costs at the time of
financial reporting? Describe how to compute the adjustment.
• Ex 4-22
• Ex 4-32

1. Difference between job costing and process costing

A. Job Costing
Job costing is used to cost a distinct product or service. Each job generally uses
different amounts of resources. For example, specialized machine made at Hitachi, a
construction project managed by Bechtel Corporation, a heart transplant surgery
performed at the Mayo Clinic, or an advertising campaign produced by Saatchi &
Saatchi. Why unique? each special machine made by Hitachi is unique and distinct
from the other machines made at the plant. An advertising campaign for one client at
Saatchi & Saatchi is unique and distinct from advertising campaigns for other clients.
Because the products and services are distinct, job-costing systems are used to
accumulate costs separately for each product or service.
 B. Process Costing
Process costing is used to cost masses of identical or similar units of products
or services. For example, Citibank provides the same service to all its customers when
processing customer deposits. Intel provides the same product (say, a Core i9 chip) to
each of its customers. All Minute Maid consumers receive the same frozen orange juice
product. In each period, process-costing systems divide the total costs of producing an
identical or similar product or service by the total number of units produced to obtain
a per-unit cost. This per-unit cost is the average unit cost that applies to each of the
identical or similar units produced in that period.

2. An advertising agency uses job costing for an advertising campaign for PepsiCo because
each particular client has different needs and requests for their advertising campaign
thus making the agency use job costing. Job costing itself provides each customer with a
specific service for their specific needs including PepsiCo itself. Whereas the advertising
agency uses job costing for their service, PepsiCo uses process costing for their products
because they are producing masses of similar products for each of their customer and the
process costing obtains the per-unit cost by dividing the total costs of producing an
identical or similar product or service by the total number of units produced and that’s why
PepsiCo uses process costing to determine the cost of their products.

3. The cost object when using a job-costing system is the single or multiple units of distinct
product or service called a job. A job cost record is used to record and accumulate all
the costs assigned to a specific job, starting when work begins.
Example:
4. Source documents in a job costing system usually is an original record (such as a labor
time card on which an employee’s work hours are recorded) that supports journal entries
in an accounting system.
Example:

5. One of the significant difference between normal costing and actual costing is that normal
costing uses budgeted indirect-cost rates calculated at the beginning of the year, whereas
actual costing uses actual indirect-cost rates calculated at the end of the year.

Normal costing systems are usually more recommended because the manufacturing costs
of a job are available much earlier in a normal-costing system than in an actual costing
system. Consequently, the manufacturing and sales managers can evaluate the profitability
and the adequacy of the pricing of the different jobs, and the efficiency with which the jobs
are done, as soon as they are completed, while the experience is still fresh in everyone’s
mind. Normal costing also provides managers with cost information at a point when there
is still time to take corrective actions, such as improving the company’s labor efficiency or
reducing the company’s overhead costs.

6. To compute predetermined overhead rates (budgeted manufacturing overhead rate) we

have to divide the budgeted overhead cost with the budgeted total quantity of cost-
allocation-base. The allocation base is often direct labor hours, direct labor costs, or
machine hours. Or you can divide the manufacturing overhead cost by the activity driver.
7. Flow of costs in a normal job-costing system:

The upper part of this exhibit shows the flow of inventoriable costs from the purchase of
materials and other manufacturing inputs to their conversion into work in process and
finished goods, to the sale of finished goods (COGS).
Direct materials and direct manufacturing labor can be easily traced to jobs. They become
part of the work-in-process inventory asset on the balance sheet once work on the jobs has
commenced. The manufacturer also incurs manufacturing overhead costs (including
indirect materials and indirect manufacturing labor) to convert direct materials into work-
in-process inventory.
Overhead (indirect) costs, however, cannot be easily traced to individual jobs. As we have
known previously, manufacturing overhead costs are first accumulated in a manufacturing
overhead account and then allocated to individual jobs. As manufacturing overhead costs
are allocated, they become part of work-in-process inventory.
The lower part of this exhibit shows the period costs—marketing and customer-service
costs. These costs do not create any assets on the balance sheet because they are not
incurred to transform materials into a finished product. Instead, they are expensed in the
income statement in the period that they are incurred.

8. How under-or over-allocated indirect costs incurred:

1) Under-allocated indirect costs:
Occurs when the allocated amount of indirect costs in an accounting period is less than
the actual overhead amount incurred for the period.
2) Over-allocated indirect costs:
Occurs when the allocated amount of indirect costs in an accounting period is more
than the actual overhead amount incurred for the period.

9. We need to adjust the over or under-allocated indirect cost when it comes the time for
financial reporting to ensure that the company’s financial statements accurately reflect the
economic reality of its operations. There are three ways that we can do to adjust the over
or under-allocated indirect cost:
a. Adjusted allocation-rate approach:
This approach restates all overhead entries in the general ledger and subsidiary ledgers
using actual overhead cost rates rather than budgeted overhead cost rates. First, the
actual manufacturing overhead rate is computed at the end of the fiscal year. Then we
re-compute the manufacturing overhead costs allocated to every job during the year
using the actual manufacturing overhead rate instead of the budgeted one. Finally, end-
of-year closing entries are made. The result is that at year-end, every job-cost record
and finished-goods record—as well as the ending Work-in-Process Control, Finished
Goods Control, and Cost of Goods Sold accounts—represent actual manufacturing
overhead costs incurred.
Example:
Consider the Western Pulp and Paper machine job, WPP 298. Under normal costing,
the manufacturing overhead cost allocated to the job is $3,520 (the budgeted rate of
$40 per direct manufacturing labor hour * 88 hours). Increasing the manufacturing
overhead allocated by 12.5%, or $440 ($3,520 * 0.125), means the adjusted amount of
manufacturing overhead cost allocated to Job WPP 298 is $3,960 ($3,520 + $440).
Note from page 134 that using actual costing, manufacturing overhead allocated to this
job is $3,960 (the actual rate of $45 per direct manufacturing labor hour * 88 hours).
Making this adjustment to normal costing for each job in the subsidiary ledgers ensures
that the actual total manufacturing overhead costs of $1,215,000 are allocated to jobs.

b. Proration approach
This approach spreads under-or-overallocated among ending work-in- process
inventory, finished-goods inventory, and cost of goods sold.
Example:
This is the actual costs balance for Robinson Company in 2020, before proration

How should Robinson prorate the underallocated $135,000 of manufacturing overhead at

the end of 2020?
 Robinson’s actual manufacturing overhead costs ($1,215,000) in 2020 exceed its allocated
manufacturing overhead costs ($1,080,000) in 2020 by 12.5%. The prorated amounts in
column 4 can also be derived by multiplying the balances in column 2 by 12.5%. For
example, the $3,915 prorated manufacturing overhead to Finished Goods is 12.5% x
$31,320. Or we can also use the percent of total account balance to prorate the
manufacturing overhead

.
The Journal entry to record this proration is:
Work-in-Process Control 2,025
Finished Goods Control 3,915
Cost of Goods Sold 129,060
Manufacturing Overhead Allocated 1,080,000
Manufacturing Overhead Control 1,215,000

c. Write-off Approach
In this approach, the total under- or over-allocated manufacturing overhead is
included in this year’s cost of goods sold expense, the journal entry would be:

Cost of Goods Sold 135,000

Manufacturing Overhead Allocated 1,080,000
Manufacturing Overhead Control 1,215,000

10. Exerise 4-22

Answer:
 There is no under-or-overallocated under actual costing because overhead is allocated
under actual costing by multiplying actual manufacturing costs and the actual
manufacturing overhead rate. This results in equals in the actual manufacturing overhead
costs. All actual overhead costs are allocated to products. Hence, there is no under-or-
overallocated overhead.

4. Managers at Carolin Chemicals might prefer to use normal costing because it enables
them to use the budgeted manufacturing overhead rate determined at the beginning of the
year to estimate the cost of a job as soon as the job is completed. Managers want to know
job costs for on going uses, including pricing jobs, monitoring and managing costs,
evaluating the success of the job, learning about what did and didn’t work, bidding on new
jobs, and preparing interim financial statements. Under actual costing, managers would
only determine the cost of a job at the year when they know actual manufacturing overhead
costs.

11. Exercise 4-32

4. Global Pipes began May 2020, with no work-in-process inventory. During May, it
started and finished M1. It also started M2, which is still in work-in-process inventory at
the end of May. M2's manufacturing costs, $419.000 remain as a debit balance in the work
in process inventory account in May 2020.
 Week 5
• Distinguish among spoilage, rework, and scrap.
• What is the difference between normal spoilage and abnormal spoilage.
• Ex 19-20
• Normal spoilage rate is computed by dividing the units of normal spoilage by total actual
units started in production. Do you agree? Explain.
• One key assumption to determine cost of the good unit products is the inspection point.
Explain.
• “In job costing, the costs of normal spoilage that occur while a specific job is being done
are charged to the specific job.” Do you agree? Explain.
• “The costs of rework are always charged to the specific jobs in which the defects were
originally discovered.” Do you agree? Explain.
• “Abnormal rework costs should be charged to a loss account, not to manufacturing
overhead.” Do you agree? Explain.
• Ex 19-32

1. Distinguish among spoilage, rework, and scrap.

1) Spoilage
refers to units of production—whether fully or partially completed—that do not meet
the specifications required by customers for good units and are discarded or sold at
reduced prices. Examples: of spoilage are defective shirts, jeans, shoes, and carpeting
sold as “seconds” and defective aluminum cans sold to aluminum manufacturers for
remelting to produce other aluminum products.
2) Rework
refers to units of production that do not meet the specifications required by customers
but that are subsequently repaired and sold as good finished units. For example,
defective units of products (such as smartphones, tablets, and laptops) detected during
or after the production process but before the units are shipped to customers can
sometimes be reworked and sold as good products.
3) Scrap
Is a residual material that results from manufacturing a product. Examples are short
lengths from woodworking operations, edges from plastic molding operations or from
cutting sheet metals, and frayed cloth and end cuts from suit-making operations. Scrap
can sometimes be sold for relatively small amounts. In that sense, scrap is similar to by
products but the difference is scrap arises as a residual from the manufacturing process
and is not a product targeted for manufacture or sale by the firm.
2. Difference between normal spoilage and abnormal spoilage
1) Normal Spoilage
spoilage inherent in a particular production process. In particular, it arises even when
the process is carried out in an efficient manner. The costs of normal spoilage are
included as a component of the costs of good units manufactured because good units
cannot be made without also making some defective units.
2) Abnormal Spoilage
is spoilage that is not inherent in a particular production process and would not arise
under efficient operating conditions.

3. Exercise 19-20

Normal spoilage is non-recurring and avoidable. The targeted normal spoilage is subject to change.
Nowadays, many company have reduced their spoilage to almost zero, which would realize all
potential savings. Zero spoilage usually means higher-quality products, more customer satisfaction,
more employee satisfaction, and various beneficial effects on non-manufacturing costs of direct
materials (purchasing).

4. The normal spoilage rate is actually computed by dividing the units of normal spoilage by
total actual units in production or total goods unit completed and not by dividing the normal
spoilage by total actual units started in production. This way the manufacturer can compute
the spoilage more accurately after a period of production ends by using the total goods unit
completed.
5. How to determine the cost of the goods unit:
The cost of spoiled units equals all costs incurred on them up to the point of inspection.
When spoiled goods have a disposal value (for example, carpeting sold as “seconds”), the
net cost of spoilage is the cost of the spoiled goods minus the disposal value. The unit costs
of normal and abnormal spoilage are the same when the two are detected at the same
inspection point, like for example in our Anzio Company, where inspection occurs only
upon completion of the units. However, in some situations abnormal spoilage occurs at a
different point than normal spoilage. Consider shirt manufacturing. Normal spoilage in the
form of defective shirts is identified upon inspection at the end of the production process.
Now suppose a faulty machine produces defective shirts at the halfway point of the
production process. These defective shirts are abnormal spoilage that occurs at a different
point in the production process than normal spoilage. The per-unit cost of abnormal
spoilage is then based on costs incurred up to the halfway point of the production process,
while the per-unit cost of normal spoilage is based on costs incurred through the end of the
production process. How should normal spoilage costs be allocated between completed
units and ending work-in-process inventory? The general approach is to presume that
normal spoilage occurs at the inspection point in the production cycle and to therefore
allocate its cost over all units that have passed that point during the accounting period.
Example: Consider three different cases: Inspection occurs at (1) the 20%, (2) the 55%, or
(3) the 100% completion stage. The last option is the one we have analyzed so far. A total
of 1,000 units are spoiled in all three cases. Normal spoilage is 10% of the good units that
pass the inspection point during the current period. The following data are for July 2020.
Note how the number of units of normal and abnormal spoilage changes depending on
when inspection occurs.
 Using weighted-average method:

Because ending work-in-process inventory has passed the inspection point, these units are
assigned normal spoilage costs, just like units that have been completed and transferred
out. Conversion costs of units completed and transferred out equal conversion costs for (1)
7,000 good units produced plus (2) 20% * (10% * 5,500)= 110 equivalent units of normal
spoilage. We multiply by 20% to obtain the equivalent units of normal spoilage because
conversion costs are only 20% complete at the inspection point. Conversion costs of ending
work-in-process inventory equal conversion costs of (1) 50% of 2,000 = 1,000 equivalent
good units plus (2) 20% * (10% * 2,000) = 40 equivalent units of normal spoilage. Thus,
equivalent units of normal spoilage accounted for equal 110 equivalent units related to
units completed and transferred out plus 40 equivalent units related to units in ending work
in process, for a total of 150 equivalent units.

6. I agree because when normal spoilage occurs when a specific job is being done, that
particular job bears the cost of spoilage minus the disposal value of the spoilage. The
journal entry to recognize the disposal value follows (items in parentheses indicate
subsidiary ledger postings):
 Materials Control (spoiled goods at current net disposal value): 5 units x $600 per unit 3.000

Work-in-Process Control (specific job): 5 units x $600 per unit 3.000

7. I agree because if the rework is normal but occurs because of the requirements of a specific
the rework costs are charged to that job.
Journal entry:
Work-in-Process Control (specific job) 3.800
Materials Control 800
Wages Payable Control 2.000
Manufacturing Overhead Allocated 1.000

8. Yes, I agree because if rework is abnormal, it is charged to a loss account and not to the
manufacturing overhead. Why do we have to do this? Because abnormal rework represents
unexpected or unusual expenses that are not part of the normal operating costs of a
business. So we have to distinguish them from normal operating expenses, provide
transparency in financial reporting, accurately reflect their impact on profitability, support
effective decision-making, ensure compliance with accounting standards, and facilitate
budgeting and forecasting.

Loss from Abnormal Rework 3.800

Materials Control 800
Wages Payable Control 2.000
Manufacturing Overhead Allocated 1.000

9. Exercise 19-32

Remaining costs for the 1.680 remaining boxes remains the same (9 per box) because it’s
unnafected by the loss from abnormal spoilage.

c. The unit cost in 2a and 2b are different because in 2a the normal spoilage cost is charged
as a cost of the job that has exacting specifications. In 2b, however, normal spoilage is due
to production process, not related to an attribute of this specific job.