A Job Costing System Accumulates Economics Essay

A Job Costing System Accumulates Economics Essay Chapter 14 A job-costing system accumulates and analyzes costs separately for each product or small batches of products. Examples of firms that use job-costing systems include law firms and firms that build custom houses. A process-costing system accumulates and analyzes costs by each process (or a department) rather than by each job. Examples of firms that use process-costing systems include steel mills and paper companies. Direct materials and direct labor are traced, and overhead is allocated. Work in process inventory is the inventory of unfinished products at the start of a period. Cost of goods manufactured is the cost of items finished and transferred from work in process inventory to finished goods inventory. Cost of goods sold is the cost of products sold in a period. It is the cost of items transferred from finished goods inventory to the income statement. A predetermined overhead rate equals expected overhead costs for the period divided by the expected activity level. Fi rms use predetermined overhead rates because actual overhead costs and activity volumes frequently fluctuate. A normal-costing system is a job-costing system that uses a predetermined overhead rate. Underapplied overhead means that the overhead applied to jobs is smaller than the amount actually spent on overhead. Overapplied overhead means that the overhead applied to jobs exceeds the amount spent on overhead. False – if a firm has underapplied overhead, the actual rate must have exceeded the predetermined rate. (1) correct rates are year end, (2) write off to cost of goods sold, and (3) prorate among inventory accounts and cost of goods sold. The adjustment will increase cost of goods sold and, in turn, decrease net income. The proration method allocates the under- or overapplied overhead to WIP inventory, FG inventory, and cost of goods sold in proportion to their unadjusted ending balances. Three accounts will be affected: (1) WIP, (2) FG, and (3) COGS. Income will be hig her under the proration method because some of the adjustment will be to the inventory account. Discussion Questions Job shops and process shops differ considerably in the extent to which we can trace costs to individual units and jobs. A pure job shop makes custom products. Each unit is a separate job and is unique. It is therefore possible to trace many costs directly to each job. However, in process shops, it is not possible to trace most costs to individual units. Rather, we can trace the costs, even for direct materials and direct labor, only at the process or departmental level. Yes. Each patient’s care may be viewed as a job. Many of the costs, including the costs of nurse care, attending physician’s time, medicines and drugs, room occupancy can be directly traced to the patient. Some indirect costs may still have to be allocated. However, such a system also has elements of process costing in that we might use pre-determined rates (e.g., $40 per hour of nursing or $100 per visit by a doctor) to determine costs rather than use actual costs. Business consulting firms are likely to have job-costing like systems. Fast food restaurants like McDonald’s have more of process costing-type environment.