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Chapter 4 Part 2. Source Documents 1. Job Cost Record - is a document that records and accumulates all the costs assigned to a specific job. - is the basic record for product costing. Materials Requisition Record

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Source Documents 1

Job Cost Record- is a document that records and accumulates all the costs assigned to a specific job.

- is the basic record for product costing.

Materials Requisition Record

- is the form used to charge job cost records and departments for the cost of direct materials used on specific jobs.


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Source Documents 2

Labor Time Record

It is used to charge job cost records and departments for labor time used on specific jobs.

It shows the time each employee spent on individual jobs.


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Actual Costing Systemfor allocating indirect costs

Choose a cost allocation base (cost driver)

Actual indirect cost rate =

Actual costs in indirect cost poolActual total quantity of cost allocation base

In Actual costing, indirect costs of a cost object

= actual indirect cost ratex actual quantity of cost allocation base for the cost object


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Normal Costing Systemsfor allocating indirect costs

Choose a cost allocation base (cost driver)

Budgeted indirect cost rate =

Budgeted costs in indirect cost poolBudgeted total quantity of cost allocation base

In Normal costing, indirect costs of a cost object

= Budgeted indirect cost ratex actual quantity of cost allocation base for the cost object


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Longer Time Period Used to Compute Indirect-Cost Rates

The numerator reason(indirect costs):

The shorter the period, the greater the influence of seasonal patterns on the level of costs.

The denominator reason (quantity of the allocation base):

The need to spread monthly fixed indirect costs over fluctuating levels of output.

General and Subsidiary Ledgers


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Budgeted Indirect Costs

  • Budgeted indirect-cost rates can be assigned to individual jobs on an ongoing and timely basis.

  • However, budgeted rates are based on estimates made up to 12 months before actual costs are incurred.

  • Adjustments may need to made by year end.


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Under / Over Allocation

  • Underallocated indirect costsoccur when the allocated amount of indirect costs in an accounting period is less than the actual amount incurred.

  • Overallocated indirect costsoccur when the allocated amount of indirect costs is greater than the actual amount incurred.


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Underallocated or underabsorbed costs

Underallocated indirect costs

= Indirect costs incurred – Indirect costs allocated

Underallocated indirect costs

same as underapplied indirect costs

same as underabsorbed indirect costs

Similar terms for overallocated indirect costs


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End-Of-Period Adjustments

Reasons for the underallocated amount:

Numerator reason (indirect costs)

Denominator reason (quantity of allocation base)

Approaches to disposing underallocated or overallocated overhead:

1 Adjusted allocation rate approach

2 Proration approaches

  • Immediate write-off to Cost of Goods Sold approach


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Adjusted Allocation Rate Approach

  • restates all entries in the general and subsidiary ledgers by using actual cost rates rather than budgeted cost rates.

  • Actual indirect-cost rate is computed at the end of the year.

  • Every job to which indirect costs were allocated during the year has its amount recomputed.

  • Leads to Actual Costing


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Proration Approach

  • Proration is the spreading of under- or overallocated overhead among ending work in process, finished goods, and cost of goods sold.

  • Basis to prorate under- or overallocated overhead:

  • Total amount of manufacturing overhead allocated (before proration)

  • Ending balances of Work-in-Process, Finished Goods, and Cost of Goods Sold - NO

    (old inventories allocated new amounts)


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Choosing Among Approaches

  • The adjusted allocation rate approach provides the most accurate record of individual job costs.

  • Indirect-cost-allocated components provides the most accurate inventory and cost of goods sold figures.

  • Immediate write-off approach is the simplest.


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Example 0

Newman Sports manufactures various sporting goods and planning to sell a batch of 25 special machines (Job 100) to Healthy Gym for $104,800.

A key issue for Newman Sports in determining this price is the cost of doing the job.

  • Step 1: The cost object is Job 100.

  • Step 2: Identify the direct costs of Job 100.

    Direct material = $45,000

    Direct manufacturing labor = $14,000


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Example

Step 3: Select the cost-allocation base.

Newman chose machines hours as the only allocation base for linking all indirect manufacturing costs to jobs.

Job 100 used 500 machine hours.

2,480 machine hours were used by all jobs.


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Example

Step 4: Identify the indirect costs.

Actual manufacturing overhead costs $65,100.

Step 5: Compute the rate per unit. Actual indirect cost rate is $65,100 ÷ 2,480= $26.25 per machine hour.

Step 6: Compute the indirect costs allocated to the job.

$26.25 per machine hour × 500 hours = $13,125


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Example

Step 7: Compute the cost of Job No. 100.

Direct materials $45,000

Direct labor 14,000

Factory overhead 13,125

Total $72,125


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Example

What is the gross margin of this job?

Revenues $104,800

Cost of goods sold 72,125

Gross margin $ 32,675

What is the gross margin percentage?

$32,675 ÷ $104,800 = 31.2%


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Normal Costing Example

Assume that Newman Sports budgets $60,000 for total manufacturing overhead costs and 2,400 machine hours.

What is the budgeted indirect-cost rate?

$60,000 ÷ 2,400 = $25 per hour

How much indirect cost was allocated to Job 100?


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Normal Costing Example

500 machine hours × $25 = $12,500

What is the cost of Job 100 under normal costing?

Direct materials 45,000

Direct labor 14,000

Factory overhead 12,500

Total $71,500


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