The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.
| Decision | Guidelines | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| The building-block concepts of a costing system are cost object, direct costs of a cost object, indirect costs of a cost object, cost pool, and cost-allocation base. Costing-system overview diagrams represent these five concepts in a systematic way. Costing systems aim to report cost numbers that reflect the way cost objects (such as products or services) use the resources of an organization. | |||||||||
| Job-costing systems assign costs to distinct units of a product or service. Process-costing systems assign costs to masses of identical or similar units of a product or service and compute unit costs on an average basis. These two costing systems represent opposite ends of a continuum. The costing systems of many companies combine some elements of both job costing and process costing. | |||||||||
| The main challenge of implementing job-costing systems is estimating actual costs of jobs in a timely manner. | |||||||||
| A general seven-step approach to normal costing requires identifying (1) the job, (2) the actual direct costs, (3) the cost-allocation bases, (4) the budgeted indirect costs associated with each cost allocation base, i.e., the indirect-cost pools, (5) the budgeted cost-allocation rates, (6) the allocated indirect costs (budgeted rates times actual quantities of the cost-allocation bases), and (7) the total costs of a job. | |||||||||
| Actual costing and normal costing differ in the indirect-cost rates used:
Both systems use actual quantities of inputs for tracing direct costs and actual quantities of the cost-allocation bases for allocating indirect costs. | |||||||||
| A manufacturing job-costing system records the flow of inventoriable costs in the general and subsidiary ledgers for (1) acquisition of materials and other manufacturing inputs, (2) their conversion into work in process, (3) their conversion into finished goods, and (4) the sale of finished goods. The job-costing system expenses period costs, such as marketing costs, as they are incurred. | |||||||||
| The two standard approaches of adjusting for under- or overallocated manufacturing overhead costs at the end of the accounting year for the purposes of stating balance sheet and income statement amounts at actual costs are (1) to adjust the allocation rate and (2) to prorate on the basis of the total amount of the allocated manufacturing overhead cost in the ending balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold accounts. Many companies write off amounts of under- or overallocated manufacturing overhead costs to Cost of Goods Sold when the amounts are immaterial or when the underallocated overhead costs are the result of inefficiencies. | |||||||||
| In some variations of normal costing, organizations use budgeted rates to assign direct costs, as well as indirect costs, to jobs. |