Using Cost Codes In Budgeting
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Essay
Job costing
and batch costing are both methods of costing. Both are used in specific order
costing. But job costing determines the cost of one unit of production but in
batch costing, we will be unable to calculate the cost of one unit. For example
you see 12 biscuits in one pack of biscuits. But this pack is the batch of 12.
We will calculate the cost of one pack instead of one biscuit.
Using job costing
In a job
costing system, costs may be accumulated either by job or by batch. For a
typical job, direct material, labor, subcontract costs, equipment, and other
direct costs are tracked at their actual values. These are accrued until the
job or batch is completed. Overhead or "burden" may be applied either
by using a rate based on direct labor hours or by using some other Activity
Based Costing (ABC) cost driver. In either case, once overhead/burden is added,
the total cost for the job can be determined. If the accountant is using a
general ledger accounting system, which lacks true job costing functionality,
the costs must be manually transferred out of Work in Process to Finished Goods
(Cost of Goods Sold for service industries). Of course, in the days of
computerized job costing software, journaling costs manually is an obsolete
process. Such hand-journaling is mandatory for companies that continue to use
general accounting software to do job costing. Enlightened accountants are
moving forward and using job costing software, thereby improving cost control,
reducing risk, and increasing the chance of profitability.essay is an example of a student's work
Disclaimer
Using cost codes in budgeting
In a true job
cost accounting system, a Budget is set up in advance of the job. As actual
costs are accrued, they are compared to budgeted costs, to determine variances
for each phase of each job. Cost Codes are used for each phase, allowing
"mini-budgets" to be generated and tracked. In the construction
industry, the Construction Specifications Institute (CSI) has established an
industry standard Cost Coding system. Job costing system consists of various
cost driver that drives job cost, moreover it
An advertising campaign for Pepsi is likely to
be very specific to that individual client. Job costing enables all the
specific aspects of each job to be identified. In contrast, the processing of
checking account withdrawals is similar for many customers. Here, process
costing can be used to compute the cost of each checking account withdrawal.
The seven steps in job costing are:
1.) Identify
the job that is the chosen cost object,
2.) Identify
the direct costs of the job,
3.) Select
the costallocation bases to use for allocating indirect costs to the job,
4.) Identify
the indirect costs associated with each costallocation base,
5.) Compute
the rate per unit of each costallocation base used to allocate indirect costs
to the job,
6.) Compute
the indirect costs allocated to the job, and
7.) Compute
the total cost of the job by adding all direct and indirect costs assigned to
the job.
Example
These
examples will assume that overhead is allocated on the basis of Direct Labor
Hours. Direct Material is abbreviated DM, Direct Labor as DL, and Overhead as
OH.
XYZ
corporation manufactures airplanes. 1 order was completed (110), 2 received
further work (111, 112), and 1 new order was received (113). Overhead is
allocated at a rate of $100/DL Hour. All employees earn $20/hour. Beginning
Work In Process Balances are as follows: 110, $25,000; 111, $10,000; 112,
$12,000; 113 $0 (New Order). Below are the amounts of DM and DL used.
110 $2,000
DM, 25 DL hours. Therefore, $5,000 in new cost is added ($2,000 DM, $500 DL,
$2,500 OH). The job had a total cost of $30,000. this amount is transferred out
of Work in Process to Finished Goods or Cost of Goods Sold.
111 $3,000
DM, 30 DL hours. Therefore, $6,600 in new cost is added ($3,000 DM, $600 DL,
$3,000 OH). The job has a new total cost of $16,600. This amount remains in
Work in Process until completion.
112 $5,000
DM, 100 DL hours. Therefore, $17,000 in new cost is added ($5,000 DM, $2,000
DL, $10,000 OH). The job has a new total cost of $29,000. This amount remains
in Work in Process until completion.
113 $1,000
DM, 10 DL hours. Therefore, $2,200 in new cost is added ($1,000 DM, $200 DL,
$1000 OH). The job has a new total cost of $2,200. This amount remains in Work
in Process until completion.
Caution:
Remember, overhead is allocated on the basis of DL hours. While in this case,
allocating overhead on the basis of DL cost ($5 of overhead for every $1 DL
cost) would produce the same result, this may not always be the case. Since
rates are developed based on a budget, if employees are actually paid a
different rate from the budgeted rate, allocating at a $5 to $1 ratio would
produce a different cost from the stated $100/DL hour allocation. Companies use
slightly different overhead allocation methods.
PROCESS COSTING:
Process
costing is an accounting methodology that traces and accumulates direct costs,
and allocates indirect costs of a manufacturing process. Costs are assigned to
products, usually in a large batch, which might include an entire month's
production. Eventually, costs have to be allocated to individual units of
product. It assigns average costs to each unit, and is the opposite extreme of
Job costing which attempts to measure individual costs of production of each
unit. Process costing is usually a significant chapter.
The importance of process costing
Costing is an
important process that many companies engage in to keep track of where their
money is being spent in the production and distribution processes. Understanding
these costs is the first step in being able to control them. It is very
important that a company chooses the appropriate type of costing system for
their product type and industry. One type of costing system that is used in
certain industries is process costing that varies from other types of costing
(such as job costing) in some ways. In Process costing unit costs are more like
averages, the process-costing system requires less bookkeeping than does a
job-order costing system. So, a lot of companies prefer to use process-costing
system.
Reasons for use
Companies
need to allocate total product costs to units of product for the following
reasons:
A company may
manufacture thousands or millions of units of product in a given period of
time.
Products are
manufactured in large quantities, but products may be sold in small quantities,
sometimes one at a time (automobiles, loaves of bread), a dozen or two at a
time (eggs, cookies), etc.
Product costs
must be transferred from Finished Goods to Cost of Goods Sold as sales are
made. This requires a correct and accurate accounting of product costs per
unit, to have a proper matching of product costs against related sales revenue.
Managers need
to maintain cost control over the manufacturing process. Process costing
provides managers with feedback that can be used to compare similar product
costs from one month to the next, keeping costs in line with projected
manufacturing budgets.
A
fraction-of-a-cent cost change can represent a large dollar change in overall
profitability, when selling millions of units of product a month. Managers must
carefully watch per unit costs on a daily basis through the production process,
while at the same time dealing with materials and output in huge quantities.
Materials
part way through a process (e.g. chemicals) might need to be given a value,
process costing allows for this. By determining what cost the part processed
material has incurred such as labor or overhead an "equivalent unit"
relative to the value of a finished process can be calculated.
Process cost procedures
There are
four basic steps in accounting for Process cost:
Summarize the
flow of physical units of output.
Compute
output in terms of equivalent units.
Summarize
total costs to account for and Compute equivalent unit costs.
Assign total
costs to units completed and to units in ending work in process inventory.
Job costing vs. process costing
Job costing
(known by some as job order costing) is fundamental to managerial accounting.
It differs from Process costing in that the flow of costs is tracked by job or
batch instead of by process.
The
distinction between job costing and process costing hinges on the nature of the
product and, therefore, on the type of production process:
Process
costing is used when the products are more homogeneous in nature. Conversely,
job costing systems assign costs to distinct production jobs that are
significantly different. An average cost per unit of product is then calculated
for each job.
Process
costing systems assign costs to one or more production processes. Because all
units are identical or very similar, average costs for each unit of product are
calculated by dividing the process costs by the number of units produced.
Many
businesses produce products with some unique features and some common
processes. These businesses use costing systems that have both job and process
costing features
A Detailed Worked Example
The following
example illustrates how to approach a Process Costing question, paying
particular attention to presentation and calculation. Candidates should always
strive to present their solutions as neatly and methodically as possible, not
only to help the marker follow the calculations, but also to allow themselves
to check that they have not missed out a vital step.
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