Job Costing: Appropriate Industries, Method, and Cost Allocation

This document provides an overview of job costing, its suitability for different industries, the method used, and cost allocation. It also explains the concept of overapplied and underapplied overhead and explores the differences between job costing and activity-based costing.

For, Concetta Ltd. 2019
Answer 1:
Job costing as a costing approach is appropriate for industries which
manufactures specialised goods or have spate product lines for various
products manufactured and each such separate product line have
significant separable costs. Example of company for which using job
costing is appropriate are construction companies, FMCG companies,
companies in aviation industry, merchandising company etc.
Job costing also known as the traditional costing method is the simplest of
all costing approaches used. This method collects all the cost that has
been incurred by the company in a given period of time and then allocates
the entire cost to the various products of the company based on one
single allocation factor which can be total machine hours or labour hour
worked, total labour cost incurred, total production in the company or any
such similar allocation base (Bragg, 2019).
The total cost for the allocation is all costs including Direct Material, Direct
Labour and Manufacturing overheads of the company.
Answer 2:
The company Concetta Ltd. has 3 jobs as opening Work In process
Inventory as on 30 November. The company was able to complete some
and transfer to finished goods. The ending WIP for the company can be
computed as below:
For Concetta Ltd
Job No. Opening WIP
- 30
November
Completed
and
transferred
Closing WIP -
December 31
CC723 20,000 20,000 0
CH291 15,000 15,000 0
PS812 25,000 0 25,000
We see there were 3 jobs as opening WIP and completed 2 of them
completely in December. The ending WIP of the company was 25,000
units of Job No PS812 as at 31 December.
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For, Concetta Ltd. 2019
The cost of the ending WIP inventory account as at 31 December is
computed as below:
Computation of balance in Ending WIP - 31/12
Particulars Amount Amount
Opening Balance as on 11/30 $2,50,000
Add: Additions in December
Raw Material $1,24,000
Purchased Parts $87,000
Labour Cost $2,00,500
Manufacturing
Overhead
(19,500 * $5/hr)
$97,500 $5,09,000
Balance in WIP inventory account as at
31/12
$7,59,00
0
Explanation:
1. The cost of the ending WIP is opening + costs added to the WIP
during the month in direct material, direct labour and overheads
applied.
2. The company applies overhead to the product based on the
machine hours worked by the company. The company estimated
that a total of 900,000 machine hours will be worked during the
year.
3. The total estimated overhead of the company is $4,500,000.
4. Based on this, the pre-determined overhead rate based on total
machine hours is computed as below:
Computation of pre-determined Overhead
Rate
Total manufacturing overhead
budget
$4,500,00
0
Total Machine Hours 900,000
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For, Concetta Ltd. 2019
Therefore, pre-determined
overhead rate
(Total Overhead / Total Machine
Hours)
$5
Answer: The balance in Work in process inventory account as at 31
December for Concetta Ltd. is $759,000.
Answer 3:
The cost of the chairs in Concetta’s Finished Goods Inventory as at
December 31 is computed as below:
Value of Finished Goods Inventory
Per unit cost $34
Ending inventory 12/31 $13,400
Value of Finished Goods Inventory $4,55,60
0
Explanation:
1. The no. of units in the finished good inventory for chairs is
computed as below:
Finished Goods Inventory of Chair
Particulars Amount
Inventory as on 11/30 19,400
Add: Units Completed during the month 15,000
Units available for sale 34,400
Less: No. of units sold during the month 21,000
Thus, Ending inventory 12/31 in units 13,400
2. The company uses FIFO method of inventory valuation. This
indicates that the Inventory as on 11/30 have been sold first and
thus the Inventory as on 12/31 consists of units that were
manufactured during the month.
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For, Concetta Ltd. 2019
3. The cost of the 15,000 units that were manufactured during the
month is computed as below:
Units of Chairs Completed in December
Particulars Amount Amount
WIP Inventory as on 11/30 $4,31,000
Add: Additions in December
Raw Material, $3,000
Purchased Parts $10,800
Labour Cost $43,200
Manufacturing
Overhead
(4,400 * $5/hr)
$22,000 $79,000
Total Cost of the Chairs in the
month
$5,10,00
0
4. Based on total cost $510,000 for 15,000 units manufactured during
the month. The per unit rate is computed as below:
Per unit cost of Chairs Produced
Total Chairs Manufactured during the
month
15,000
Total Cost of the Chairs in the month $5,10,00
0
Per unit cost $34
5. The ending inventory is then simply this per unit cost * units in
ending inventory.
Answer: The cost of the chairs in Concetta’s Finished Goods Inventory as
at December 31 is $455,600.
Answer 4:
The overapplied or underapplied overhead for the company is computed
as below:
Overapplied Overhead
Overhead applied during the
year
$43,99,50
0
Actual Overhead incurred $43,92,00
0
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For, Concetta Ltd. 2019
Overapplied Overhead $7,500
Explanation:
1. The overheads are said to be Overapplied or Underapplied when the
applied overhead of the company differs from the overhead actually
incurred by the company.
2. Overapplied: When the overhead applied is more than the actual
overhead.
3. Underapplied: When the overhead applied is less than the actual
overhead.
4. The total overhead incurred by the company is computed as below:
Computation of Total Overhead Incurred
From January to November $41,40,000
For December $2,52,000
Total during the year $43,92,000
5. The total overhead applied on the basis of machine hours is as
below:
Computation of Machine Hours Used
From January to November 8,30,000
For December 49,900
Total during the year 8,79,900
Total Overhead applied
(879,900 mc hrs * $5/mc hr)
$43,99,5
00
6. Since the overhead applied are more than the actual overhead, the
company has over applied overhead.
Answer: Concetta Ltd. over applied overhead to the tune of $7,500.
Answer 5:
Often it is seen that there are differences between the actual overheads
that have been incurred by the company and the total overheads that
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For, Concetta Ltd. 2019
have been applied by the company using principles of job costing method.
These differences refer to either over application of overheads (When the
actual overhead is less than the overhead applied by the company) or
under application of overheads (When the actual overhead is more than
the overhead applied by the company).
At the end of the financial year this difference must be balanced and for
doing so the company can use either of the two accounting treatments as
mentioned below:
Treatment – 1: Assign to Cost of Goods Sold and balance
When the difference between the actual and applied overhead is not
material in volume or nature, the same is simply adjusted (added for
under application and subtracted for over application) to the cost of goods
sold computed during the year.
This is feasible only when the differences are not substantial in amount
and will not affect the cost of goods sold exponentially, because if the
adjustment leads to unproportionate lower or higher cost of goods sold,
the profit for the year will be affected adversely giving misguiding results.
The allocation of the difference directly to the cost of goods sold balances
the difference during the given period of time.
Treatment – 2: Assign the difference to units worked on during the year
When the difference between the actual and applied overhead is material
in volume or nature, adjusting it with the cost of goods sold will affect the
profitability of the company adversely. Keeping the view the requirement
that the accounts of the company should reflect true and fair view of the
state of affairs of the company, the same is not recommended.
In such a situation, the adjustment is made to all the products that were
affected during the year, be it the WIP, Finished goods inventory or sales
made. This is because the overheads were applied to these units only, and
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For, Concetta Ltd. 2019
the difference is also adjusted with each of them reflecting their true cost
and ultimately the true profitability of the company.
Answer 6:
The activity based costing is a modern approach to costing wherein the
product costs of the organization is computed on the basis of the costs of
each activity that is being consumed by the product till it reaches a the
delivery point for the consumers. ABC starts with identification of the
underlying activities or resources of the organisation and then allocates
the resource costs to the products and/or services based on the usage of
these resources. This is a more robust approach of allocating overhead
costs to the products of an organization.
Both Conventional and ABC costing method allocates the cost of the
company to the product sold. The major point of difference between the
two is the allocation base that they use to allocate the costs to the
company to the products.
While, ABC costing starts with accumulation of overhead costs for each of
the resource activities of an organization, and then assignment of these
costs to various activity drivers based on their usage of the resource
activity, the conventional costing method uses a single plantwide rate for
overhead allocation.
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For, Concetta Ltd. 2019
References
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