Industrial engineers are engaged in productivity improvement of resources used in production (or other engineering processes). They reduce resource consumption in various operations of the processes and thus reduce the cost. To help them in cost reduction, industrial engineers have to prepare process chart costing sheets. The sheets utilize job costing system in case of discrete production systems.
Job Costing System
In this system of costing, the cost object is an individual unit of product or service, part, batch, or lot. A classic example is an order based job made for a specific customer. Hence the name job costing.
Relevant Cost Concepts
Cost objectDirect cost of a cost object
Indirect cost of a cost object
Cost pool: Cost pool is grouping of individual cost items. It can be very broad comprising of hundreds of cost items. Or it can be narrow having only two items
Cost-allocation base: Cost allocation bases are used to link an indirect cost pool to a cost object. Usually cost drivers are used as cost allocation bases. Horngren gave the example automobile operating cost of an organization. The cost driver is number of miles traveled. Number of miles traveled is used as a cost allocation base. Different jobs are charged for automobile cost on the basis of number of miles traveled by the persons of the organization in producing and delivering the job.
Relevant Costing Concepts
Actual Costing: Actual costing is costing method that traces direct costs to a cost object by using actual direct-cost rate of cost item times the actual quantity of the direct-cost input (item) and allocates indirect costs based on the actual indirect-cost rate (rates in case multiple indirect cost pools are there) times the actual quantity of the cost-allocation base (appropriate base when multiple cost pools are used).Normal Costing: In this method of costing, direct costs are traced to cost object in the same manner as in actual costing. But indirect costs are allocated on the basis of budgeted indirect-cost rate and the actual cost quantity of cost allocation base.
Source Documents in Job Costing
An accountant in financial accounting system makes entries on the basis of some source documents and journal and ledger are the main registers for accounting entries.Similarly cost accounting is also based on source documents and records. A key document or record or account in cost accounting is job cost record (or job cost sheet). It records and accumulates all the costs assigned to a specific job as resources were consumed in producing the goods and services specified in the job. Hence, the job cost record is started as soon as the work begins on a particular job.
Each entry in a job cost record is based on a source document.
Materials from the store are ordered by the manufacturing engineers using a materials requisition record. This form is the source document for charging job cost records and department for the cost of direct materials used on a specific job.
For recording direct labor related costs in job cost record, labor-time record is the source document. Each employees of the organization can have a labor time record and the time that he spends on various jobs is recorded on a daily basis on this record. The cost per hour of each employee is determined and accordingly labor cost is recorded in job cost records.
The indirect cost items are given standing order numbers and standing order cost records are maintained for them. Based on materials requisition records and labor-time records costs are charged to standing order cost records.
Special attention needs to be paid to the accuracy of the source documents as the accuracy of job cost records depends on the reliability of inputs.
Seven Step Procedure of Job Costing
Step 1: Identify the chosen cost object. The specific jobs for which job cost is to be ascertained is to uniquely identified and a job cost record is to be opened for each job.Step 2: Identify the direct costs of the job: The job number is to be mentioned in the material requisition record and labor-time records. From these source documents, the job cost records are to be posted or charged with direct costs.
Step 3: Select the cost allocation bases to use for allocating indirect costs to the job.
Step 4: Identify the indirect costs associated with each cost allocation base.
Step 5: Compute the rate per unit of each cost-allocation base.
Step 6: Compute the indirect costs allocated to the job.
Step 7: Compute the total cost of the job by adding all direct and indirect costs.
Journal and Ledger Entries in Cost Accounting
Like in financial accounting, in cost accounting also journal and ledger are maintained.Job costing system has a separate job cost record for each job and entries are made in it for each cost item charged to it. A summary of the job cost record is posted in a subsidiary ledger. In the general ledger, Work-in-Process Control Account is there and it presents the totals of the separate job cost records pertaining to all unfinished jobs.
A general ledger account with control in their name or title signifies or indicates that they are supported by underlying subsidiary ledgers that have additional details. Materials Control Account and Accounts Payable Control Account are additional examples of control accounts. Material Control Account has a subsidiary ledger – Stores Ledger that has detail on each type of material stored and used in the company. Accounts Payable Control Account has a subsidiary ledger that has accounts of individual suppliers.
Horngren has given examples of transactions to illustrate the use of journal entries in cost accounting.
1. Purchases of materials on credit $89,000
Materials Control A/c Dr. $89,000
To Accounts Payable Control $89,000
2. Materials issued to manufacturing departments: direct materials: $81,000, and indirect materials $4,000
Work-in Process Control A/c Dr. $81,000
Manufacturing Overhead Control A/c Dr. 4,000
To Materials Control $85,000
3. Total manufacturing payroll or salaries and wages: Direct $39,000 and indirect, $15,000
Work-in Process Control A/c Dr. $39,000
Manufacturing Overhead Control A/c Dr. 15,000
To Materials Control $54,000
Summary
The important points to be remembered from this chapter or topic are the method of arriving at job cost and method of arriving at indirect cost of a job. There are source documents and from these source documents job cost record is prepared and this record will show the cost of a job. Journal and ledger are kept and the ledger will show the value of inventory in the form of material, work-in process and finished goods.Costing Process Charts
We can take the process described in a process chart for a discrete industry product as the cost object and determine the final cost of the product and also provide the cost of various components that go into the product. We can do cost measurements for various elemental inputs that go into each part and into the assembly operations. Such measurements will guide process cost analysis to reduce the cost of the whole process by reducing the cost at element level, part level and operation level as feasible.
Process charts can be operation process charts of flow process charts. Operation process charts contain only material transformation operations and inspection operations. Hence the operation chart costing will show the cost spent for material transformation and inspection operations.
Flow process chart will also depict material transport cost between machines and departments, warehousing costs and cost of delays. Hence costing of flow process chart will provide the total cost of tranferring a finish item to the store for either despatch or for further internal processing.
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