Chapter 4: Job Costing

Question 1

What is costing?

Answer 1

process of accumulating, classifying, and assigning direct materials, direct labor and factory overhead costs to products, services, or projects.

Question 2

Name three considerations in developing a costing system?

Answer 2

1. Cost accumulation method: job costing / process costing
2. Cost measurement method: Actual, normal, or standard costing
3. Overhead application method: volume-based or activity-based

Question 3

What is job costing?

Answer 3

: tracing costs to specific product or service. Jobs consist of individual products / services. Most appropriate when costs can be readily identified with a specific product or service

Question 4

What is process costing?

Answer 4

accumulating costs at departmental level and allocation these cost to products or services. Most appropriate in firms primarily producing homogeneous products or services, or continuous mass production.

Question 5

What is normal costing?

Answer 5

uses actual costs for direct materials and direct labor and normal costs for factory overhead. Normal costing involves estimating a portion of the overhead to be assigned to each product as it is produced.

Question 6

What is actual costing?

Answer 6

uses actual costs incurred for all product costs, including Direct Materials, Direct Labor and factory overhead

Question 7

What is standard costing?

Answer 7

uses standard costs and quantities for Direct Materials, Direct Labor and Factory overhead. Standard costs are expected costs the firm should attain.

Question 8

What is volume based costing?

Answer 8

Volume-based costing systems use one volume-based cost driver to proportionally allocate overhead over multiple products

Question 9

What is activity based costing?

Answer 9

allocate factory overhead costs to products using cause-and-effect criteria with multiple cost drivers.

Question 10

What is overhead application?

Answer 10

process of allocating overhead costs to cost objects

Question 11

What are actual costing systems?

Answer 11

costing process using actual costing incurred for direct materials, direct labor and factory overhead

Question 12

What is actual factory overhead?

Answer 12

costs incurred for indirect materials, indirect labor and other indirect production costs, including factory rent, insurance property tax.

Question 13

Name the 4 steps to obtain predetermined overhead rate?

Answer 13

1. Estimate total factory overhead costs for the planned production for the upcoming operation period, usually a year. This value will become the numerator amount
2. Select most appropriate cost driver for applying the factory overhead costs
3. Estimate total amount of the chosen cost driver for the upcoming operating period. This value will become the denominator amount
4. Divide estimated factory overhead costs by estimated amount of the chose cost driver to obtain predetermined overhead rate

Question 13

What are normal costing systems?

Answer 13

costing process that uses actual costs for direct materials and direct labor and applies factory overhead to various jobs using a predetermined application rate

Question 14

What is predetermined factory overhead rate?

Answer 14

estimated rate used to apply factory overhead to a cost object

Question 15

What is factory overhead applied?

Answer 15

amount of overhead assigned to a cost object using a predetermined factory overhead rate

Question 16

Name the two ways to dispose of difference in applied and actual overhead?

Answer 16

• If significant: spread over WIP, FG and COGS on proportional basis
• If not significant: adjusted to COGS

Question 17

When can the plantwide approach be used for overhead assignment?

Answer 17

Plantwide approach to overhead assignment can be used only when the overhead rate determined by this approach is very similar to that of a departmental approach.

Question 18

What are overapplied and underapplied overhead?

Answer 18

Overapplied overhead: excess of applied overhead over actual factory overhead cost for a period
Underapplied overhead: amount by which actual factory overhead exceeds factory overhead applied

Question 19

Name three potential errors in overhead applications?

Answer 19

1. Aggregation error
2. Specification error
3. Measurement error

Question 20

What is aggregation error in overhead application?

Answer 20

arises when one costing method is used as compared to another, but the one used is not as accurate as the other one and with volume, the difference ends up being significant

Question 21

What is a specification error in overhead application?

Answer 21

wrong cost driver is used in application rate

Question 22

What is measurement error in overhead application?

Answer 22

amounts used for estimated cost driver or estimated overhead are incorrect.

Question 23

What is operation costing?

Answer 23

Hybrid costing system that uses job costing to assign direct materials costs to jobs and process costing to assign conversion costs to products or services