Costing methods

• Costing involves classifying, accumulating, and assigning direct materials, direct labor, and factory overhead expenses to cost objects such as products, services, or projects.
• When developing a costing system, management accountants must make choices regarding the cost accumulation method, cost measurement method, and overhead application method.
• The cost accumulation methods includes job costing and process costing.
• Cost measurement methods include actual, normal, and standard costing.
• Overhead application methods includes volume-based or activity-based.

Cost Accumulation

• Job costing is used for individual products, batches, or services where costs can be easily identified with a specific job, order, contract or project.
• Job costing companies include: construction, printing, special equipment manufacturing, shipbuilding, custom furniture manufacturing, professional, medical, and advertising.
• In a job costing system, a job can be a single product, or multiple products in a batch.
• "Push method" distributes a product to a warehouse for future sale.
• "Pull method" is based on direct customer demand.
• Process costing is typically used for homogeneous products and/or services with continuous mass production.
• Process costing is used in industries like chemical, bottling, plastics, food and paper.

Cost Measurement

• Actual costing uses actual costs incurred for direct materials, direct labor, and factory overhead.
• Normal costing uses actual costs for direct materials and direct labor but normal costs for factory overhead, estimating a portion of overhead to be assigned to each product.
• Normal costing provides a timely estimate of the cost of production.
• Standard costing uses standard costs and quantities for direct materials, direct labor, and factory overhead, representing the expected costs the firm should attain.
• Standard costing allows for cost control, performance evaluation, and process improvement.

Overhead Application

• Volume-based product costing allocates overhead to products or jobs using only volume-based cost drivers like units produced, assuming each product uses the same amount of overhead.
• Activity-based costing (ABC) allocates factory overhead costs using cause-and-effect criteria with multiple cost drivers and both volume-based and non-volume-based cost drivers.
• ABC accurately allocates costs to products based on resource consumption during various activities

Strategic Role of Costing

• Accurate cost information is needed by firms to compete successfully.
• Cost leadership firms rely on manufacturing efficiency and quality, needing timely and accurate cost data.
• Firms should choose a cost system that matches its competitive strategy.
• Cost leadership firms that produce commodity products in process industries often use process costing systems.
• These firms use activity-based costing and standard costing.
• Commodity or cost leadership firms could use a combination of process costing, activity-based costing, and standard costing.

Job Costing Cost Flows

• Job costing accumulates costs and assigns them to specific jobs, customers, projects, or contracts.
• The basic supporting document in job costing is the job cost sheet, recording direct materials, direct labor, and factory overhead costs for a job.
• Job costing is typically done by a database software system that collects job cost data and prepares reports, which can be designed for the industry.
• A job cost sheet includes three cost elements of direct materials, direct labor, and overhead.
• After production is completed, the overhead should be added based on a certain peso amount per labor hour.

Direct and Indirect Material Costs

• Purchases for a job include direct materials (lumber, fabric) and indirect materials (glue, nails).
• The production department uses a materials requisition to request materials for production, specifying the job charged with the materials used.
• Direct materials costs are charged to Work-in-Process Inventory until the job is completed.
• Indirect materials are treated as part of the total factory overhead cost (glue, nails, factory supplies).

Direct and Indirect Labor Costs

• Direct labor costs are recorded on the job cost sheet using a time ticket, which shows the amount of time an employee worked on each job, pay rate, and total direct labor cost.
• Indirect labor costs are treated as part of the total factory overhead cost, including salaries or wages for supervisors, inspectors, and production warehouse clerks.

Factory Overhead Costs

• Overhead allocation is a process of allocating factory overhead costs to cost objects, especially jobs.
• Allocation is necessary because overhead costs aren't directly traceable to individual jobs.
• Two approaches to allocating overhead costs: actual costing and normal costing.
• Actual factory overhead includes indirect materials, indirect labor, factory rent, insurance, property tax, depreciation, repairs and maintenance, power, light, heat, and employer payroll taxes.

Actual Costing

• Actual costing calculates unit costs at the end of the accounting period, using revenues and actual expenses for direct materials, direct labor, and overhead to determine overall profitability.
• Unit costs fluctuate under actual costing because total fixed costs do not change, so unit costs change as volume changes.
• The company only knows the cost or profitability of each job at the end of the period with actual costing.

Normal Costing

• Normal costing uses actual costs for direct materials and direct labor, applying estimated factory overhead to jobs using a predetermined rate.
• Normal costing avoids the fluctuations in cost per unit under actual costing, normalizing overhead cost fluctuations.
• The predetermined factory overhead rate is an estimated rate used to apply factory overhead cost to a specific cost object.

Service Industries

• Job costing is used in service industries like advertising agencies, hospitals, repair shops, consulting, architecture, accounting, and law firms.
• Terms like client or project (accounting/consulting firms), case (hospitals/law firms), and contract or project (advertising agencies) are used instead of "job".
• "Project costing" is used to track costs and progress of non-recurring tasks within companies such as developing a marketing plan or improving operating efficiency.
• Job costing in service firms uses similar recording procedures and accounts as illustrated earlier, but the primary focus is on direct labor and less on direct materials.
• Overhead costs are generally applied to jobs based on direct labor cost.

Explanation of costing which involves classifying, accumulating, and assigning direct materials, direct labor, and factory overhead. It covers cost accumulation, including job costing and process costing. Cost measurement methods include actual, normal, and standard costing.