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- Relationship of the article with Cost Accounting
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7 STEPS TO MAKE A JOB ORDER COSTING
1.- Identify the chosen cost-object
2.- Identify the direct costs the job
3.- Select the cost allocation bases
4.- Identify the indirect costs
5.- Calculate the rate per unit
6.- Calculate the indirect costs
7.- Calculate the total cost of the job
EXAMPLE OF A JOB ORDER COSTING
A manufacturing company is planning to sell a batch of 25 special machines (Order 650) to a retailer for $114,800.
Step 1. IDENTIFY THE OBJECT COST
The cost-object is Order 650.
Step 2. IDENTIFY
THE DIRECT COSTS OF THE JOB
Step 3. SELECT THE DISTRIBUTION BASES FOR COST ALLOCATION
The distribution of costs is based on machine-hours. The order 650 used 500 machine hours. The total machine hours used in all jobs was 2,480.
Step 4. IDENTIFY THE INDIRECT COSTS
The manufacturing indirect costs (overhead) were $ 65,100.
Step 5. CALCULATE THE RATE PER UNIT
The indirect cost rate is $ 65100 ÷ 2480 = $ 26.25 per machine-hour.
Step 6. CALCULATE THE INDIRECT COSTS
$26.25 per machine-hour x 500 hours = $ 13,125
Step 7. CALCULATE
THE TOTAL COST OF THE JOB
What is the
contribution margin of this work?
What is the percentage of contribution margin?
$32.675 ÷ $ 114.800 = 28.5%
ACTUAL OR CURRENT COSTING VS NORMAL COSTING
Actual costing is a system that uses current costs to determine the cost of individual orders (see Step 7 in the example above).
Normal costing is a method that distributes indirect costs based on their budgeted rate by the actual amount of the cost distribution base.
EXAMPLE: Assuming that the manufacturing company of the example above budgeted a total of $60,000 for manufacturing indirect costs and 2400 machine-hours. Which would be the rate of indirect costs budgeted?
Ans = $60,000 ÷ 2,400 = $25 per hour.
How much indirect cost was distributed to the Order 650?
Ans = 500 machine-hours X $25.00 = $12,500
the cost of the Order 650 under normal costing would be:
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