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1
Traditional Costing and ABC
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Answer 1
Certain manufacturing industries produce and supply goods to customers according to customers’ order and specification. These industries are called jobbing ng type industry. Examples of such industries are printing, ship building, furniture making, garment, foundries, etc. Some of the non-manufacturing industries also function in this principle, like audit firms, consultant engineers, etc. The outputs of these industries are clearly distinguishable by jobs, batches, contracts, etc. Each job or order is worked upon with particular degree of attention and skill depending upon customers’ specifications. The method of costing applied to these industries is called job costing.
Answer 2
    Budgeted OHD rate
    
    5
    
    
    (Budgeted OHD/Budgeted machine hrs)
    
    
    
    
    
    
    
    
    
    Manufacturing OHD cost
    
    
    
    
    Job
    Units
    Machine
    OHD
    OHD/Unit
    
    produced
    hours used
    absorbed
    
    
    
    
    
    
    
    
    CC 723
    20000
    12000
    60000
    3
    
    CH 291
    15000
    4400
    22000
    1.466667
    
    DS 444
    5000
    14000
    70000
    14
    
    Total
    
    
    152000
    
    
    
    
    
    
    
    
    Direct labor cost
    
    
    
    
    
    
    
    
    
    
    Job
    Units
    Direct
    Direct
    
    
    
    produced
    labor
    labor/unit
    
    
    
    
    
    
    
    CC 723
    20000
    122400
    6.12
    
    
    CH 291
    15000
    43200
    2.88
    
    
    DS 444
    5000
    138000
    27.6
    
    
    Total
    
    303600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Direct Material Cost
    
    
    
    
    
    
    
    
    
    
    Job
    Units
    RM
    PP
    Total
    Material/unit
    
    produced
    $
    $
    $
    
    
    
    
    
    
    
    CC 723
    20000
    51000
    104000
    155000
    7.75
    CH 291
    15000
    3000
    10800
    13800
    0.92
    DS 444
    5000
    65000
    187000
    252000
    50.4
    Total
    
    
    
    420800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Raw material and Purchased parts consumed in December
    
    
    RM
    PP
    Total
    
    
    CC 723
    51000
    104000
    155000
    
    
    CH 291
    3000
    10800
    13800
    
    
    PS 812
    124000
    87000
    211000
    
    
    DS 444
    65000
    187000
    252000
    
    
    Total
    
    
    631800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Labour cost in opening inventory
    
    
    
    
    Units
    Cost
    
    
    
    CC 723
    20000
    122400
    
    
    
    CH 291
    15000
    43200
    
    
    
    PS 812
    25000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total direct labor cost
    
    504100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance in WIP A/C
    
    
    
    
    
    
    
    
    
    
    Job CC 723 A/C
    
    
    
    
    
    
    
    
    
    
    To Balance b/d
    900000
    By Cost of sales A/C
    1238600
    To Material A/C
    155000
    
    
    
    To Wages A/C
    122400
    
    
    
    To Mfg. OHD A/C
    
    
    
    
    (152000/303600 =50%)
    61200
    
    
    
    
    
    1238600
    
    
    
    
    
    1238600
    
    
    1238600
    
    
    
    
    
    
    
    
    
    
    
    
    Job CH 291 A/C
    
    
    
    
    
    
    
    
    
    
    To Balance b/d
    431000
    By Cost of sales A/C
    509600
    To Material A/C
    13800
    
    
    
    To Wages A/C
    43200
    
    
    
    Mfg OHD A/C
    21600
    
    
    
    (50% of wages)
    
    
    
    
    
    
    509600
    
    
    509600
    
    
    
    
    
    
    Job PS 812 A/C
    
    
    
    
    
    
    
    
    
    
    To Balance b/d
    250000
    By Cost of sales A/C
    761750
    To Material A/C
    211000
    
    
    
    To Wages A/C
    200500
    
    
    
    Mfg OHD A/C
    100250
    
    
    
    (50% of wages)
    
    
    
    
    
    
    761750
    
    
    761750
    
    
    
    
    
    
    
    
    
    
    
    
    Work in progress control A/C
    
    
    
    
    
    
    
    
    
    
    To Balance b/d
    1581000
    By Cost of sales A/C
    2509950
    To Stores ledger control A/C
    631800
    By Balance c/d
    206950
    Wages control A/C
    504100
    
    
    
    
    
    2716900
    
    
    2716900
Answer 3
    Cost of chairs
    
    Cost of sales
    1238600
    Units produced
    20000
    Cost/unit
    
    61.93
    
    
    
    Closing finished inventory units
    2500
    (20000-17500)
    
    Value of chairs in stock
    154825
Answer 4
    
    
    $
    Budgeted overhead rate
    
    per machine hour
    5
    
    
    
    Total machine hours
    49900
    Mfg OHD absorbed
    249500
    Mfg OHD incurred
    252000
    OHD under absorbed
    2500
Please refer to excel sheet for all calculations.
Answer 5
Treatment of over or under absorbed overhead
In cost accounting, the over or under absorbed amount of overhead can be treated in three alternative ways depending upon nature of business, causes of such variation, and magnitude of the variation. These are explained below.
Carry forward to next period: This method can be applied when the normal business cycle extends to moiré than one year. This method is not very popular as it ignores the matching principle of...