Managerial Accounting Concepts - Job Costing

Summary :

This chapter compares managerial accounting with financial accounting and identifies the basic components of a product's cost, distinguishing product costs from period costs. It compares financial reporting by a merchandiser with that of a manufacturer, traces cost flows through a job costing system, and explains predetermined overhead rates.

Managerial versus financial accounting, and product cost

Managerial accounting serves internal decision makers with detailed, forward-looking information prepared as needed, while financial accounting serves external users through general-purpose statements prepared under set standards; the two draw on much of the same underlying data but for different audiences. A manufactured product's cost consists of direct materials, direct labor, and manufacturing overhead, and only these product costs attach to inventory, while period costs, such as selling and administrative expenses, are expensed as incurred regardless of production volume.

Reporting for a manufacturer

A manufacturer's financial statements differ from a merchandiser's mainly in the cost of goods sold section: rather than simply purchasing finished goods for resale, a manufacturer prepares a statement of cost of goods manufactured that tracks materials, labor, and overhead through work in process into finished goods. The resulting cost of goods manufactured then flows into the income statement, and unsold inventory at each stage of production appears among the assets on the balance sheet.

Job costing and overhead rates

A job cost system accumulates the materials, labor, and overhead costs of production according to individual jobs, which suits companies that produce distinct, identifiable units or batches, such as a construction project or a custom order. Because actual overhead costs are not known until a period ends, companies apply overhead to jobs using a predetermined overhead rate, calculated in advance by dividing estimated overhead by an estimated activity base, so job costs can be determined as work is completed.