Management accounting to inform decision-making, including job costing
Management accounting to inform decision-making, including job costing
This domain tests how you build and use cost information. You must classify costs, calculate a job cost using a predetermined overhead rate, set a price, and use relevant costing and CVP to support a short-term decision.
Job costing rules
- Prime cost = direct materials + direct labour + direct expenses. Production overhead is absorbed using a predetermined rate = budgeted overhead / budgeted activity base (direct labour hours, machine hours, or labour cost).
- Total job cost = prime cost + absorbed overhead. A markup on cost and a margin on sales are different: price at 20% markup = cost × 1.20; price at 20% margin = cost / 0.80.
- Under- or over-applied overhead = actual overhead - absorbed overhead. Close it to cost of sales unless told to prorate.
- Relevant costs are future, incremental cash costs. Sunk costs, allocated fixed costs, and depreciation on existing equipment are normally irrelevant; opportunity costs are relevant.
Worked example
Budgeted overhead is $120,000 and budgeted direct labour hours are 15,000, so the rate is $8 per direct labour hour. Job 101 uses $5,000 of direct materials and 400 labour hours at $15 per hour ($6,000). Absorbed overhead = 400 × 8 = $3,200; total cost = 5,000 + 6,000 + 3,200 = $14,200. A 20% markup on cost gives 14,200 × 1.20 = $17,040. A 20% margin on sales gives 14,200 / 0.80 = $17,750. The margin price is higher because the margin is a percentage of the selling price, not of cost.
Traps
Using actual overhead instead of the predetermined rate; allocating overhead on the wrong base; confusing markup with margin; including sunk or allocated fixed costs in a special-order decision; and treating fixed cost per unit as constant when volume changes.