MAC4862 – TL 104
PART 4 – COST ACCOUNTING BASES AND ALLOCATION
LEARNING UNIT 13 – NATURE, CLASSIFICATION AND ALLOCATION OF COST
13.1 – Nature and classifica on of cost
13.2 – Variable and absorp on cos ng
13.3 – Ac vity-based cos ng (ABC)
LEARNING UNIT 14 – PRODUCT COSTING SYSTEMS
14.1 – Job cos ng………………………………………………………………………2
14.2 – Process cos ng……………………………………………………………….29
14.3 – Joint and by-product cos ng…………………………………………..75
PART 5 – PLANNING AND CONTROL
NOT COVERED IN THIS DOCUMENT. WILL BE SUMMARISED SEPARATELY.
LEARNING UNIT 15 – PLANNING, BUDGETING AND CONTROL
15.1 – Budge ng and management control systems
15.2 – Other cost management techniques/principles
15.3 – Cost-volume-profit analysis
LEARNING UNIT 16 – STANDARD COSTING
16.1 – Variance analysis
16.2 – Reconcilia on of budget to actual
16.3 – Variance analysis for controlling purposes
16.4 – Pro-ra ng of variances and compliance with the relevant accoun ng standard
LEARNING UNIT 17 – PERFORMANCE MEASUREMENT
17.1 – Divisional financial performance measures
17.2 – Transfer pricing in divisional companies
PART 6 – DECISION-MAKING
LEARNING UNIT 18 – INFORMATION APPLICATION TO DECISIONS
18.1 – Relevant costs and revenues for decision-making
18.2 – Pricing decisions and profitability analysis
LEARNING UNIT 19 – INFORMATION FOR DECISION-MAKING
19.1 – Decision-making under condi ons of risk and uncertainty
Page 1 of 88
, MAC4862 – TL 104
PART 4 – COST ACCOUNTING BASES AND ALLOCATION
PART 4 - PURPOSE
• Key cos ng terms and guidelines
• Concepts and established principles
in order to classify, record and present costs for the goods sold and valua on of inventories and
compile Statements of Profit or Loss and Other Comprehensive Income on different bases.
PART 4 CONSISTS OF THE FOLLOWING LEARNING UNITS:
1. Learning Unit 13: Nature, Classifica on and Alloca on Of Cost
2. Learning Unit 14: Product Cos ng Systems
LEARNING UNIT 14 – PRODUCT COSTING SYSTEMS
A er studying this topic, you should be able to do the following:
14.1. Value purchased and manufactured inventory using the FIFO or weighted average cost
methods.
14.2. Apply backflush accoun ng in a JIT environment.
14.3. Record and account for material, labour and overhead costs in the general ledger.
14.4. Cost-specific jobs (manufacturing or service).
14.5. Correctly account for the treatment of normal and abnormal losses.
14.6. Value work-in-process in a process cos ng system involving more than one process.
14.7. Determine whether separate products should be processed further a er the split-off point.
14.8. Consider the alloca on of joint costs and treatment of by-products and their proceeds.
LEARNING UNIT 14.1 Job Cos ng
Before studying this topic, you should be able to:
Iden fy when a job cos ng system is appropriate.
Account for the acquisi on of material, labour and overheads (manufacturing and non-
manufacturing)
Appropriately allocate these costs to cost objects.
Value inventory on the first-in-first-out (FIFO) basis and the weighted average method.
Dis nguish between the different types of remunera on.
Calculate gross and net pay.
Describe accoun ng procedures for jobs completed and products sold.
Calculate the profit or loss per job.
Page 2 of 88
, MAC4862 – TL 104
Textbook Reference: Drury Chapter 4 (Pages 82-96)
ACCOUNTING ENTRIES FOR A JOB COSTING
SYSTEM
Job-order costing relates to a costing system that is required in
organisations where each unit or batch of output of a product or
service is unique.
This creates the need for the cost of each unit to be calculated
separately.
The term “job” thus relates to each unique unit or batch of
output.
Also important to know is that the term contract costing is used
to describe a job costing system that is applied to relatively large
cost units that take a considerable amount of time to complete.
The accounting system which is used is one in which the cost and
financial accounts are combined in one set of accounts, which is
known as an integrated cost accounting system.
An alternative system, where the cost and financial accounts are
maintained independently, is known as an interlocking cost
accounting system.
WHEN IS A JOB COSTING SYSTEM APPROPRIATE?
A job costing system is appropriate in situations where the
following conditions are present:
Customized or Unique Products/Services: Job costing is
suitable when a company produces customized or unique
products or services. Each job or project is distinct and has
specific requirements, specifications, or customization for
individual customers. Examples include construction projects,
Page 3 of 88
, MAC4862 – TL 104
custom manufacturing, software development, and
specialized consulting services.
Significant Variations in Costs: If there are substantial
variations in costs between different jobs or projects, a job
costing system helps in accurately tracking and allocating
costs to each job. This allows for better cost control,
profitability analysis, and accurate pricing decisions.
Directly Attributable Costs: A job costing system is useful
when costs can be directly identified and attributed to
specific jobs or projects. This includes direct materials, direct
labour, and any other direct costs that can be easily
allocated to a particular job.
Monitoring Profitability: Job costing enables the monitoring
of profitability at the individual job level. It helps determine
if each job or project is generating sufficient revenue to
cover the associated costs and provide a reasonable profit
margin. This information is valuable for assessing project
viability, evaluating pricing strategies, and making informed
business decisions.
Regulatory or Contractual Requirements: Certain industries
or contracts may require the use of job costing systems to
comply with regulatory standards or contractual
obligations. This ensures accurate cost tracking, billing, and
reporting for compliance purposes.
Cost Control and Estimation: Job costing systems provide a
mechanism for cost control by monitoring actual costs
against budgeted or estimated costs for each job. This helps
identify cost overruns, inefficiencies, or areas where cost-
saving measures can be implemented in future projects.
Page 4 of 88
PART 4 – COST ACCOUNTING BASES AND ALLOCATION
LEARNING UNIT 13 – NATURE, CLASSIFICATION AND ALLOCATION OF COST
13.1 – Nature and classifica on of cost
13.2 – Variable and absorp on cos ng
13.3 – Ac vity-based cos ng (ABC)
LEARNING UNIT 14 – PRODUCT COSTING SYSTEMS
14.1 – Job cos ng………………………………………………………………………2
14.2 – Process cos ng……………………………………………………………….29
14.3 – Joint and by-product cos ng…………………………………………..75
PART 5 – PLANNING AND CONTROL
NOT COVERED IN THIS DOCUMENT. WILL BE SUMMARISED SEPARATELY.
LEARNING UNIT 15 – PLANNING, BUDGETING AND CONTROL
15.1 – Budge ng and management control systems
15.2 – Other cost management techniques/principles
15.3 – Cost-volume-profit analysis
LEARNING UNIT 16 – STANDARD COSTING
16.1 – Variance analysis
16.2 – Reconcilia on of budget to actual
16.3 – Variance analysis for controlling purposes
16.4 – Pro-ra ng of variances and compliance with the relevant accoun ng standard
LEARNING UNIT 17 – PERFORMANCE MEASUREMENT
17.1 – Divisional financial performance measures
17.2 – Transfer pricing in divisional companies
PART 6 – DECISION-MAKING
LEARNING UNIT 18 – INFORMATION APPLICATION TO DECISIONS
18.1 – Relevant costs and revenues for decision-making
18.2 – Pricing decisions and profitability analysis
LEARNING UNIT 19 – INFORMATION FOR DECISION-MAKING
19.1 – Decision-making under condi ons of risk and uncertainty
Page 1 of 88
, MAC4862 – TL 104
PART 4 – COST ACCOUNTING BASES AND ALLOCATION
PART 4 - PURPOSE
• Key cos ng terms and guidelines
• Concepts and established principles
in order to classify, record and present costs for the goods sold and valua on of inventories and
compile Statements of Profit or Loss and Other Comprehensive Income on different bases.
PART 4 CONSISTS OF THE FOLLOWING LEARNING UNITS:
1. Learning Unit 13: Nature, Classifica on and Alloca on Of Cost
2. Learning Unit 14: Product Cos ng Systems
LEARNING UNIT 14 – PRODUCT COSTING SYSTEMS
A er studying this topic, you should be able to do the following:
14.1. Value purchased and manufactured inventory using the FIFO or weighted average cost
methods.
14.2. Apply backflush accoun ng in a JIT environment.
14.3. Record and account for material, labour and overhead costs in the general ledger.
14.4. Cost-specific jobs (manufacturing or service).
14.5. Correctly account for the treatment of normal and abnormal losses.
14.6. Value work-in-process in a process cos ng system involving more than one process.
14.7. Determine whether separate products should be processed further a er the split-off point.
14.8. Consider the alloca on of joint costs and treatment of by-products and their proceeds.
LEARNING UNIT 14.1 Job Cos ng
Before studying this topic, you should be able to:
Iden fy when a job cos ng system is appropriate.
Account for the acquisi on of material, labour and overheads (manufacturing and non-
manufacturing)
Appropriately allocate these costs to cost objects.
Value inventory on the first-in-first-out (FIFO) basis and the weighted average method.
Dis nguish between the different types of remunera on.
Calculate gross and net pay.
Describe accoun ng procedures for jobs completed and products sold.
Calculate the profit or loss per job.
Page 2 of 88
, MAC4862 – TL 104
Textbook Reference: Drury Chapter 4 (Pages 82-96)
ACCOUNTING ENTRIES FOR A JOB COSTING
SYSTEM
Job-order costing relates to a costing system that is required in
organisations where each unit or batch of output of a product or
service is unique.
This creates the need for the cost of each unit to be calculated
separately.
The term “job” thus relates to each unique unit or batch of
output.
Also important to know is that the term contract costing is used
to describe a job costing system that is applied to relatively large
cost units that take a considerable amount of time to complete.
The accounting system which is used is one in which the cost and
financial accounts are combined in one set of accounts, which is
known as an integrated cost accounting system.
An alternative system, where the cost and financial accounts are
maintained independently, is known as an interlocking cost
accounting system.
WHEN IS A JOB COSTING SYSTEM APPROPRIATE?
A job costing system is appropriate in situations where the
following conditions are present:
Customized or Unique Products/Services: Job costing is
suitable when a company produces customized or unique
products or services. Each job or project is distinct and has
specific requirements, specifications, or customization for
individual customers. Examples include construction projects,
Page 3 of 88
, MAC4862 – TL 104
custom manufacturing, software development, and
specialized consulting services.
Significant Variations in Costs: If there are substantial
variations in costs between different jobs or projects, a job
costing system helps in accurately tracking and allocating
costs to each job. This allows for better cost control,
profitability analysis, and accurate pricing decisions.
Directly Attributable Costs: A job costing system is useful
when costs can be directly identified and attributed to
specific jobs or projects. This includes direct materials, direct
labour, and any other direct costs that can be easily
allocated to a particular job.
Monitoring Profitability: Job costing enables the monitoring
of profitability at the individual job level. It helps determine
if each job or project is generating sufficient revenue to
cover the associated costs and provide a reasonable profit
margin. This information is valuable for assessing project
viability, evaluating pricing strategies, and making informed
business decisions.
Regulatory or Contractual Requirements: Certain industries
or contracts may require the use of job costing systems to
comply with regulatory standards or contractual
obligations. This ensures accurate cost tracking, billing, and
reporting for compliance purposes.
Cost Control and Estimation: Job costing systems provide a
mechanism for cost control by monitoring actual costs
against budgeted or estimated costs for each job. This helps
identify cost overruns, inefficiencies, or areas where cost-
saving measures can be implemented in future projects.
Page 4 of 88
