Cost Accounting (14th Edition)

NORMAL COSTING 107
environments, we need to broaden the set of cost drivers.) In 2011, Robinson budgets
28,000 direct manufacturing labor-hours.
Step 4: Identify the Indirect Costs Associated with Each Cost-Allocation Base. Because
Robinson believes that a single cost-allocation base—direct manufacturing labor-hours—
can be used to allocate indirect manufacturing costs to jobs, Robinson creates a single
cost pool called manufacturing overhead costs. This pool represents all indirect costs of
the Manufacturing Department that are difficult to trace directly to individual jobs. In
2011, budgeted manufacturing overhead costs total $1,120,000.
As we saw in Steps 3 and 4, managers first identify cost-allocation bases and then
identify the costs related to each cost-allocation base, not the other way around. They
choose this order because managers must first understand the cost driver, the reasons why
costs are being incurred (for example, setting up machines, moving materials, or designing
jobs), before they can determine the costs associated with each cost driver. Otherwise,
there is nothing to guide the creation of cost pools. Of course, Steps 3 and 4 are often
done almost simultaneously.
Step 5: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate
Indirect Costs to the Job. For each cost pool, the budgeted indirect-cost rate is calculated
by dividing budgeted total indirect costs in the pool (determined in Step 4) by the
budgeted total quantity of the cost-allocation base (determined in Step 3). Robinson
calculates the allocation rate for its single manufacturing overhead cost pool as follows:
Budgeted manufacturing overhead rate =
Budgeted manufacturing overhead costs
Budgeted total quantity of cost-allocation base
=
$1,120,000
28,000 direct manufacturing labor-hours
= $40 per direct manufacturing labor-hour
Step 6: Compute the Indirect Costs Allocated to the Job. The indirect costs of a job are
calculated by multiplying the actual quantity of each different allocation base (one allocation
base for each cost pool) associated with the job by the budgeted indirect cost rate of
each allocation base (computed in Step 5). Recall that Robinson’s managers selected direct
manufacturing labor-hours as the only cost-allocation base. Robinson uses 88 direct manufacturing
labor-hours on the WPP 298 job. Manufacturing overhead costs allocated to
WPP 298 equal $3,520 ($40 per direct manufacturing labor-hour 88 hours) and appear
in the Manufacturing Overhead panel of the WPP 298 job-cost record in Exhibit 4-2.
Step 7: Compute the Total Cost of the Job by Adding All Direct and Indirect Costs
Assigned to the Job. Exhibit 4-2 shows that the total manufacturing costs of the WPP job
are $9,705.
Direct manufacturing costs
Direct materials $4,606
Direct manufacturing labor ƒ1,579 $ 6,185
Manufacturing overhead costs
($40 per direct manufacturing labor-hour * 88 hours)
ƒ3,520
Total manufacturing costs of job WPP 298 $9,705
Recall that Robinson bid a price of $15,000 for the job. At that revenue, the normalcosting
system shows a gross margin of $5,295 ($15,000 – $9,705) and a gross-margin
percentage of 35.3% ($5,295 ÷ $15,000 = 0.353).
Robinson’s manufacturing managers and sales managers can use the gross margin
and gross-margin percentage calculations to compare the profitability of different jobs to
try to understand the reasons why some jobs show low profitability. Have direct materials
been wasted? Was direct manufacturing labor too high? Were there ways to improve
the efficiency of these jobs? Were these jobs simply underpriced? Job-cost analysis provides
the information needed for judging the performance of manufacturing and sales
managers and for making future improvements (see Concepts in Action on p. 108).