Accounting Business Reporting for Decision Making

CHAPTER 11 Costing and pricing in an entity 479

Process

Indirect manufacturing costs

Direct material costs

Inventoriable product cost per unit

Total process costs Number of units of products

FIGURE 11.8 Overview of a process costing system

Traditionally, manufacturing costing systems pooled indirect costs on a departmental basis or into

a single factory-wide cost pool. As noted earlier, the indirect cost rate can be determined using either

actual costs or budgeted costs. As the inventoriable product cost is used for financial reporting pur-

poses, it is necessary to identify any variances caused by allocating costs on a predetermined basis using

budgeted costs. A variance is the difference between a budget cost and an actual cost. Such variances

arise when an entity over- or under-estimates either the expenditure level of indirect costs assigned to

the cost pool or the expected usage of the cost driver. The variances are recorded in the financial records

as either overapplied or underapplied overhead. Overapplied overhead refers to a situation where the

indirect costs applied to an inventoriable product cost are greater than the actual costs incurred. For

underapplied overhead, the applied indirect costs are lower than actual costs.

Indirect manufacturing costs

Job A Job B Job C

Direct material Direct labour

Inventoriable product cost per unit

Individual job cost

Number of units

F I G U R E 11. 9 Overview of a job costing system