BUSN7031 · Management Accounting and Cost Analysis
Job & Process Costing Systems
Job and process costing are the two cost systems at the core of BUSN7031 Management Accounting and Cost Analysis at the Australian National University. They answer one operational question — how do you attach direct materials, direct labour and manufacturing overhead to a unit of output — in two different ways: job costing accumulates cost on a job cost sheet for custom, one-off work, while process costing averages cost across identical units using equivalent units. This chapter also covers normal costing and the predetermined overhead rate, the treatment of under- and over-applied overhead, and the difference between the weighted-average and FIFO methods. It is a calculation-heavy, high-yield topic that appears in the online quizzes and reliably supplies one of the four worked problems in the closed-book final exam.
What this chapter covers
- 011. Job vs process costing — diagnose from the output: custom jobs vs continuous, identical units
- 022. Source documents & the job cost sheet — materials requisition, labour time record, overhead allocation
- 033. Cost flow — DM → WIP → FG → COGS through T-accounts and journal entries
- 044. Actual vs normal costing — the two systems differ only in how overhead is treated
- 055. Predetermined overhead rate — budgeted overhead ÷ budgeted base, applied at the actual base
- 066. Under- and over-applied overhead — Actual Control − Allocated, then write-off or proration
- 077. Process costing five steps — physical flow → equivalent units → cost per EU → assign costs
- 088. Weighted-average vs FIFO & transferred-in costs — blend or separate the opening-WIP cost
Worked example: predetermined rate and under/over-applied overhead
- +1Predetermined rate. Budgeted overhead ÷ budgeted base = $600,000 ÷ 24,000 DLH = $25 per DLH. This rate is set before the year and stays fixed.
- +1Overhead applied. Rate × ACTUAL base = $25 × 23,000 DLH = $575,000. Note it is the actual 23,000 hours, not the 24,000 budgeted.
- +1Under/over-applied. Actual (Control) − Applied = $585,000 − $575,000 = $10,000.
- +1Direction. Actual is above applied, so jobs were charged too little overhead → the balance is under-applied.
- +1Disposition. Because $10,000 is immaterial, write it off to Cost of Goods Sold — an under-applied balance increases COGS (Dr COGS, Dr MOH Allocated, Cr MOH Control). A material balance would instead be prorated across WIP, FG and COGS.
Key terms
- Job costing
- A system that accumulates cost on a job cost sheet for heterogeneous, custom output where each order is a distinct cost object with its own job number — e.g. a tax return, a patient, custom cabinetry.
- Process costing
- A system used for homogeneous, mass, continuous output where the cost object is a process or department and cost is averaged across units using equivalent units — e.g. litres of milk, tonnes of cement.
- Normal costing
- Costing that uses actual direct materials and actual direct labour but applies manufacturing overhead at a budgeted (predetermined) rate × the actual base. It differs from actual costing only in the overhead pool.
- Predetermined overhead rate
- Budgeted total manufacturing overhead ÷ budgeted total volume of the allocation base, set before the period. Overhead applied = this rate × the actual quantity of the base a job consumes.
- Under-applied overhead
- When actual overhead (MOH Control) exceeds the overhead allocated to jobs — the firm charged jobs too little. Its disposition increases Cost of Goods Sold. Over-applied is the reverse.
- Equivalent unit
- A partly-complete unit restated as the equivalent number of fully-complete units, so a per-unit cost can be struck. Computed separately for direct materials and for conversion, which usually differ in completion percentage.
- Weighted-average method
- A process-costing method that blends beginning-WIP cost into the current cost pool and averages across all equivalent units to date — simpler, but it obscures period-to-period cost changes.
- Transferred-in costs
- Costs that follow units from one department into the next. They are treated like direct materials added at the beginning of the receiving department: 100% complete in that department's ending WIP, never conversion.
Job & Process Costing Systems FAQ
What is the difference between job costing and process costing?
Job costing accumulates cost on a job cost sheet for custom, distinguishable output — each job is its own cost object with a unique number. Process costing averages cost across identical, continuously produced units using equivalent units and a production cost report. Diagnose from the output, not the industry: if a customer could point at 'my order', use job costing; if the units are indistinguishable, average them.
Why use a predetermined overhead rate instead of actual overhead?
Actual overhead is not known until period-end and lurches month to month (a mid-year repair, quarterly bills), so costing a job at actual overhead would make identical jobs look dearer in a repair month and arrive too late for pricing decisions. A predetermined rate — budgeted overhead ÷ budgeted base, set before the year — gives a stable, timely cost. Overhead is then applied as that rate × the actual base the job used.
What do under-applied and over-applied overhead mean?
Under/over-applied = actual overhead (MOH Control) − overhead allocated to jobs. If actual is above allocated, overhead is under-applied — jobs were charged too little, and clearing the balance increases Cost of Goods Sold. If actual is below allocated, it is over-applied and lowers COGS. Small balances are written off to COGS; material balances are prorated across WIP, Finished Goods and COGS.
How do equivalent units work, and why compute them separately for materials and conversion?
Equivalent units restate partly-finished units as the equivalent number of fully-finished units so a meaningful per-unit cost can be found. Direct materials are usually added at a discrete point (often the start), so ending WIP is often 100% complete for materials, while conversion is added uniformly and may be only partly complete. Because the completion percentages differ, you compute two separate equivalent-unit figures and two cost-per-EU rates.
Can AI help me with Job & Process Costing Systems?
Yes — ask Sia to walk through any Job & Process Costing Systems problem or concept step by step, the way Australian National University tests it. Sia is an AI tutor that explains the predetermined rate, under/over-applied disposition, the five process-costing steps and weighted-average vs FIFO reasoning so you build the understanding yourself, rather than doing your assessment for you.
How is job and process costing examined in BUSN7031?
It is a calculation-first, high-yield topic. It falls inside the second online quiz (which covers the first seven weeks) and is a perennial worked problem in the 65% closed-book final exam — expect either a normal-costing over/under-applied schedule or a weighted-average equivalent-units question among the four problems. With no formula sheet provided, you must rebuild the predetermined-rate mechanics and the five process-costing steps from memory.
Studying with AI? Sia — free AI accounting tutor works through BUSN7031 step by step.
Exam move
Treat this as a procedure to drill, not facts to read: the marks are in running the right machine in the right order and tying out. First, diagnose job vs process from the output. For normal costing, get the predetermined rate down in the first 30 seconds — every later number depends on it — then always apply it to the ACTUAL base, and fix the direction (actual vs applied) before writing any journal. For process costing, write the five-step skeleton down the margin immediately, compute equivalent units separately for materials and conversion, remember that materials added at the start are 100% complete in ending WIP, and close with a cost reconciliation (costs assigned = costs to account for) to bank free method marks and catch slips.
