Question

(a Distinguish between Job Order Cost Accounting and Process Cost Accounting, noting in which circumstances each would be used. 4 Marks (b) Briefly explain the following, using examples: 10 Marks Direct labour Indirect labour Direct materials Indirect materials Manufacturing overhead 11 Marks The DIT Merchandising Company incurred the following costs during 2017. Prepare an Income Statement for 2017. 550,000 135,000 65,000 Sales Revenue Purchases of Merchandise Salaries, Sales Staff Rent, Sales Facility Utilities Supplies Advertising 35,000 10,000 5,000 15,000 Beginning and ending merchandise inventories were: Merchandise Inventory, Jan 1 2017 15,000 Merchandise Inventory, Dec 31 2017 10,000

Answer 1

a) In  job order cost accounting system, cost incurred is assigned to a specific job and then further it can be assigned to every unit produced. Cost is measured for every job order. Job order cost accounting system is generally used in the industries where product or services are manufactured based on specific customer's requirements like aircraft manufacturing, law firms, movie producers etc.

In Process cost accounting system, cost incurred in a specific process is assigned to that individual process. In a production cycle there are various processes to be followed to produce a finished product. Process cost accounting system is used to ascertain the cost of a product at each process or stage of manufacture.Process cost accounting system is used in industries where number of manufacturing processes are more for a product to reach its finished level, for example Petroleum manufacture, Paint manufacture , textile industry etc.

b) Direct labor is labor which is directly related to producing a product or service. For example for manufacturing a product an assembly line is set, labor working at assembly line is direct labor

Indirect labor is labor which supports production product or service but not directly involved in production process. For example factory supervisor is not directly involved in production process but supports in production by his/her supervision.

Direct Material is a material which is directly used for producing a product or service. For example to produce tomato ketchup tomato is a direct material.

Indirect Material is a material which is used as consumables during production process. For example cleaning supplies, small spare parts of machine such as screws, tools etc.

Manufacturing overheads are expenses incurred in production of goods or services apart from direct material and direct labor cost. For example rent of equipment or factory, depreciation of equipment or factory, Repair cost of equipment etc.

c) Income statement to be made as under:

DIT Merchandising Company
Income Statement
For the year ended December 31, 2017
Particulars	Amount	Amount
Sales Revenue		$ 550,000
Less: Cost of Goods sold
Opening Inventory	$    15,000
Add: Purchases	$ 135,000
Less: Ending inventory	$    10,000	$ 140,000
Less: Expenses
Salaries, sales staff	$    65,000
Rent, sales facility	$    35,000
Utilities	$    10,000
Supplies	$      5,000
Advertising	$    15,000	$ 130,000
Net Income		$ 280,000