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Paper

4606 words - 19 pages

Revised Fall 2012

CHAPTER 2
SYSTEMS DESIGN: JOB ORDER
COSTING
Key Terms and Concepts to Know
Job-Order Costing vs. Process Costing
 Job-order costing is used for companies that produce different products each
period. Costs are accumulated for each job.
 Process costing is used for companies that produce many identical units of a
single product for long periods of time. Costs are accumulated by manufacturing
department.
Key Job-Order Costing Documents
 Material requisitions request materials for production and support direct materials
costs charged to each job.
 Time cards or time tickets record direct labor hours used in production and
support direct labor costs charged ...view middle of the document...

 There are three kinds of overhead costs consider:
o Estimated overhead cost which is determined from the annual budget
prepared before the year begins and is used only in the pre-determined
overhead rate calculation
o Actual overhead cost which is incurred periodically throughout the year and
debited to the manufacturing overhead account
o Applied overhead cost which is added to jobs in the work-in-process
inventory account throughout the year and credited to the manufacturing
overhead account
 The manufacturing overhead account is a holding account for the actual overhead
costs (debits) and applied over costs (credits).
o Actual overhead costs flow into the account as they are incurred
Page 2 of 24

Revised Fall 2012

o Applied overhead costs flow out of the account as the jobs flow through the
production process.
o The account balance may be either debit (underapplied) or credit
(overapplied).
o Underapplied overhead represents an expense which must be transferred to
cost of goods sold.
o Overapplied overhead represents a reduction of expense charged to jobs
which must be transferred to cost of goods sold.
 Manufacturing overhead is applied to jobs in work-in-process using the following
formula:
Pre-determined
amount of allocation
Overhead applied =
X
overhead rate
base incurred by the job
 The predetermined overhead rate is computed before the period begins:
Pre-determined overhead rate =

Estimated annual overhead cost
Estimated amount of the allocation
base (denominator activity)

Example #2
ABC Company uses job-order costing. It incurred the following costs for job M301: 20
pounds of raw materials (all direct) were issued to be used for job M301 at a cost of $7
per pound. Three people were assigned to work on Job M301 at a rate of $12 per hour.
Records show that a total of 25 direct labor-hours were worked on Job M301.
Manufacturing overhead is applied based on direct labor-hours. At the beginning of the
year, estimated total manufacturing overhead was $450,000 and the total direct laborhours incurred would be 50,000.
Required: Determine the cost assigned to Job M301.
Solution #2
Pre-determined overhead rate = $9.00 =
Direct materials
Direct labor
Manufacturing overhead

20 pounds X
25 hours X
25 hours X

Page 3 of 24

$450,000
50,000 direct labor hours
$7.00 =
$12.00 =
$9.00 =

$140
$300
$225
$665

Revised Fall 2012

Flow of Costs Through Inventory Accounts
Raw Materials
Beginning
Balance
-DM
Usage
+Purchases

=Ending
Balance

Work in Process
Beginning
Balance

Finished Goods
Beginning
Balance

Cost of Goods Sold
Beginning
Balance

 +DM
Usage
+DL
Usage

-COGM

+MOH
Applied
=Ending
Balance

 +COGM

=Ending
Balance

-COGS

 +COGS

=Ending
Balance

Manufacturing
Overhead
Beginning
Balance
+Actual
overhead
costs
incurred
=Underapplied

-MOH
applied

= Overapplied

 With the exception of overhead,...

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