Bus 254 chapter 3 notes.doc

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Absorption Costing (full cost) = All manufacturing costs (direct material, direct labour, and
both vairable and fixed overhead) are included as part of the cost of a finished unit of product
Process Costing system = used when company produces many units of a single product for a
long period of time
oUnit Cost = Total manufacturing cost / total unit produced
Job-Order Costing System = used when company produces different products each period
oUnit Cost = Total cost of each job / number of units produced in that job
Measuring Direct Material Cost
Bill of Materials = document that lists the type and quantity of each item of material
needed to complete a unit of product
oThe issuing of a Product Order is then occurred
Material Requisition Form = detailed source document that
oSpecifies type and quantity of materials needed
oIdentifies the job to which the cost of the materials are to be charged
Job cost sheet = form prepared to each separate job that records materials, labour, and
overhead costs charged to the job
oUnder Direct Material, it shows “Req No.” and “Amount”
oUsed just as materials are issued
Measuring Direct Labour Cost
Time Ticket = A detailed source document that is used to record an employee’s hour-by-
hour activities during the day
oIncludes start and end time, rate of pay, total amount, and job number
oData added to job cost sheet
Direct labour under job cost sheet contains “ticket”, “hours”, and
Application of Manufacturing Overhead
Harder to do because:
oIt is an indirect cost (hard to traced to particular job)
oConsist of many different items
oRemains relatively constant due to the presence of fixed costs
Allocation Base = measure of activity such as direct labour-hours or machine-hours that
is used to assign costs to cost objects
oUsed to compute the Predetermined Overhead Rate
POR = Estimated total manufacturing overhead cost / Estimated total
units in allocation base
Overhead Application = process of charging manufacturing overhead cost to job cost
sheets and to the Work in Process account
Overehead applied = POR X Amount of allocation base incurred (actual)
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