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MIDTERM 2: Chapter 5 - 9

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ACC 406
Vincent Cappelli

Midterm 2 Review Chapter 5 Job Order Costing Characteristics of Job Order Environmentcan be divided into 2 major parts depending on whether or not their productsservices are unique 1 Job Order Accounting SystemFirms produce unique products or services EX tailor making suits construction company that remodels homes service station that fixes your car lawyer who handles your real estate transaction 2 Process Costing Accounting SystemFirms producing similar products or servicesEX oil producers characteristics of the production process will determine whether it is a job or processProcess Production and Costing firms produce large quantities of similar or homogenous productsEX food cement petroleum and chemical firms One liter of paint is the same as another liter one bottle of aspirin is the same as anothercost of one unit or a product is identical to the cost of another process firms accumulate production cost by process or by department for a given period of time output for the process for that period of time is measured unit costs are compared by dividing process costs for the given period by the output of the periodJob Order Production and Costing firms operating in job order industries produce a wide variety of services or products that are quite distinct from one another Customized or built to order products fit into this category job is one distinct unit or set of unitsEX it may be remodeling job for a specific family or a set of 12 tables for childrens reading room common job order processes include printing construction furniture making medicaldental services and automobile repair and beautician services key feature is that the cost of one job differs from that of another and must be kept track of separately when costs are assigned and accumulated it is called job order costing system production cost consists of direct materials direct labour and overheadNormal Costing and Overhead Application unit costs are very important because managers need accurate cost information on material labour and overhead when making decisions there are 2 ways to measure the costs associated with production1 Actual Costing requires firms to use actual cost of all direct materials direct labour and overhead used in production to determine unit cost strict actual cost system is rarely used because they cannot provide unit cost information on a timely basis main problem of using this system is overhead overhead items do not have the direct relationship that direct materials and direct labour do there are 2 main problemsMany overhead costs are not incurred uniformly through the year EX repair costs occur when ever a machine breakdown occur timing can make overhead costs in the month of a machine break down higher than in other monthsNonuniform production levels can mean that low production in one month would give rise to a high unit overhead costs and high production in another month would give rise to a low unit overhead costs you would have to wait at the end of the year to total the actual over head costs this process takes too long therefore managers must react to day to day conditions in the marketplace in order to maintain a sound competitive position 2 Normal Costing requires firms to assign actual costs of direct materials and direct labour to units produced and too apply overhead to units based on a predetermined estimate it is more widely used in practice it also solves problems associated with actual costing normal cost system determines unit cost by adding direct materials actual direct labour and estimated overhead overhead cost can be estimated by approximating the years actual overhead at the beginning of the year and then using a predetermined rate throughout the year to obtain the needed unit cost informationNormal Costing and Estimated Overhead in normal costing overhead must be estimated and applied to production it can be described in 3 steps 1 Calculate the predetermined overhead rateCalculated at the beginning of the year by dividing the total estimated annual overhead by the total estimated level of associated activity or cost driverEstimated overhead is simply the firms best estimate of the amount of overhead utilities indirect labour depreciation to be incurred in the coming year estimate is often based on last years figuresAssociated activity level depends on which activity is best associated with overhead activity chosen is the number of direct labour hours or direct labour costThis makes sense when much of the overhead cost is associated with direct labour fringe benefits worker safety training programs cost of running the personnel department number of machine hours could be a good choice for a company with automated productionEstimated activity level is simply the number of direct labour hours or machine hours expected fPredetermined Overhead Rate Formula Overhead RateEstimated Annual OverheadEstimated Annual Activity Level 2 Apply overhead to production throughout the yearOnce you have the overhead rate you can begin to apply overhead to productionApplied overhead predetermined overhead rate X actual use of the associated activity for the period 3 Reconcile the difference between the total actual overhead incurred during the year and the total overhead applied to productionThere are 2 types of overhead that must be taken into considerationActual Overheadcosts are tracked throughout the year in the overhead account
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