ADMN 3021H Chapter 5: Chapter 5

2 Pages

Business Administration
Course Code
ADMN 3021H
Malcolm Mac Taggart

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Chapter 5 Systems Design: JobOrder Costing Process Costing A company produces many units of a single product One unit of product is indistinguishable from other units of product The identical nature of each units of product enables assigning the same average cost per unit Ex. Cement mixing, refining oil, bottling beverages, etc. JobOrder Costing Many different products are produced each period Products are manufactured to order The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job Ex. Aircraft manufacturing, greeting card designs, clothing, etc. Why Use An Allocation Base? Its impossible or difficult to trace overhead costs to particular jobs Manufacturing overhead consists of many different items ranging from the grease used in machines to the production managers salary Many types of manufacturing overhead costs are fixed even though output fluctuates during the period The timing of payment of manufacturing overhead costs often varies Manufacturing Overhead Application The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins POHR = estimated total manufacturing overhead costsestimated total units in the allocation base The Need for a POHR Using a predetermined rate makes it possible to estimate total job costs sooner Actual overhead for the period is not known until the end of the period Predetermined rate is based on estimates rather than actual results Predetermined overhead rate is computed before the period begins and used to apply overhead cost to jobs throughout the period Overhead applied activity = POHR x Actual activity Computation of the Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced Choice of an Allocation Base for Overhead Cost The allocation base used in the POHR should drive the overhead cost
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