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Chapter 3

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ACCT 2230
Elliot Currie

Chapter 3: Systems Design: Job-Order Costing Absorption costing (Full costingcosting method that includes all manufacturing costs (direct materials, direct labour, and both variable and fixed overhead cosas part of the cost of finished unit of product Process Costing Process Costing System- used in those manufacturing situations where a single, homogeneous product (cement or oil) flows in a continuous stream out of the production process -company uses many units of single product for long periods of time Unit Cost (per litre, kilogram, bottles) = *since one unit of product line is indistinguishable from any other unit of product, each unit is assigned the same average cost Job-Order Costing Job-Order Costing - used in situations where many different products, jobs, or services are produced each period (ie. Levi Strauss would make different types of jeans for men and women during a month) -used exclusively in service industry & non-profit organizations (hospitals, social service agencies, law firms, movie studios, accounting firms, all use variation of job-costing to accumulate costs for accounting, billing and performance evaluation purposes) -products are manufactured to order -each product has own unique cost per unit Bill of materials- record that lists the type and quantity of each major item of the materials required to make a product Materials requisition form- detailed source document that specifies the type and quantity of materials that are to be drawn from the storeroom and identifies the job to which the costs of materials are to be charged Job cost sheet- form prepared for each job that records the materials, labour, and overhead costs charged to the job Time ticket-detailed source document that is used to record an employee’s hour-by-hour activities during a day Calculating Predetermined Manufacturing Overhead Rates -manufacturing overhead must be included with direct materials and direct labour on the job cost sheet, since manufacturing overhead is also a product cost Four reasons why assigning manufacturing overhead to units of product can be difficult task: 1. manufacturing overhead is an indirect cost. This means that it is either impossible or difficult to trace these costs directly to a particular product or job 2. manufacturing overhead consists of many different items (ranging from grease used in machines to annual salary of production manager) 3. Even though output may fluctuate due to seasonal or other factors, manufacturing overhead costs tend to remain relatively constant due to presence of fixed costs 4. the timing of payment of manufacturing overhead costs often varies. Some items (property tax) is paid once per year, while other items are paid daily, monthly, quarterly, or as acquired. But we produce finished items continuously and rather uniformly all year long Steps To Determine Predetermined Overhead Rate: 1. Determine the costs to be allocated 2. Determine the allocation base 3. Calculate the predetermined overhead rate Allocation base- measure of ac(direct labour-hours (DLH)or machine- that is used to assign costs to cost objects -impossible/difficult/costing to trace directly -consists of many different items and job may be completed and sold before the actual overhead can be determine Predetermined Overhead Rate- used to charge overhead costs to jobs; rate is established in advance for each period by use of estimate of total manufacturing overhead cost and of the total allocation base for the period -computed BEFORE period begins and used to APPLY overhead cost to jobs throughout period Predetermined overhead rate = Overhead application- process of charging manufacturing overhead cost to job cost sheets and to the work in progress account Formula for determining the amount of overhead cost to apply to particular job Overhead Applied = Predetermined x Amount of the Allocation To Particular Job
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