Chapter 3 Job Order Costing.docx

5 Pages

Accounting & Financial Management
Course Code
AFM 102
Tom Vance

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03 – Systems Design: Job-Order Costing Chapter 3: Systems Design: Job-Order Costing  absorption costing: a costing method that includes all manufacturing costs (DM, DL, variable and fixed OHEAD) as part of the cost of a finished unit of product (full cost) Process and Job-Order Costing ProcessCosting  used in situations where the company produces many units of a single produce for long periods of time  ex: producing paper, mixing and bottling beverages, making wieners  unit product cost= total manufacturing cost total units produced Job-Order Costing  used in situations where many different products are produced each period  ex: clothes (different styles each period), greeting cards, airline meals  used extensively in services industries Job-Order Costing –An Overview Measuring Direct MaterialsCost  bill of materials: a document that shows the type and quantity of each major item of the materials required to make a product  production order is issued when an agreement has been reached with the customer regarding the quantities, prices, and shipment date for the order  materials requisition form: a detailed source document that...  specifies the type and quantity of materials that are to be drawn from the storeroom  identifies the job to which the costs of materials are to be charged  direct materials represent materials that are directly traced to the produce/service  raw materials are ingredients that are converted into finished goods Job Cost Sheet  a form prepared for each separate job that records the materials, labour, and overhead costs charged to the job  serves as a key part of a firm’s accounting records  serves as a subsidiary ledger to the WIP account because the detailed records provided for the jobs in process add up to the balance in WIP Measuring Direct LabourCost  consists of labour charges that are easily traced to a particular job  other labour charges are treated as a part of manufacturing overhead  time ticket: an hour-by-hour summary of the employee’s activities throughout the day  the accounting dept. collects time tickets and enters the direct labour-hours and costs on individual job cost sheets Applicationof Manufacturing Overhead  must be included with DM and DL on the job cost sheet since it is also a product cost  note that: page 1 of 5 03 – Systems Design: Job-Order Costing  it is an indirect cost, meaning it is difficult/impossible to trace these costs to a particular product/job  it consists of many diff. items  tends to remain relatively constant due to the presence of fixed costs  allocation base: a measure of activity such as direct labour-hours or machine-hours that is used to assign costs to cost objects  predetermined overhead rate: used to charge overhead costs to jobs in production; the rate is established in advance for each period by use of estimates of total manufacturing overhead cost and of the total allocation base for the period estimated total manufacturing overheadcost  predeterminedoverheadrate= estimated total units in the allocation base  managers would like to know the accounting system’s valuation of completed jobs before the end of the period  if actual overhead rates were computed frequently, seasonal factors in overhead costs or in the allocation base could produce fluctuations in the overhead rates  the use of a predetermined overheard ate simplifies record-keeping  overhead application: the process of charging manufacturing overhead cost to job cost sheets and to the WIP account  overhead = predetermined overhead rate × amount of allocation base incurred by the job  when the allocation base is direct labour-hours: overhead = predetermined overhead rate × actual direct labour hours charged to the job Example:using the predeterminedrate  estimated total manufacturing overhead costs: $320 000  direct labour-hours: 40 00027  direct labour-hours were charged to the job esimated OHEAD $320 000  predetermined overhead rate = = = $8 / hour estimated units 40 000 hours  overhead applied to job = predetermined rate × direct labour-hours charged = $8/hour × 27 hours = $217  normal cost system: overhead costs are applied to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job Choice of an Allocation Base for Overhead cost  cost driver: a factor that causes overhead costs (computer time, flight-hours, etc)  in companies where direct labour and overhead costs are moving in opposite directions, it would be difficult to argue that direct labour drives overhead costs  some companies have used activity-based costing principles to redesign their costing accounting systems  a costing technique that is designed to reflect more accurately the demands that products, customers, and other cost objects make on overhead resources Computation of Unit Cost  totals for direct materials, direct labour and manufacturing overhead are transferred to the Cost Summary section to obtain the total cost for the job  the total is divided by the number of units to obtain the unit cost  this unit cost is an average cost and should not be interpreted as the cost that would actually be incurred if another unit were produced Summary initiates work on a are accumulated forms the basis is prepared as job, whereby on a form , for computing a basis for costs are charged prepared by the product and unit issuing a ... through... aknown as a ...., costs that are usendingvalue inventories and to determine cost of Sales Production Materiapage 2 of 5 Direct predetermined goods sold for requisition labour overhead rates units sold Order order form time ticket Job cost 03 – Systems Design: Job-Order Costing Job-Order Costing –The Flow of Costs The Purchase and Issueof Materials Labour Cost raw materials work in process accounts payable manufacturing overhead salaries and wages payable issue of direct and indirect materials work in process manufacturing overhead ManufacturingOverhead Costs raw materials manufacturing overhead issue of direct materials only accounts payable work in process raw materials ma
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