Textbook Notes (369,205)
Canada (162,462)
RSM222H1 (43)
Chapter 3-5

Comprehensive Chapter 3-5 Notes.docx

5 Pages

Rotman Commerce
Course Code
Michael Khan

This preview shows pages 1 and half of page 2. Sign up to view the full 5 pages of the document.
CHAPTER 3: Job-Order Costing The way a product is costed can have an impact on net income and management decisions. The purpose is to provide cost data to help managers plan, control, direct, and make decisions. However, external financial reporting and tax requirements may affect how costs are summarized in managerial reports. Absorption Costing – a method of costing that includes ALL manufacturing costs – direct materials, direct labour, and both variable and fixed overhead – as part of the cost of a finished product. Basically the FULL COST (most common approach) Process Costing System – used in manufacturing situations where a single, homogeneous product is produced for long periods of time (like paper, bottles, and hot dogs). Unit product cost is calculated by dividing total manu cost by the total units produced Job-Order Costing System – used in situations where many different products, jobs, or services are produced each period. Usually products are done in batches or jobs. Costs are traced and allocated to jobs and then the costs of that job are divided by the number of units to get the avg cost per unit. (e.g. construction projects, greeting cards, airline meals). Service industries use this a lot, but they don’t have raw materials. Job-Order Costing Overview: Measuring Direct Materials Cost Usually there will be a bill of materials, a doc that shows the type and qty of each major type of material required to make one product. A production order is issued when an agreement has been reached about qty, price, and shipment date. Then, the Production Dep’t prepares a materials requisition form, which specifies the type of qty of materials needed from the storeroom, and the job itself. Then, the accounting dep’t prepares a job cost sheet, which is a form prepared for each job that records the amterials, labour, and overhead costs charged. It is a key part of accounting records because they serve as a subsidiary ledger to the Work in Process account. Direct labour must be added too. Workers use time tickets, a summary of an employee’s hours during a day. Only direct labour is added Job Cost Sheet, while indirect is charged to overhead. Manufacturing overhead is an indirect cost that is hard to trace to a job, and tend to stay constant to the presence of fixed costs. Therefore, an allocation base is selected to measure activity such as direct labour-hours or machine-hours that is used to assign overhead costs, that is common to all of the company’s products. Manufacturing overhead is commonly applied using a predetermined overhead rate, which is the total estimated manufacturing overhead divided by the allocation base. Assigning overhead costs to jobs before the start of them is called overhead application. Normal Cost System – a costing system in which overhead costs are applied to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job. Of course, the overhead cost is not the actual amount, because it’s immeasurable. Another method is to wait until the end of the period to calculate the actual overhead rate. However, managers like using predetermined overhead rates more BECAUSE: 1. Managers like to know the valuation of completed jobs before the end of the period. 2. If actual overhead rates are computed frequently, seasonal issues will provide too much fluctuation, and can be misleading. 3. Predetermined rates simplify record-keeping. Choice of an Allocation Base – this should drive the overhead cost/affect it most, such as labour-hours or labour cost. However, direct labour is decreasing due to new technology and the importance of knowledge workers like engineers who do indirect research. Therefore, managers have developed activity-based costing principles to redesign their accounting system. The Flow of Docs in a Job-Order Costing System Production •A sales order is Order •Materials Requisiton Form prepared as a •A production order •Direct Labour Time basis for initiates work on a Ticket Job Cost Sheet issuing... job, where costs •Predetermined are charged Overhead Rates Sales Order through: Job Order Costing- The Flow of Costs 1. Raw materials are acquired as assets 2. Requisitioned direct material is debited to Work in Progress, while indirect material is debited to Manufacturing Overhead. Raw Materials is credited. (The work in progress account is the control account that is the total of individual job cost sheets for the period) 3. Direct Labour is credited as Work in Progress and Indirect Labour is credited as Manufacturing Overhead. Salaries/Wages Payable is credited. 4. When new costs are found, debit Manufacturing Overhead and credit Account Payable (property tax, prepaid insurance, acc. Dep, etc.) Predetermined Overhead Rate is used to apply overhead costs to jobs. Multiply the number of direct hours by that rate to get the manufacturing overhead (credit). Debit Work in Progress. It’s used as a clearing account because actual costs are debited to Manufacturing Overhead as they incur. *Note: Actual overhead costs are not charged to jobs and DO NOT appear on the job cost sheet or work in process account – only the applied overhead cost based on the predetermined overhead rate does. Non-Manufacturing Costs Advertising and selling costs should not go into the manufacturing overhead account, but the income statement as an expense. Depreciation on office equipment is a period cost on the income statement, while depreciation on factory equip’t is a product cost and debited to manufacturing overhead. Cost of Goods Manufactured When a job is completed, the work in progress account is credited and finished goods are debited. As those goods are shipped to customers, their cost is transferred from the Finished Goods account to the COGS account and revenue is recognized. Steps: Debit A/R, Credit Sales. Debit COGS (for the amount sold, unit price x unit qty), and credit Finished Goods. *Note: The schedule of COGS manufactured is the overhead applied to jobs, not actual overhead because it’s easier to trace back to a journal entry. Complications of Overhead Application There could be over or under-applied overhead because it’s only an estimate at the beginning. Therefore, you could 1. Close out the COGS, 2. Allocate evenly b/w work in process, finished goods, and COGS, or 3. Carry it to the next period. The second allocation is more accurate – you find the percentage of applied overhead of the total, and then multiply that by the over or under-applied overhead amount. Plantwide Overhead Rate – a single predetermined overhead rate that is used throughout a plant. In large companies, multiple predetermined overhead rates are often used. CHAPTER 4: Systems Design – Process Costing Process Costing is used in in
More Less
Unlock Document

Only pages 1 and half of page 2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.