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Chapter 3

Chapter 3.docx


Department
Administrative Studies
Course Code
ADMS 2510
Professor
Alison Beavis
Chapter
3

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Chapter 3
The design of costing system depends on cost-benefit trade-offs as assessed by managers.
The nature of systems design is also influenced by the nature of what is to be costed.
Absorption costing is a popular approach for determining COGS and the cost of inventories for
financial accounting and income taxes.
Job order costing requires more effort than process costing systems.
A production order is issued when an agreement has been reached with the customer concerning the
quantities, prices and shipment date for the order.
As discussed in Chapter 2, this latter category of labour costs is termed indirect labour and includes
tasks such as maintenance, supervision, and cleanup.
Calculating predetermined MFG over head
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 the grease used in
machines to the annual salary of the production manager.
3. Even though output may fluctuate due to seasonal or other factors, manufacturing overhead
costs tend to remain relatively constant due to the presence of fixed costs.
4. The timing of payment of manufacturing overhead costs often varies. Some items such as
property taxes for the land on which the factory is built may be paid once per year, while other
items are paid for quarterly, monthly, or as acquired. But we produce finished items
continuously and rather uniformly all year long.
The overhead assigned to the job is simply a share of the total overhead that was estimated at the
beginning of the year
all costs of operating the factory other than direct materials and direct labour are classified as
manufacturing overhead costs. These costs are entered directly into the Manufacturing Overhead
account as they are incurred
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