4.) Job Order Costing, Overhead Allocation and Absorption Flashcards
When is Specific Order costing used? What types are there?
- Applicable where the output is produced to the customer’s specification
- Types: job and contract costing
What are the characteristics of Specific Order Costing common to both job and contract costing?
- Where many products are separately identifiable
- Costs are attributed to individual jobs/contracts e.g. to a particular ‘batch’ of a size/style of jeans
- Cost records are maintained for each job/contract
What are the differences in job and contract costing? (Specific Order Costing)
- Job costing is smaller scale and shorter term than contract costing, can be applied to Services e.g. solicitors firm, each client has a service provided to them; the cost incurred is the ‘job’
- Contract is longer term, larger scale e.g. infrastructure; HSC train project
When is Continuous Order Costing used? What types are there?
- Applicable when goods/services are mass produced from repeated procedures; no separate/identifiability as in Specific Order Costing
- Type: Process costing
What are the characteristics of Process Costing, and what type of Costing is this?
- Output units are identical/nearly identical e.g. soft drinks, cereals etc. (mass production)
- Cost units are rarely separable
- Costs attributed to process (NOT to each job/contract) and averaged over units ‘the job’; dividing overall cost by total no. of units
What is an example of a Process Cost in Services?
E.g. chamber maid costing in a hotel:
- Job is not unique to each client/room
- Not tangible
- Perishable (can’t be stored)
- Simultaneous production and consumption of service cost
What three variables make up Job-Order Costing?
Basically product cost:
- Direct materials costs (traced directly to each job)
- Direct labour costs (traced directly to each job)
- Manufacturing overhead (OH; has little traceability, supports production indirectly - all costs that cannot be directly attributed to products although necessary for production)
»> Direct material and labour costs charged to each job as work is performed (can be traced)
> OH is shared out w/each job
How are Overheads assigned to Products? (2 stage process)
Stage 1:
- Overheads are assigned to departments or cost centres (higher level stage)
Stage 2:
- Costs accumulated in cost centres are assigned to products (cost then filters down to product)
What types of cost centres are there in a manufacturing company? How are overheads assigned to the products?
- Production cost centres
- Service cost centres
> Expenses are allocated to those cost centres to which they obviously belong e.g. food/drink expenses are allocated to canteen (service)
If expenses cannot be allocated, they are apportioned i.e. divided up on a fair and logical basis, so that each cost centre gets an appropriate share
List some examples of production and service cost centres respectively.
Production:
- Assembly
- Machinery
- Finishing
Services:
- Production scheduling
- Materials support
- Canteen
- Maternity procurement
What happens to costs that are apportioned to service cost centres? Why?
- Re-apportioned to production cost centres; as service cost centres (e.g. canteen) do not add specific value to the product - they do not generate revenue, just accumulate cost (part of Stage 1 of Assigning Overheads)
- Total overhead costs of each production cost-centre are then absorbed within products via absorption rates, as they pass through cost centres (e.g. Assembly, Machining, Finishing)
What does Stage 1 of Assigning Overheads to products entail?
Allocation and Apportionment:
- Where a cost is directly attributable to a department, allocation can take place (e.g. food/drink costs to the canteen; a service cost centre)
- Non-allocatable costs are apportioned on a logical basis
- Basis of apportionment varies from department to department
Describe the different Methods of Apportionment for the following Cost items to Cost Centres:
- Rent of building
- Lighting
- Power for machines
- Production supervisor’s salary
- Canteen costs
- Depreciation of machinery
- Rent of building; Floor area
- Lighting; Floor area
- Power for machines; No. of machines
- Production supervisor’s salary; No. of employees
- Canteen costs; No. of employees
- Depreciation of machinery; Value of machinery
What does Stage 2 of Assigning Overheads to products entail? What information is required?
Absorption:
- Takes place once costs have been allocated/apportioned to cost centres/departments
- Costs (OH) are charged out to units/products
Info required:
»> OH cost for the period
»> Productive capacity used in making each unit (e.g. Direct Materials, Direct Labour hours)
What is the source document regarding the procurement of Direct Materials for a job?
Materials requisition form:
- Via materials procurement department
- Form authorises the use of materials on a job
- Contains the type, quantity and total cost of material charged to job A-143
What is the source document regarding the the number of hours workers spend on a job?
Employee time tickets:
- Records direct labour hours
- Records the time spent on each job
- Now often computerised e.g. barcode system
What is meant by the Predetermined Rate (of production overhead absorption)?
- Set rate, which when applied to cost units/products passing through cost centres, will absorb/’pick-up’ all the overheads attributable to that cost centre
- Predetermined = Manufacturing overhead and productive capacity figures are estimated/budgeted
Rate = Manufacturing OH cost/Productive capacity for period (e.g. Direct labour/Direct materials - cost driver)
What bases are there for selecting absorption rates?
Volume based measures of productive capacity, ideally a cost driver that causes overhead:
- Machine hours
- Direct labour hours
- Direct wages
- Direct materials
- Prime cost
- No. of units
When direct labour-hours are used as the absorption rate to apply OH cost to jobs, how would a company’s predetermined OH rate be calculated?
Manufacturing overhead cost/Direct labour hours = Rate (per DLH = multiply rate by DLH to apply Man OH to jobs)
When the percentage of direct material cost is used as the absorption rate to apply OH cost to jobs, how would a company’s predetermined OH rate be calculated?
Manufacturing overhead cost/Direct materials cost x 100
= % rate (e.g. 250% = 2.5 times the direct materials cost)
What is the primary document used for tracking costs associated with a given job?
A Job-Order Cost Sheet:
- Direct materials
- Direct labour
- Manufacturing overhead
Why is there a need for a predetermined manufacturing OH rate?
- Using a predetermined rate makes it possible to estimate total job costs sooner
- As actual overhead for the period is not known until the end of the period
> Simplifies record keeping
> Can use estimated information to price their products
How is Man OH applied?
- POHR (predetermined OH rate calculated from Estimated OH/Estimated cost driver) x Actual activity
»> Actual activity: units produced, labour hours, machine hours etc. incurred in the period
(actual amount of the cost driver)
Describe the Document Flow Summary for Materials.
Materials Requisition:
Branch 1 -
> Direct materials
> Job Cost sheets
Branch 2 -
> Indirect materials
> Manufacturing OH account (recorded here as don’t know what actual OH is at this point)
