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
