51. Job Order Costing

Question 1

Describe when an organization would use a job order costing model and when an organization would use a process costing model.

Answer 1

• Job order costing model: This model is used when the customer or client receiving the product can be identified before the process begins and the job with its associated costs are tracked together throughout the process.
• Process costing model: This model is used when an organization is building similar products without separately identifying each product during the process and the organization can only identify the buyer during the selling process.

Question 2

Briefly describe the three-step process that manufacturing and service organizations use to account for overhead.

Answer 2

Step 1: Before the reporting period starts, establish an overhead application rate by determining the overhead cost budget and an overhead application basis.
Step 2: Use the overhead application rate during the year to apply costs to actual job or service invoices as the work takes place. Additionally, track the actual overhead costs during the year.
Step 3: At the end of the year, reconcile the overhead to determine if overhead costs have been over- or under-applied during the year.

Question 3

What are the two reasons that an organization’s ability to accurately track costs is critical to compete effectively despite the fact that most organizations are in a “price taker” rather than a “price maker” position in the economy?

Answer 3

• In order to efficiently manage costs and incentivize employees to reduce costs and improve quality, an organization needs a clear and confident view of costs.
• When they have a clear and confident view of costs, organizations can effectively manage their strategic market positions by emphasizing and deemphasizing certain products or customers available in the organizations’ portfolio.