Chapter 16 - Job Costing Flashcards
Process Production and Costing
Firms mass-produce large quantities of similar or homogeneous products. The cost of one unit of a product is identical to the cost of another.
Job-order Production and Costing
These firms produce a wide variety of services or products that are quite distinct from each other. Costs are accumulated by job.
Actual Costing
Only actual costs of direct materials, direct labor, and overhead are used to determine unit cost. This method is hardly ever used because of issues of defining overhead, uneven overhead and uneven production.
Normal Costing
Determines unit cost by adding actual direct materials, actual direct labor, and estimated overhead. Overhead can be estimated by approximating the year’s actual overhead at the beginning of the year and then using a predetermined rate throughout the year to obtain the needed unit cost information.
3 Steps of Normal Costing
1) Calculate the predetermined overhead rate.
2) Apply overhead to production throughout the year.
3) Reconcile the difference between the total actual overhead incurred during the year and the total overhead applied to production.
Predetermined Overhead Rate =
Estimated Annual Overhead / Estimated Annual Activity Level
Applied Overhead =
Predetermined Overhead Rate x Actual Activity Level
Overhead Variance
The difference between actual overhead and applied overhead. Usually, the entire overhead variance is assigned to Costs Of Goods Sold.
Underapplied Overhead
Actual overhead is greater than applied overhead. Product cost has been understated. The variance is added to COGS.
Overapplied Overhead
Actual overhead is less than applied overhead. Product cost has been overstated. The variance is subtracted from COGS.
3 Methods of Assigning Costs of Support Departments to Producing Departments
- Direct Method
- Sequential Method
- Reciprocal Method
Direct Method
Ignores support department interactions and assigns support department costs only to the producing departments.
Sequential Method (or Step Method)
Limited accounting of support department interaction. Cost allocations are performed in a step-down fashion, following a predetermined ranking procedure. Usually defined by ranking the support departments in order of the amount of service rendered. Once a support department’s costs are allocated, it never receives a subsequent allocation from another support department.
Reciprocal Method
Recognizes all interactions among support departments. Not widely used due to its complexity.
