Job order costing overhead allocation and absorption Flashcards
Specific order costing
Applicable when the output it produced ti the customers specification,
Job and contract costing
Many products separately identifiable.
Costs attributed to individual jobs/contracts
Cost records maintained for each job/contract
Job costing smaller scale and shorter term than contract costing.
Continuous order costing
Applicable where goods/services are mass produced from repeated procedures.
Job order costing
Direct Materials (traced directly to each job) → THE JOB
Direct labour (traced directly to each job) → THE JOB
Manufacturing Overhead (all costs that cannot be directly attributed to products although necessary for production. Attached to each job) → THE JOB
The job - batch of products produced.
Charging costs to units
Charge direct material and direct labour costs to each job as work is performed.
Overview of assigning overheads to products
Stage 1 -
Overheads are assigned to departments or cost centres.
Stage 2 -
Costs accumulated in cost centres are assigned to products (absorbed into product).
Cost centres
Term to describe place where overheads accumulated.
Businesses have different cost centres.
Cost centres in manufacturing company
Production cost centres - machinery.
Service cost centres - providing support to production cost centres eg canteen used by production staff.
Process of assigning overheads to products
Expenses are allocated to those cost centres to which they obviously belong.
If expenses cant be allocated, they are apportioned - divided up on a fair and logical basis so that each cost centres gets an appropriate share.
Costs apportioned to service cost centres are re-apportioned to production cost centres - product doesnt pass through service cost centre but services support production process.
Total overhead costs of each production cost centre are absorbed within products by means of absorption rates as they pass through the cost centres.
Stage 1 of assigning overheads to products - Allocation and Apportionment
Where a cost is directly attributable to a department, allocation can take place. - direct cost for that department but an indirect cost for product.
Non-allocable costs, however, must be apportioned on some logical basis. - all departments use this resource which drives the cost.
The basis of apportionment caries from department to department.
Examples of methods of apportionment of costs to cost centres
Cost Item Method of Apportionment
Rent of building Floor area of each dept.
Lighting Floor area of each dept.
Power for machines no. of machines
Production supervisors salary no. of employees
Canteen costs no. of employees
(service cost centre)
Depreciation of machinery value of machinery
Stage 2 of assigning overheads to products - Absorption
Once costs have been allocated/apportioned to departments, they must then be charged out to units - using a fair and logical basis.
Info needed -
OH cost for the period
Productive capacity available in that period (volume based measure, direct material/labour)
Total overhead costs must be charged to all units produced in proportion to the amount of productive capacity used up in making each unit - products using more productive capacity should have more charge allocated to them.
Job order cost sheet - direct materials
Reg. No. (A materials requisition form is used to authorise the use of materials on a job.)
Amount £
Job order cost sheet - direct materials - Materials requisition form
Cost of material is charged to job X.
Description - type
Quantity - number
Unit cost - for each item
Total cost - for each item, then sum of the all the total costs
Job order cost sheet - Direct labour
Ticket (number) - workers use time tickets to record the time spend on each job.
Hours
Amount £ - Hourly rate x hours
Job order cost sheet - direct labour - Employee time ticket
Starting time Ending time Hours completed Hourly Rate Amount Job number
Predetermined rate
A set rate which, when applied to cost units passing through the cost centre, will absorb or ‘pick up’ all the overheads attributable to that cost centre.
Rate = Estimated OH costs for period/Estimated productive capacity for period
Use different rates for each department - we simplified and assumed flat rate used but not likely in reality.
Bases for selecting absorption rates
Machine hours Direct labour hours Direct wages Direct materials Prime cost No. of units
Measures of productive capacity that can be used (volume based measure).
Dont take into account if products more complex that they might consume more overhead as this method is simple so doesnt recognise this.
Examples of absorption rates
Direct labour hour rate =
Estimated overheads for the year/Estimated direct labout hours for the year
=Rate per hour
Direct Material percentage=
Estimated overheads for the year/Estimated direct material costs x100
=the rate
Job order cost sheet
Primary document for tracking the costs associated with a given job.
DLH
Direct labour hour
Job order cost sheet - manufacturing overhead
Hours - same as the hours for direct labour
Rate - apply manufacturing overhead to jobs using a predetermined overhead rare of £X DLH
Amount
Predetermined manufacturing overhead rate
Using predetermined rate makes it possible to estimate total job costs sooner.
Estimated overhead for period - actual overhead for the period is not known until end of the period.
Estimates -
Need to determine profitability before end of year and be able to price product.
Compare estimate to actual amount at end of year, will be a difference.
POHR
Predetermined overhead rate
Application of manufacturing overhead - Predetermined overhead rate
Used to apply overhead to jobs
POHR=
Estimated total manufacturing overhead cost for the coming period/Estimated total units in the allocation base for the coming period
Allocation base
Ideally the allocation base is a cost driver that causes overhead.
Relationship between overhead and volume based measure.
Application of manufacturing overhead
Overhead applied = POHR x Actual activity
POHR based on estimates and determined before the period begins.
Actual activity - actual amount of the cost driver such as units produced, direct labour hours or machine hours.
Incurred during the period.
Document Flow summary - materials
Materials used may be either direct or indirect.
Materials requisition→Indirect Materials→Manufacturing overhead account
Materials requisition→Direct materials (traced to individual job so straight onto job cost sheet)→Job Cost sheets
Document Flow summary - labour
An employees time may be either direct or indirect.
Employee time ticket→Indirect labour→Manufacturing overhead account
Employee time ticket→Direct labour→Job cost sheets
Document Flow summary - overheads
Employee time ticket→Indirect Labour→Manufacturing Overhead account
Other actual OH charges (eg rent, heating, lighting)→Manufacturing Overhead account
Materials requisition→Indirect materials→Manufacturing Overhead account
Manufacturing Overhead account(applied overhead)→Job cost sheets
Over-applied and under-applied overhead
Need to adjust accounting to take into account the difference.
Manufacturing overhead is closed to cost of goods sold.
Under-applied overhead
Applied OH is less than actual OH.
Over predicted profit.
Increase cost of goods sold.
Over-applied overhead
Applied OH is greater than actual OH.
Under predicted profit.
Decrease cost of goods sold.
