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
