Job Order Costing, Overhead Allocation and Absorption Flashcards
What is the problem that job order costing helps to solve for managers?
Calculating the cost of a specific cost object
Why does job order costing matter?
- Financial reporting purposes-comparing revenue to profit
- Pricing/output decisions-generate profitability through appropriate pricing of goods
- Assessing relative efficiency-.costs of producing in one way/location compared to another
- Exercising control-benchmarks of different costs help contain them & full costs be reviewed/compared
What are the two types of costing systems?
- Job costing
* Process costing
What is job costing?
• unique output e.g. car repairs at a garage or building construction
▪ Many different products are produced each period
▪ Products are manufactured to order
▪ Cost records must be maintained for each distinct product or job
What is process costing? (not assessed)
▪ Identical Output
▪ Masses of similar products are produced e.g. bottled beer
▪ Products produced in the same manner and consume
the same amount of direct costs and overheads
▪ Average cost per unit
What are the influences on the full cost of the job in job costing? and how are they traced
▪ Direct materials-traced directly to each job using materials requisition form
▪ Direct labour-traced directly to each job using time sheets
▪Manufacturing overheads-Applied to each job using a
predetermined rate
What are the basic stages of assigning overheads to products?
Stage 1: Overheads are assigned to departments or cost centres-production cost centre if flows through departments or service cost centre if e.g. canteen
Stage 2: Costs accumulated in cost centres are assigned to products
Explain the process of stage 1 dividing overheads between cost centres
• Expenses are allocated to those cost centres to
which they belong
• If expenses cannot be allocated, they are apportioned – divided upon a fair and logical basis, so each cost centre gets an appropriate share e.g. electricity bill with no meter
• Costs apportioned to service cost centres are re-apportioned to production cost centres
Explain the basis of apportionment from stage 1 of assigning overheads to products
•Non-allocable costs must be apportioned on some logical basis
•The basis of apportionment varies according
to the cost item e.g. rent/lighting=floor area, deprreciation=value of machinery
• Basic or complex apportionment can be used e.g. apportioning power for machines by no. of machines but some machines may be more powerful than others
Explain stage 2 of assigning overheads to products
Absorption:
•After stage 1: they must then be charged out to units - using a fair and logical basis
•Total OC must be charged to all units produced in proportion to the amount of productive capacity used up in making each unit
What information is needed for absorption (stage 2)?
- OH cost for the period
2. Productive capacity available in that period
What is the pre-determined overhead rate?
• A set rate (different for each department) 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
note: if denominator is a cost then X100
Give an example of how the productive capacity chosen may vary for different departments
• Labour hours more appropriate for labour-intensive departments e.g.
• Machine hours more appropriate for machine intensive departments e.g. sewing department
other examples: Direct wages, Direct materials, Prime cost
• No. of units
Explain the materials requisition form
- used to authorise the use of materials on a job.
* Outlines type/description, quantity. unit cost and total cost for a specific job
Explain time tickets
- Workers use time tickets to record the time spent on each job.
- inc hourly rate and hours completed
