Lecture Two Flashcards
Job-order costing
Job-order costing is used in situations where many different products are produced each period
Ex
1. Many diffrent products are produced each period
2. Products are manufacturing to order
3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job
Examples of companies using job-order costing
Boeing (aircraft manufacturing), Walt Disney studios
Compute a predetermined overhead
An allocation base, such as direct labor hours, direct labor dollars, or machine hours, us used to assign manufacturing overhead to individual jobs.
Why do we use allocations base?
a. It is impossible or difficult to trace overhead costs to particular jobs.
b. Manufacturing overhead consists of many different items ranging from the grease used
in machines to the production manager’s salary.
c. Many types of manufacturing overhead costs are fixed even though output fluctuates
during the period.
Manufacturing overhead application
The predetermined overhead rate (POHR) used overhead to jobs is determined before the period begins
POHR =
POHR =
estimated total manufacturing overhead cost for the coming period /
Estimated total units in the allocation base for the coming period
(Ideally the allocation base is a cost driver that causes overhead)
The need for POHR
Predetermined overhead rates that rely upon estimated data are often used because:
- Actual overhead for the period is not known until the end of the period, thus inhibiting
the ability to estimate job costs during the period. - Actual overhead costs can fluctuate seasonally, thus misleading decision makers.
Overhead application rate
Y = a+bX
Y = estimates total fixed manufacturing overhead + (direct labor hour $ x direct labor hours)
POHR = Y (estimated total manufacturing overhead) / estimated direct labor hours = $ per direct labor hour
Raw materials
Include any materials that go into the final product
Work in process
Consist of units of production that are only partially complete and will require further work before they are ready for sale to customers
Finished goods
Consists of completed units of product that have not been sold to customers
Cost of goods manufactured
Include the manufacturing costs associated with the goods that were finished during the period
Underapplied and overapplied overhead
The difference between the overhead cost applied to work in process ant he actual overhead costs of a period is referred to as either underapplied or overapplied overhead
Underapplied overhead
Exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period
Overapplied
Exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period
Activity-based costing
A number of allocation bases are used for assigning costs to products.
Examples of companies: hotels or hospitals
- An ABC system can help identify areas where the company can benefit from
improving its current processes. - Activity-based management focuses on managing activities to eliminate waste and
reduce delays and defects
Benefits of ABC
ABC improves the accuracy of product costing by:
1. Increasing the number of cost pools used to accumulate overhead costs.
- Using activity cist pools that are more homogeneous than departmental cost pools.
- Assigning overhead costs using activity measures that cause those costs, rather than
relying solely on direct labor-hours. - Activity-based costing also highlights activities that could benefit most from process
improvement efforts.
Difference between job-order and ABC
JOB-ORDER
Products - single
Volume - same
Activity- direct labor
ABC
Products - several
Volume - different
Activity - direct labor, manufacturing hours, setups
