Chapter 2 - Job Order Absorption Costing

Summary: There are two decisions that need to be made when applying manufacturing overhead costs to products for financial reporting purposes:

1. How many predetermined overhead cost pool rates will be used? -A single (plantwide) rate or multiple (departmental) rates 2. Which cost driver will be used to apply the overhead costs in each cost pool to the products? - Examples: DL$, DLH, MH, Units

job-order costing general approach

1. Identify the cost object (job or individual product). 2. Trace the direct materials costs to the job as the materials are put into production. 3. Trace the direct labor costs to the job as the workers perform their tasks. 4. Allocate (apply) an appropriate amount of overhead costs to the job. 5. Compute the total cost of the job as the sum of the direct materials, direct labor, and manufacturing overhead costs.

Normal Costing

A costing system in which manufacturing overhead costs are applied to a job by multiplying a predetermined overhead rate by the amount of the cost driver used by the job.

Job Cost Sheet

A form that records the direct materials, direct labor, and manufacturing overhead charged to a job. It is attached (physically or electronically) to each job throughout the production process. Slide 6

Process to apply manufacturing overhead costs to a job under this system:

A predetermined overhead rate is established using the total estimated manufacturing overhead costs in the cost pool and the total estimated amount of the cost driver. POR = est. total MOH/est. total # of cost driver - Typical cost drivers include direct labor-hours (DLH), direct labor cost (DL$), machine-hours (MH), and units (#). Manufacturing overhead is applied using the predetermined overhead rate times the actual amount of the cost driver used. MOH Applied = POR * actual amount of CD used

Absorption costing

Absorption costing is a costing method that includes all manufacturing costs (fixed and variable) in the cost of a product.

Example for last card

For example, labor-related overhead could be applied on direct labor-hours and machine-related overhead could be applied on machine-hours.

Some organizations use a single cost pool and a single predetermined overhead rate to apply manufacturing overhead costs to products; this single rate is called a...

Plantwide rate

Cost Pool

a collection of manufacturing overhead costs that are accumulated for the purpose of assigning the costs to products.

Job-order costing

a costing system that assigns product costs to specific jobs or units of product that are manufactured.

Other organizations use two or more cost pools and multiple predetermined overhead rates to apply manufacturing overhead costs to products; these are called...

departmental rates

The (multiple) departmental rates are

more accurate but they are more costly to use. The choice depends on whether the increased accuracy from the departmental rates is worth the extra costs of measuring the cost pools and cost drivers.

Cost Driver

the measure used to assign the accumulated overhead costs to products (also called an allocation base).

Recall: Managerial accounting systems report product costs to...

value inventory and measure cost of goods sold.