Cost management - Chapter 4

Job order costing process

-Measuring direct materials costs -Measuring direct labor costs -Computing predetermined overhead rates and applying manufacturing overhead -Computations of unit costs

Absorption costing

Absorption costing - all manufacturing costs, both fixed and variable are assigned to units of product - units are said to fully absorb manufacturing costs

Computing predetermined overhead rates - Allocation

Because of challenges, allocation is used to assign overhead costs to products. Accomplished by selecting an allocation base that is common to all company's products or services, Allocation base = measure that is used to assign overhead costs to products and services. Examples - direct labor hours, machine hours.

Computing predetermined overhead rate - applying manufacturing overhead

Overhead application = process of assigning overhead cost to jobs Overhead applied to a particular job = predetermined overhead rate x actual direct labor hours charged to the job o Normal cost system = applies overhead to jobs by multiplying a predetermined overhead rate by the actual amount of allocation base incurred by jobs.

Computing predetermined overhead rates

Predetermined overhead rate = estimated total overhead cost / estimated total amount of allocation base Rate is computed by dividing total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period

Measuring direct labor costs

Time ticket= hour by hour summary of employees activity throughout the day.

Job order costing

Used where many different products , each with individual and unique features, are produced each period In a job order costing system - costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit

Computing predetermined overhead rates - Challenges

o Manufacturing overhead is an indirect cost. Can't trace it to specific job o Manufacturing overhead consists of many different types off cost. Some are variable and some are fixed o Because of fixed costs in manufacturing overhead, the total tends to remain relatively constant. Average cost per unit will vary from one period to next o You use predetermined overhead rates to reduce fluctuations that may occur in overhead cost during the year and you need to have some idea of cost of a project

Computing predetermined overhead rate - steps

• 1 - Estimate total amount of the allocation base (the denominator) that will be require for next period's estimated level of production. • 2 - estimate total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base • 3- use the cost formula to estimate the total manufacturing overhead cost (the numerator) for the coming period o Y = a +bX • 4-Compute predetermined overhead.

Measuring direct materials costs

• Bill of materials = document that lists the type and quantity of each type of direct material needed to complete a unit of product. • Production order = agreement with client on quantity, price, shipment date • Materials requisition form = document that specifies they type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of materials. Used to control the flow of materials into production and also for making entries into accounting records. • Job cost sheet = records the materials, labor, and manufacturing overhead charged to a job

Computation of unit costs

• Unit product cost info is used for valuing unsold units in ending inventory and for determining cost of goods sold, • Unit product cost is an average cost and should be interpreted as the cost that would actually be incurred if another unit were produced. • Incremental cost of an additional unit is something less that the average unit cost because much of the actual overhead costs would not change if another unit was produced