Job Order Costing

Problem with PDR is that it is based on estimates. Thus:

Applied Overhead will not equal Actual Overhead Cost Incurred

Over-Applied Overhead

Exists when the amount of applied overhead using PDR is greater than the total amount of actual overhead incurred

Under-Applied Overhead

Exists when the amount of applied overhead using PDR is less than the total amount of actual overhead incurred

The lack of a direct link between the overhead costs and products presents a problem:

How do we determine the amount of overhead cost charged to each product?

Manufacturing Overhead is an:

Indirect Cost

2 Traditional Types of Cost Accounting Systems:

Job-Order Costing, Process Costing

Job-Order Costing

Many different products are produced and manufactured to order, thus, tracing or allocating costs to each job and maintaining cost records for each job is necessary

Applied Overhead =

PDR x Actual Activity

Examples of Companies that use Job-Order Costing:

Print Shops, Custom Made, Construction, Landscapers

Accounting recordings for overhead:

Record actual overhead costs; Record overhead applied to jobs

Cost Accounting System

Represents the system used by a company to accumulate product cost information

Product Costs:

are accumulated 'per job'; each job is assigned its own set of product costs

Manufacturing Overhead is assigned to products using:

Some activity level, such as direct labor hours, machine hours, or direct labor cost. To accomplish the assignment of overhead, a PRE-DETERMINED OVERHEAD RATE (PDR) must be calculated.

Applied Overhead

The amount of overhead cost assigned to products

Actual Overhead for the period:

is not known until the end of the period

PDR =

(Estimated Manufacturing Overhead Cost)/(Estimated Activity Level)

Cost of Goods Manufactured Refined =

Beginning work in process + Direct Materials Used + Direct Labor + Applied Overhead - Ending Work in Process

Refinement of two equations:

Cost of Goods Manufactured, Conversion Costs

Direct Costs

Costs that can be easily and efficiently traced to a unit of product

Indirect Cost

Costs that cannot be easily and efficiently traced to a unit of product

When direct materials are purchased:

Debit Direct Material Inventory; Credit Cash/Accounts Payable

Record actual overhead costs:

Debit Overhead; Credit Whatever (cash, supplies, accumulated depreciation, etc.)

When direct labor cost is incurred:

Debit Work In Process Inventory; Credit Cash/Salaries Payable

When direct materials are used:

Debit Work In Process Inventory; Credit Direct Material Inventory

Record overhead applied to jobs:

Debit Work In Process Inventory; Credit Overhead

Conversion Costs Refined =

Direct Labor + Applied Overhead

How does manufacturing overhead differ from the two other manufacturing costs?

Direct materials and direct labor (manufacturing costs) are direct costs

The difference between applied overhead and actual overhead costs incurred is called:

Under-Applied or Over- Applied Overhead (overhead variance)

Process Costing

Used when a company makes a lot of the same thing so each unit is assigned the same average cost per unit

Accounting recording for direct labor:

When direct labor cost is incurred

Accounting recordings for direct materials:

When direct materials are purchased; When direct materials are used in production

Overhead Variance is:

closed directly into cost of goods sold

Companies that use Job-Order Costing:

produce separately identifiable products (referred to as jobs)