Accounting 208 - Chapter 3

Direct Cost

1. Direct materials- Traced directly to each job as the work is performed. 2. Direct labor - Traced directly to each job as the work is performed.

Cost Driver

Is a factor that causes overhead costs.

Inaccurately assigning

Manufacturing costs to jobs adversely influences planning and decisions made by managers. i. Job-order costing systems can accurately trace direct materials and direct labor costs to jobs. ii. Job-order costing systems often fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs.

Predetermined overhead rates that rely upon estimated data are often used because

(1)Actual overhead costs for the period are not known until the end of the period, thus inhibiting the ability to estimate job costs during the period. (2) Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

Subsidiary Ledger

1. All of a company's job cost sheets collectively form a subsidiary ledger. 2. The job costs sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in: a. Work-in-Process and Finished Goods on the balance sheet. b. Cost of Goods Sold on the income statement.

Measuring Direct Materials Cost

1. Once a sales order has been received and a production order issued, the Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials (e.g., $116) to be drawn from the storeroom, and the job number (e.g., A-143) to which the cost of the materials is to be charged. a. For an existing product, the production department can refer to a bill of materials to determine the type and quantity of each item of materials needed to complete a unit of product. 2. The Accounting Department records the total direct material cost of $116 on the appropriate job cost sheet. Notice, the material requisition number (e.g., X7-6890) is included on the job cost sheet to provide easy access to the source document.

Measuring Direct Labor Cost

1. Workers use time tickets to record the amount of time that they spent on each job and the total cost assigned to each job. 2. The Accounting Department records the labor costs from the time tickets of $120 on to the job cost sheet.

Predetermined Overhead Rate

Is calculated by dividing the estimated amount of manufacturing overhead for the coming period by the estimated quantity of the allocation base for the coming period. Ideally, the allocation base chosen should be the cost driver of overhead cost.

Indirect Costs

Manufacturing overhead (including indirect materials and indirect labor). These costs are allocated to jobs rather than directly traced to each job.

Allocation Base

Such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to products. Allocation bases are used because: a.It is impossible or difficult to trace these costs to particular jobs (i.e., manufacturing overhead is an indirect cost). 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 may fluctuate during the year.

The Job Cost Sheet

The accounting department relies upon a job cost sheet for tracking the direct and indirect costs associated with a given job.

Single Predetermined plant-wide overhead rate

To allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours. a. It is often overly-simplistic and incorrect to assume that direct-labor hours is a company's only manufacturing overhead cost driver.

Multiple predetermined overhead rates

Uses more than one overhead rate to apply overhead costs to jobs. For example, assume Dickson Company uses a job-order costing system and computes a predetermined overhead rate in each production department. The company uses cost-plus pricing to establish selling prices for all of its jobs.

underapplied overhead

When a company applies less overhead to production than it actually incurs. a. increases cost of goods sold and decreases net operating income

overapplied overhead

When it applies more overhead to production than it actually incurs. a. decreases cost of goods sold and increases net operating income.

Job Order Costing

i.Many different products are produced each period. ii. Products are manufactured to order. iii. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

overhead applied to a particular job

predetermined overhead rate x amount of the allocation base incurred by the job