Chapter 2: Job-Order Costing

Raw Materials

Any materials that go into the final product.

Non-Manufacturing costs

Not assigned to individual jobs, rather they are expensed in the period in which they are incurred.

Applied Overhead Equation

POHR *Actual Direct Labor Hours = Applied Overhead

Schedule of COGS

Calculates the cost of raw material and direct labor used in production and the amount of manufacturing overhead applied to production. It calculates the manufacturing costs associated with goods that were finished during the period. Contains 3 types of costs: direct materials, direct labor, and manufacturing overhead.

Examples of companies that would use job-order costing:

1. Boeing (aircraft manufacturer) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)

Examples of an Allocation Base

1. Direct Labor Hours 2. Direct Labor Dollars 3. Machine Hours

Why is Allocation Base used?

1. It is impossible or difficult to trace overhead costs to particular jobs. 2. Manufacturing overhead consists of many different items ranging form the grease used in machines to the production manager's salary. 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

Job-Order costing is used when:

1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires reacting or allocating costs to each job, and maintaining cost records for each job.

Finished Goods

Completed units of product that have not been sold yet.

Cost Structure of Job-Order Costing

Direct Materials & Direct Labor: Charged to each job as work is performed. Manufacturing Overhead (indirect cost): Allocated to jobs rather than directly traced to each job.

POHR (Predetermined Overhead Rate)

Estimated total manufacturing overhead cost for the coming period /Estimated total units int eh allocation base for the coming period **Ideally, the allocation base is a cost driver that causes overhead.

Underapplied and Overapplied Overhead

The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period. Underapplied: 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: 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.

Cost of Goods Manufactured (COGM)

The manufacturing costs associated with the goods that were finished during the period.

Work in Process

Units of production that are only partially complete and will require further work before they are ready for sale.

How to estimate total amount of manufacturing overhead:

Y=A+Bx Y= The estimated total manufacturing overhead cost A= The estimated total fixed manufacturing overhead cost B= The estimated variable manufacturing overhead cost per unit of the allocation base x= The estimated total amount of the allocation base