Ch 17 Job Order Cost Systems and Overhead Allocations

Job orders costing is typically used

By companies that tailor goods or services to the specific needs of individual customers

Goods in services should be allocated overhead cost in proportion to those generated by the creation

If an activity based used to apply overhead cost is not a primary cost driver, the overhead cost charge to certain jobs may become significantly distorted

And organizations cost accounting must provide an accurate map

That links cost to processes used in creating goods and or services

cost driver

a variable, such as the level of activity or volume, that causally affects costs over a given time span

The Manufacturing Overhead account is debited for

the actual amount of overhead cost incurred during the period

Direct manufacturing cost (direct materials used and direct labor)

are recorded on the job cost sheet as quickly as these cost can be traced to the job.

Cost accounting systems help management attain two important objectives

1. To determine the unit cost of manufacturing product or providing a service. 2. To provide managers with useful information for planning and cost control functions

Example of over head application rate

A company using direct labor hours as an activity base with a allocate the grades proportion of it's over it cost to those products or services regarding the most direct labor hours

overapplied overhead

A credit balance remaining in the account indicates that overhead applied to jobs exceeded actual overhead costs

underapplied overhead

A debit balance remaining in the Manufacturing Overhead account

overhead application rate

A device used to apply a normal amount of overhead costs to work in process. The rate is predetermined at the beginning of the year and expresses the percentage relationship between estimated total overhead for the year and the estimated total of some cost driver, such as direct labor hours, direct labor costs, or machine hours. Use of the overhead application rate causes overhead to be charged to work in process in proportion to the amount of "cost driver" traceable to those units.

(application of Overhead costs to jobs) Overhead is an indirect cost and cannot be traced conviniently to specific jobs or units

A predetermined overhead application rate is used to assign overhead costs to Work in Process

Job Order Costing

A widely used accounting system for measuring and tracking resource consumption

job cost sheets

An account in the work in process subsidiary ledger in which the costs charged to a particular job order are recorded.

Estimated overhead application rates

Are used to assign overhead cost to specific jobs as goods and services are provided to customers through the accounting. - expresses an expected relationship between overhead cost and some proportion to this activity

The entries in the subsiduary ledger indicate the type, quantity, and cost of the materials purchased.

At the end of each month, a summary entry is made debiting the Materials Inventory account for the total cost of direct materials purchased during the period.

Overhead application rates are competed at the

Beginning of the. Based on estimated dollar in activity amounts

Cost accounting systems are used

Both for management and financial accounting purposes

activity-based costing

Cost accounting method that tracks indirect costs to the activities that consume resources.

A year-end balance in the Manufacturing Overhead account may be closed directy to

Cost of Goods Sold on the grounds that most of the remaining balance is applicable to goods sold during the year.

Overhead allocation are important for job order costing because

Cost or accumulated separately for each job. Overhead must be a sign separately to each job.

Job order costing is appropriate for environment is characterized by

Customize goods or services that require bearing types and amounts of direct labor, direct materials, and overhead.

Entries to record completed jobs

DEBIT: Finished Goods Invetory, CREDIT: Work in Process Inventory

(Entry to apply overhead cost to production) To charge the WIP account with overhead costs DEBIT: Work in Process Inventory

DEBIT: Work in Process Inventory CREDIT: Manufacturing Overhead

(Recording materials used during the month) All of the materials used during the month are totaled. --Entry is made to record materials used during the month

DEBIT: Work on Process Inventory, CREDIT: Materials inventory . To record the cost of all direct materials placed into production

To record the overhead application rate in the journal entries

Debiting work in process inventory and crediting the manufacturing overhead account

Have a particular job is composed of multiple units manufactured unit cost of determined by

Dividing the total manufacturing cost assigned to the job by the number of units manufactured

Using predetermined estimated application rates

Enables managers to set more realistic sells prices to charge customers throughout the US jobs are completed. They can also be used to inform management on a daily basis whether reasonable amount of overhead costs are being incurred.

Overhead application rate equals

Estimated overhead cost/estimated units in the activity base

The information produced by cost accounting system is used

For external reporting requirements, Monitor resource consumption and to evaluate and reward employee performance

example of overhead account cost from several sources

Indirect labor cost come from payroll records; purchases of indirect materials and payments of utility billd come from invoices and reciepts; and deprecitaion of plant assets comes from end-of-period adjusting entries in the genral journal,

Cost accounting systems are reported on the balance sheet and income statement

Inventories, cost of goods sold, and various operating costs are tracked by this

If the year end balance in the overhead account is material in dollar amount

It should be apportioned among the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts.

Example of activity base

Machine maintenance cost may be allocated using machine hours as an activity based. Where as supervision cost may be allocated using direct labor hours

Activity based costing uses

Multiple allocation bases that represent different types of overhead cost

The following explains why companies total manufacturing overhead costs are not assigned to individual units simply by dividing actual annual overhead cost by the number of units produced during the year

Not all products consume equal amount of manufacturing overhead, estimated overhead cost per unit are needed Throughout the year so that managers know whether to much overhead is being used in the production, actual overhead cost and units produce or not known until the end of the year

Overhead costs are allocated to individual products and services using

PreDetermine the estimated overhead application rates

Many companies find that alternative activity be such as machine hours, computer time, or the time required to set up a production

Run match more appropriately with the incurrence of overhead cost

Manufacturing overhead cost per unit

Should always be a sign using a predetermined overhead rate

Processes that done some research this must be matched with associated cost

So the managers can decide how best to provide products or services to customers

A job represents

The Goods produced or services provided to fill a particular order. A job also can be the production of a batch of a particular product

For Overhead application rate to be reliable

The activity based chosen must be a significant cost driver

In job order costing

The cost direct materials direct labor and overhead or accumulated separately for each job

over-or underapplied overhead

The difference between the actual manufacturing overhead incurred during the period and the amount applied to work in process by use of a predetermined overhead application rate.

cost accounting systems

The methods and techniques used by enterprises to track resources consumed in creating and delivering products and services to customers.

Job cost sheets serve as a subsidiary ledger

To Work in Process Inventory account

Unique allocation bases maybe used across apartments

To apply overhead cost to bury types of goods or services

Do you know cost are determined by

Tracy direct materials, direct labor, and overhead to specific units of production

When a job represents a batch of items

Unit cost are determined by dividing the total cost to the job by the number of units in the batch

Once a job is finished, the job cost sheet indicates the cost of finished goods

and provides the information necessary to compute the unit cost of production

Cost or accumulated separately for each job. Overhead must be a sign separately to each job.

all product or service cost are chargerd (debited) to the Work in Orocess Inventory account as incurred

overhead cost are applied using

an overhead application rate

(recording direct labor costs) At the end of each month, a summary entry is made DEBITING Work in Process Inventory

and CREDITING the Direct Labor account for all direct labor cost assigned to jobs during the month.

Unit cost provide a basis for inventory valuation in the balance sheet

and for the determination of cost of goods sold in the income statement

As each job is completed, the job cost sheet is removed from the work in process subsidiary ledger

and the manufacturing cost on the sheet are totaled to determine the cost of finished goods manufactured.

A seperate job cost sheet is prepared for each job

and used to accumulate a record of all manufactoring cost charged to the job.

Payments to workers that contributed indirectly to the manufacturing process (such as supervisors and security guards)

are DEBITED to Manufacturing Overhead, not Direct Labor account

As sales of the finished units occur, the unit cost figure will be used in determinig

cost of goods sold

Manufacturing Overhead is a control account

details concerning the many different types of overhead costs are kept in subsidiary ledgers.

Manufacturing overhead includes all manufacturing cost other than

direct materials and direct labor.

Unit cost provide

managers with information for setting prices deciding what products or services to provide evaluating the efficiency of operations and controlling costs

An increase in the number of activity base units

must cause a proportional increase in actual overhead costs incurred

activity cost pools

overhead categories that represent the costs associated with an activity that consumes overhead resources

DEBITS to the Direct Labor account arise from making payments to workers directly involved in the production process

the offsetting credit is to the Cash account

(Flow of costs in job costing) In a perpetual inventory system, purchases of direct materials are posted from

the purchases journal to the accounts in teh materials term-48subsidiary ledger.

Cost accounting systems are

typically design to accommodate the specific needs of individual companies

job order costing

used in situations where many different products, each with individual and unique features, are produced each period