Chap 2 Job-Order Costing: Calculating Unit Product Costs

predetermined overhead rate

is computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base as follows: predetermined overhead rate = est. total manufacturing overhead cost / est. total amount of the allocation base

assigning manufacturing overhead to a specific job is complicated by three circumstances

1. Manufacturing overhead is an indirect cost. 2. Manufacturing overhead consists of many different types of costs ranging from the grease used in machines to the annual salary of the production manager. 3. Many companies have large amounts of fixed manufacturing overhead. Therefore, their total manufacturing overhead costs tend to remain relatively constant from one period to the next even though the number of units that they produce can fluctuate widely. Consequently, the average cost per unit will vary from one period to the next.

The predetermined overhead rate is computed before the period begins using a four-step process.

1. to estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2. estimate the 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 shown below to estimate the total manufacturing overhead cost (the numerator) for the coming period: Y=a+bX 4. compute the predetermined overhead rate.

steps in using Multiple Predetermined Overhead Rates

1: Calculate the estimated total manufacturing overhead cost for each department. 2: Calculate the predetermined overhead rate in each department. 3: Calculate the amount of overhead applied from both departments to specific job 4: Calculate the total job cost for Job 5: Calculate the selling price for Job (using predefined markup percentage)

cost of unused capacity

= (amount of the allocation base at capacity - actual amount of the allocation base) * predetermined overhead rate

Activity cost pool

A "bucket" in which costs are accumulated that relate to a single activity.

Subsidiary Ledger

A job cost sheet accumulates the total direct materials, direct labor, and manufacturing overhead costs assigned to a job. When all of a company's job cost sheets are viewed collectively they form what is known as a subsidiary ledger.

underapplied overhead

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

overapplied overhead

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

estimate the total manufacturing overhead cost

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

absorption costing

a costing method that includes all manufacturing costs -- direct materials, direct labor, and both variable and fixed manufacturing overhead -- in unit product costs.

normal costing system

a costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

Job-order costing

a costing system used in situations where many different products, jobs, or services are produced each period. For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month

multiple predetermined overhead rates.

a costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Each production department may be treated as a separate overhead cost pool. while more complex, is more accurate because it reflects differences across departments in terms of how jobs consume overhead costs.For example, in departments that are relatively labor-intensive, their overhead costs might be applied to jobs based on direct labor-hours and in departments that are relatively machine-intensive, their overhead costs might be applied to jobs based on machine-hours.

bill of materials

a document that lists the quantity of each type of direct material needed to complete a unit of product.

materials requisition form

a document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials. The form is used to control the flow of materials into production and also for making journal entries in the accounting records

cost driver

a factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs. In the other word, allocation base in the predetermined overhead rate is the cost driver. If the base in the predetermined overhead rate does not "drive" overhead costs, it will not accurately measure the cost of overhead resources used by each job.

job cost sheet

a form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job.

allocation base

a measure such as direct labor-hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services. The most widely used allocation bases in manufacturing are direct labor-hours, direct labor cost, machine-hours, and (where a company has only a single product) units of product.

plantwide overhead rate

a single predetermined overhead rate that is used throughout a plant. allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours. However, while direct labor-hours may indeed "drive" some of a company's manufacturing overhead costs, it is often overly simplistic and incorrect to assume that direct-labor hours is a company's only manufacturing overhead cost driver.

product-level activity

an activity that relates to specific products and typically must be carried out regardless of how many batches are run or units of product are produced and sold

activity measure

an allocation base that is used as the denominator for an activity cost pool

activity-based costing

an alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources When a company creates overhead rates based on the activities that it performs

Activity-based absorption costing

assigns all manufacturing overhead costs to products based on the activities performed to make those products.

batch-level activity

performed each time a batch is handled or processed, regardless of how many units are in the batch. Batch-level activities include tasks such as placing purchase orders, setting up equipment, and transporting batches of component parts. Costs at the batch level depend on the number of batches processed rather than the number of units produced

cost-plus pricing

the managers establish a markup percentage that they believe will generate enough revenue to cover all of a job's manufacturing costs and a portion of the company's nonmanufacturing costs, while generating some residual profit.

overhead application

the process of assigning overhead cost to specific jobs. overhead applied to a particular job = predetermined overhead rate *amount of the allocation base incurred by the job