Chapter 3
Examples of companies that would use job-order costing:
1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction 3. Walt Disney Studios (movie production)
Computing POHR
1. 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 following equation to estimate the total amount of manufacturing overhead: Y = a + bX where Y=the estimated total manufacturing overhead cost. a=the estimated total fixed manufacturing overhead cost. b=the estimated variable manufacturing overhead cost. X=the estimated total amount of the allocation base. 4. Compute the predetermined overhead rate.
Job order costing systems are used when:
1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Allocation Base
An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs.
POHR
Estimated total manufacturing overhead cost for the coming period / Estimated total units in the allocation base for the coming period.
Manufacturing Overhead Application
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
The need for POHR
Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period.
We use an allocation base because:
a. it is impossible or difficult to trace overhead costs to particular jobs. 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 fluctuates during the period.
