Job Order Costing
Problem with PDR is that it is based on estimates. Thus:
Applied Overhead will not equal Actual Overhead Cost Incurred
Over-Applied Overhead
Exists when the amount of applied overhead using PDR is greater than the total amount of actual overhead incurred
Under-Applied Overhead
Exists when the amount of applied overhead using PDR is less than the total amount of actual overhead incurred
The lack of a direct link between the overhead costs and products presents a problem:
How do we determine the amount of overhead cost charged to each product?
Manufacturing Overhead is an:
Indirect Cost
2 Traditional Types of Cost Accounting Systems:
Job-Order Costing, Process Costing
Job-Order Costing
Many different products are produced and manufactured to order, thus, tracing or allocating costs to each job and maintaining cost records for each job is necessary
Applied Overhead =
PDR x Actual Activity
Examples of Companies that use Job-Order Costing:
Print Shops, Custom Made, Construction, Landscapers
Accounting recordings for overhead:
Record actual overhead costs; Record overhead applied to jobs
Cost Accounting System
Represents the system used by a company to accumulate product cost information
Product Costs:
are accumulated 'per job'; each job is assigned its own set of product costs
Manufacturing Overhead is assigned to products using:
Some activity level, such as direct labor hours, machine hours, or direct labor cost. To accomplish the assignment of overhead, a PRE-DETERMINED OVERHEAD RATE (PDR) must be calculated.
Applied Overhead
The amount of overhead cost assigned to products
Actual Overhead for the period:
is not known until the end of the period
PDR =
(Estimated Manufacturing Overhead Cost)/(Estimated Activity Level)
Cost of Goods Manufactured Refined =
Beginning work in process + Direct Materials Used + Direct Labor + Applied Overhead - Ending Work in Process
Refinement of two equations:
Cost of Goods Manufactured, Conversion Costs
Direct Costs
Costs that can be easily and efficiently traced to a unit of product
Indirect Cost
Costs that cannot be easily and efficiently traced to a unit of product
When direct materials are purchased:
Debit Direct Material Inventory; Credit Cash/Accounts Payable
Record actual overhead costs:
Debit Overhead; Credit Whatever (cash, supplies, accumulated depreciation, etc.)
When direct labor cost is incurred:
Debit Work In Process Inventory; Credit Cash/Salaries Payable
When direct materials are used:
Debit Work In Process Inventory; Credit Direct Material Inventory
Record overhead applied to jobs:
Debit Work In Process Inventory; Credit Overhead
Conversion Costs Refined =
Direct Labor + Applied Overhead
How does manufacturing overhead differ from the two other manufacturing costs?
Direct materials and direct labor (manufacturing costs) are direct costs
The difference between applied overhead and actual overhead costs incurred is called:
Under-Applied or Over- Applied Overhead (overhead variance)
Process Costing
Used when a company makes a lot of the same thing so each unit is assigned the same average cost per unit
Accounting recording for direct labor:
When direct labor cost is incurred
Accounting recordings for direct materials:
When direct materials are purchased; When direct materials are used in production
Overhead Variance is:
closed directly into cost of goods sold
Companies that use Job-Order Costing:
produce separately identifiable products (referred to as jobs)
