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Learning Objective 1
Distinguish between process costing and joborder costing and identify companies that would use each costing method.
Job-order Costing
A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit.
Job-order Costing
1.One unit of product is indistinguishable from Weyerhaeuser (paper manufacturing) 2.other units Aluminum (refining aluminum ingots) Reynolds of product. 3.The identical nature and bottling beverages)enables Coca-Cola (mixing of each unit of product
assigning the same average cost per unit.
Job-order Costing
Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Job-order Costing
Example companies: Products are manufactured to order. 1. Boeing (aircraft manufacturing) 2.The unique nature of each order requires tracing or Bechtel International (large scale construction) allocating costs to each job, and maintaining cost 3.records for each job. (movie production) Walt Disney Studios
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.
Learning Objective 2
Job No. 1
Direct Labor Job No. 2 Job No. 3
Manufacturing Overhead
Charge direct material and direct labor costs to each job as work is performed.
Job No. 1
Direct Labor Job No. 2 Job No. 3
Manufacturing Overhead
Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.
Learning Objective 3
Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Actual overhead for the period is not known until the end of the period
Estimated total units in the allocation base for the coming period
$640,000 160,000 direct labor hours (DLH)
POHR =
POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200. b. $350. c. $380. d. $730.
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as theovhd. rate job WR53? cost of $760,000/20,000hours $38 Pred.
a. $200. b. $350. c. $380. d. $730.
Direct materials $200 Direct labor $15 x 10 hours $150 Manufacturing overhead $38 x 10 hours $380 Total cost $730
Learning Objective 8
Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.
Problems of Overhead Application cost applied to The difference between the overhead
Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead.
Underapplied overhead exists 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 overhead exists 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.
PearCos predetermined overhead rate of $4.00 per direct labor hour. Overhead Applied During the Period
Applied Overhead = POHR Actual Direct Labor Hours Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tigers manufacturing overhead is
a. $50,000 overapplied. b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
Tiger, Inc. had actual manufacturing overhead Overhead Applied costs of $1,210,000 and a predetermined overhead $4.00 per hour 290,000 hours rate of $4.00 per machine = $1,160,000 Inc. worked hour. Tiger, 290,000 machine hours during the period. Tigers Underapplied Overhead manufacturing overhead is $1,210,000 - $1,160,000
a. $50,000 overapplied. = $50,000 b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Evaluation
Job order costing is useful in the following ways: Job costing data can be utilised for estimating the production costs of specific jobs or lots of production. Estimates of future job costs serve not only as a basis for bidding and price setting but also as a standard for measuring efficiency and evaluating the performance through comparisons with the actual costs incurred. From the point of view of accounting also, the system is easy to operate as the costs are recorded order or job-wise. From the point of view of accounting also, the system is easy to operate as the costs are recorded order or job-wise. Finally, job cost sheets which are the focal point of job order system can be utilised by the management to segregate jobs on the basis of contributions/profits made by them. This information, in turn, will help the management in deciding which types of jobs should be accorded priority.
Batch Costing
Batch costing is a variant of job costing. It is a natural type of system to be utliised in situations when a firm manufactures products in readily identifiable batches or definite lots For identification purposes, each batch is required to be numbered in batch costing as each job is numbered in the job costing system. The unique feature which distinguishes job costing from batch costing is that, while in the former production is tailored to meet the customers specifications, in the latter, in general, goods are produced to inventory them for future sale to customers.