Chapter 3 Job Order Costing Absorption costing all manufacturing costs both fixed and variable are assigned to units of product units are said to fully absorb manufacturing costs Job Order Costing An Overview Indirect costs like rent are assigned to products services by averaging across time and products the type of production process influences how this averaging is done Job order costing is used in situations where many different products are produced each period Job Order Costing Example Yost Precision Machining produces couplings for Loops Unlimited rollercoaster company Measuring direct materials cost o Bill of materials is a document that lists the type and quantity of each type of direct material needed to complete a unit of product o A product order is issued when an agreement has been reached with the customer on the quantities prices and shipment date o Materials requisition form is 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 used to control the flow of materials into production and for making entries in the accounting records o Job cost sheet records the materials labor and manufacturing overhead costs charged to that job Measuring direct labor costs throughout the day Measuring manufacturing overhead o Time ticket is an hour by hour summary of the employee s activities o Difficult to assign manufacturing overhead to a specific job bc It is an indirect cost It consists of many different items The average cost per unit will vary from one period to the next bc the fixed costs make the manufacturing overhead costs remain constant even though the number of units produced can change o Allocation base is a measure such as direct labor hours or machine hours that is used to assigned overhead costs to products services o Predetermined overhead rate computed before the period begins is computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base Computed using a 4 step process Estimate the total amount of the allocation base that will be required for next period s estimated level of production Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base Use the cost formula to estimate the total manufacturing overhead cost Y a bX Compute the predetermined overhead rate o Overhead application the process of assigning overhead cost to jobs Overhead applied to a particular job predetermined overhead rate amount of the allocation base incurred by the job o Normal cost system applies overhead to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the jobs o Actual overhead rates can caused fluctuations more to heat the factory in the winter than in the fall a job would be given different overhead costs if we used the actual overhead costs instead of a predetermined rate o Cost driver is a factor such as machine hours beds occupied computer time or flight hours that causes overhead costs Job Order Costing The Flow of Costs Product costs flow through inventories on the balance sheet and then on to the COGS in the income statement Raw materials include any materials that go into the final product when they are used their costs are transferred to the work in process inventory account as direct materials Work in process consists of units of product that are only partially complete and will require further work before they are ready for sale o Manufacturing overhead costs are applied to work in process by multiplying the predetermined overhead rate by the actual quantity of the allocation base consumed by each job Finished goods works in process to finished goods completed units of product that have not yet been sold Cost of goods manufactured the amount transferred from works in process to finished goods includes the manufacturing costs associated with the goods that were finished during the period As goods are sold their cost is transferred from finished goods to cost of goods sold Period costs do not flow through inventories they are recorded as expenses on the income statement in the period incurred At the same time that direct labor costs are added to work in process they are also added to the individual job cost sheets Manufacturing overhead costs are recorded directly into the manufacturing overhead account as they are incurred How are manufacturing overhead costs assigned to works in process o By the predetermined overhead rate o 15 000 machine hours were worked and the predetermined overhead rate is 6 dollars per machine hour 6 15 000 90 000 would be applied to work in process Manufacturing overhead clearing account Actual overhead costs are charged to manufacturing overhead as they are incurred throughout the period Overhead is applied to work in process using the predetermined overhead rate Since predetermined overhead rate is estimated the overhead costs applied during the year will prob be more or less than the actual overhead cost incurred therefore the manufacturing overhead account can be left with a balance we ll discuss this later Actual overhead costs are not charged to jobs do not appear on the job cost sheet nor do they appear in the work in process account only the applied overhead cost based on the predetermined overhead rate appears on the job cost sheet and in the work in process account Nonmanufacturing costs DO NOT go into the manufacturing overhead account they are charged directly to the income statement When a product is finished debit finished goods credit works in the process When a product is shipped to customers transfer amount from finished goods to cost of goods sold o Usually the whole order is not sold at once so we need to determine the unit product cost to see how much to move Schedules of Cost of Goods Manufactured and Cost of Goods Sold Schedule of cost of goods manufactured contains three elements of product costs direct materials direct labor manufacturing overhead and it summarizes the portions of those costs that remain in ending work in process inventory and that are transferred out into finished goods Schedule of cost of goods sold contains three elements of product costs direct materials direct labor manufacturing overhead and it summarizes the portions of those costs that remain in ending finished
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