ACCTG 231 Lecture 5 Ch. 2 Job-Order CostingOutline of Current Lecture I. Job-Order Costing: An OverviewII. Job-Order Costing –An ExampleIII. Why Use an Allocation Base?IV. Manufacturing Overhead ApplicationV. The Need for a POHRVI. Computing Predetermined Overhead RatesVII. Key DefinitionsVIII. Job-Order Costing: The Flow of CostsCurrent LectureI. Job-Order Costing: An Overview- Job-order costing systems are used when: o Many different products are produced each periodo Products are manufactured to ordero The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job- Examples of companies that would use job-order costing include: o Boeing (aircraft manufacturing)o Bechtel International (large-scale construction)o Walt Disney Studios (movie production)II. Job-Order Costing –An Example- Change direct material and direct labor costs to each job as work is performed- Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each jobIII. Why Use an 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.- We use an allocation base becauseo It is impossible or difficult to trace overhead costs to particular jobso Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salaryo Many types of manufacturing overhead costs are fixed even though output fluctuates during the periodIV. Manufacturing Overhead ApplicationThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins- POHR=(Estimated total manufacturing overhead cost for the coming period)/(Estimated total units in the allocation base for the coming period)o Ideally, the allocation base is a cost driver that causes overheadV. The Need for a POHR- Predetermined overhead rates rely upon estimated data because…o Actual overhead for the period is not known until the end of the periodo Actual overhead costs can fluctuate seasonally, thus misleading decision makers.VI. Computing Predetermined Overhead Rates- The predetermined overhead rate is computed before the period begins using a four-step processo Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of productiono Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation baseo Use the following equation to estimate the total amount of manufacturing overhead: Y=a+bXo Where1. Y=The estimated total manufacturing overhead cost2. a=The estimated total fixed manufacturing overhead cost3. b=The estimated variable manufacturing overhead cost per unit ofthe allocation base4. X=The estimated total amount of the allocation baseo Compute the predetermined overhead rateVII. Key Definitions- Raw materials include any materials that go into the final product- Work in process: consists of units of production that are only partially complete and will require further work before they are ready for sale to customers- Finished goods: consist of completed units of product that have not been sold to customers- Cost of goods manufactured: include the manufacturing costs associated with the goods that were finished during the periodVIII. Job-Order Costing: The Flow of Costs- The transactions (in T-account and journal entry form) that capture the flow of costs in a job-order costing