Chapter Two Accounting
all manufacturing costs, both fixed and variable, are assigned to units of product—units are said to fully absorb manufacturing costs.
Conversely, all nonmanufacturing costs are treated as period costs and they are not assigned to units of product.
product costs include manufacturing overhead as well as direct materials and direct labor.
All manufacturing costs are assigned to units of product and all nonmanufacturing costs are treated as period cost under absorption costing
Used in situations with many different products each with individual and unique features.
Ex.a Diesel clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1,000 boot-cut men’s blue denim jeans, style number A312. This order of 1,000 jeans is called a job.
job-order costing system, costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit. This average cost per unit is also referred to as the unit product cost.
Most likely used in a construction company. because they do a job basis order, compared to a soda bottling factory.
(1) direct materials,
(2) direct labor
(3) manufacturing overhead.
Measuring Direct Materials Cost
Bill of materials
A document that shows the quantity of each type of direct material required to make a product.
Quantity and each type
materials requisition form
form is used to control the flow of materials into production and also for making journal entries in the accounting records
Job Cost Sheet
records the materials, labor, and manufacturing overhead costs charged to that job.
After direct materials are issued, the cost of these materials are automatically recorded on the job cost sheet
Measuring Direct Labor Cost
Direct labor consists of labor charges that are easily traced to a particular job.
Labor charges that cannot be easily traced to specific jobs are treated as part of manufacturing overhead.
As discussed in the previous chapter, this latter category of labor cost is called indirect labor and includes tasks such as maintenance, supervision, and cleanup.
Computing Predetermined Overhead Rates
- Manufacturing overhead is an indirect cost.
- from the grease used in machines to the annual salary of the production manager. Some of these costs are variable overhead costs because they vary in direct proportion to changes in the level of production (e.g., indirect materials, supplies, and power) and some are fixed overhead costs because they remain constant as the level of production fluctuates (e.g., heat and light, property taxes, and insurance).
A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects.
Key to job cost accuracy
Predetermined overhead rate
computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period.
The predetermined overhead rate is multiplied by the actual allocation base incurred by a job to find overhead applied to the job.
Use of estimated costs is to account for seasonal factors.
The total cost of a job includes ______.
applied manufacturing overhead ( Applied is used over actual for total cost)
direct labor cost
direct materials cost
establishing a markup percentage to cover all a jobs manufacturing costs and a portion of companys nonmanufacturing costs, while generating some profit
A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.
Multiple predetermined overhead rates
A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Each production department may be treated as a separate overhead cost pool.
example, in departments that are relatively labor-intensive, their overhead costs might be applied to jobs based on direct labor-hours and in departments that are relatively machine-intensive, their overhead costs might be applied to jobs based on machine-hours.
Each production department may have its own predetermined overhead rate.
When a company creates overhead rates based on the activities that it performs
Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources.
More overhead rates
When a company applies less overhead to a production than it acctually incurs.
Overapplied is when it applies More overhead to a production than it actually incurs.
cost of goods sold reported on a company’s income statement must be adjusted to reflect underapplied or overapplied overhead.
The adjustment for underapplied overhead increases cost of goods sold and decreases net operating income, whereas the adjustment for overapplied overhead decreases cost of goods sold and increases net operating income.
hen all of a company's job cost sheets are viewed collectively, they form what is known as a(n) ______.
In a system that uses multiple predetermined overhead rates, overhead is applied ______.
in each department as jobs proceed through the department
Using a departmental approach to overhead application results in ______ as using a plantwide rate.
a different selling price
Activity-based absorption costing
A costing method that assigns all manufacturing overhead costs to products based on the activities performed to make those products.
The absorption approach to overhead charges products for resources they don't use.assigns overhead based on events that consume overhead resources
A multiple predetermined overhead rate system is more accurate than a plantwide overhead rate system because it ______.
reflects differences in how overhead costs are incurred within departments
When predetermined overhead rates are based on budgeted activity ______.
products are charged for resources they don't useunit product costs fluctuate depending upon budgeted activity
Which of the following statements are true?Too much fixed overhead may be applied to products when the predetermined overhead rate is based on estimated activity.
Total estimated overhead at capacity is generally larger than total estimated overhead at the expected level of activity.
Sigma Corporation applies overhead cost to jobs on the basis of direct labor cost. Job V, which was started and completed during the current period, shows charges of $6,200 for direct materials, $9,000 for direct labor, and $5,940 for overhead on its job cost sheet. Job W, which is still in process at year-end, shows charges of $3,000 for direct materials and $4,300 for direct laborTo solve. You need to find the POR to find that take over head/DL. You will get .66 multiply by 100 for 66 percent rate. Now to find the over head cost for job W you take your rate and multiply it by the direct labor and you will get 2838 which is the amount of over head to be applied to job W
Newhard Company assigns overhead cost to jobs on the basis of 112% of direct labor cost. The job cost sheet for Job 313 includes $30,016 in direct materials cost and $10,700 in direct labor cost. A total of 1,700 units were produced in Job 313.you need to add the 112 percent of 10700 to the total manufacturing cost. so it will look like 10700 x 112% +10700 + 30016 = 52700