C HAPTER # 03

(SYSTEM DESIGN: JOB-ORDER COSTING)

N OTES

Managerial Accounting

 Costing (accumulating the cost).

It can be done by two methods based on production;

1. Process costing.
It is used in companies that produce many units of a single product for a long period. There is no
customization in process costing.

The basic formula of process costing is;

Unit product cost = total manufacturing cost / total units produced

2. Job order costing.

It is used in situations where many different products are produced each period.

There is customization in job order costing. Customer order is called job.

As simple cost has three main aspects that are direct material, direct labor, and manufacturing overhead.

 Job order costing also has three main aspects that are;
i. Measuring direct material cost.
Since job order costing is mostly followed in the manufacturing sector, materials used are the first types
of costs that are incurred. When an agreement has been reached with the customer concerning the
quantities, prices, shipment date for the order, a production order is issued. The department then prepare
a material requisition form.

- Material requisition form is a document that specifies the type and quantity of the material to be
drawn from the store room and identifies the job that will be e charge for the the cost of materials.
- Job Cost sheet is the form prepared for the job that records the material, labor, and
manufacturing overhead costs charged to that job.
ii. Measuring direct labor cost.
Direct labor cost is handled similar to direct material cost it consists of charges that are easily traced to a
particular job.

Workers use time tickets to record the time they spend on each job and task. Complete time ticket is an
hour by hour similarly of the employee’s activities throughout the day. Send working on a specific job,
the employee enters the job number on the time ticket and notes the amount of time spent on the job.
When not assigned to the particular job, the employee records the nature of the indirect labor task at the
amount of time spent on the task. At the end of day, the time ticket is gathered and the accounting
department calculates the wage cost of each Entry on the time ticket and then enters the direct labor
hours and cost on the individuals’ job Cost sheet.

Every employee has given a separate time ticket according to their working hours.

iii. Applying manufacturing overhead cost.

The product cost includes manufacturing overhead as well as direct material and direct labor. Cost sheet.
Assigning a specific job in some difficulties. There are three reasons for this;

Manufacturing overhead is an indirect cost. This means that it is either impossible or difficult to trace
these costs to a particular product or job.

Manufacturing overhead consists of many different items ranging from the greatest used in machine to
the annual salary of the production manager.

Because of the fixed cost in manufacturing overhead, total manufacturing overhead cost tend to remain
relatively constant from one duration to the next even though the number of units produced can fluctuate
widely. Consequently, the average cost per unit will vary from one duration to next. An allocation is used
to assign overhead cost to products.

- An allocation base is a major such as direct labor hours for machine hours that is used to assign
overhead cost to products or services.
- The predetermined overhead is computed by dividing total estimated manufacturing overhead
for the period by the estimated total amount of the education base as follow;

Predetermined overhead rate = estimated total manufacturing overhead cost /estimated total amount of allocation base

The predetermined overhead rate is then used to apply overhead cost to jobs throughout the period. The
process of assigning overhead cost to job is called overhead application.

- The process of assigning overhead cost to jobs is called overhead application.

The formula of determining the amount of overhead cost to apply to a particular job is:

Overhead applied to a particular job = predetermined overhead rate x amount of allocation base incurred by the job

For instance, if the predetermined overhead rate is $8 is per direct labor hour, then $8 of overhead cost
is applied to the job for each direct hour incurred on the job.

- A cost driver is an effector such as machine hours, bed occupied, computer time, flight hours
that causes overhead cost.

If the base in the predetermined overhead rate does not drive overhead cost, product cost will be
distorted.

» points to consider;
i. Actual overhead costs are not charged to jobs.
ii. Actual overhead cost does not appear on the job Cost sheet.
iii. Nor do they appear in the work in process account.
iv. Only the applied overhead cost based on the predetermined overhead rate,
on the job Cost sheet in the work in process account.
- All the products that finish manufacturing process are called finished goods.
- Absorption costing is the costing method that include all manufacturing cost, direct material,
direct labor, and both variable and fixed manufacturing overhead in the cost of a product.
- Job Cost sheet it is a form prepared for the job that records the materials, labor, manufacturing
overhead costs charged to that job.
- Overapplied overhead is a credit balance in the manufacturing overhead account that occurs
when the amount of overhead cost applied to work in process exceeds the amount of overhead
cost actually incurred during a period.
- Underapplied overhead is the Debit balance in the manufacturing overhead account that
occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost
applied to work in process during a period.
- Plantwide overhead rate is a single predetermined overhead rate that is used throughout a
plant.
- Multiple predetermined overhead rate is a costing system with multiple overhead cost pool
and a different predetermined overhead rate for each cost pool, rather than a single
predetermined overhead rate for the entire company. Production department as separate
overhead cost pool.
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(Prepared by; Ayesha Raees)