Managerial Ch. 2 - Horngren's Accounting

Cost Accounting Systems

Systems that measure, record, and report product costs.

Managerial Use of Unit Costs

Knowing unit costs helps managers determine which products to produce, set sales prices that will lead to profits, determine how many products to produce, and compute cost of goods sold for the income statement and cost of inventory for the balance sheet.

Job Order Costing System

An accounting system that accumulates costs by job.

Job (Definition)

The production of a unique product or specialized service; it may be one unit or a batch of units.

Process Costing System

An accounting system that accumulates costs by process, used when companies manufacture similar or identical products through a series of uniform steps or processes.

Product Type: Job Order Costing

Batches of unique products or specialized services (e.g., tax returns by accounting firms, homes by a custom builder, patient care in a hospital).

Product Type: Process Costing

Similar or identical products manufactured through a series of uniform steps or processes (e.g., soft drinks, paint, packaged foods).

Production Volume: Job Order Costing

Low volume.

Production Volume: Process Costing

High volume.

Cost Accumulation: Job Order Costing

Costs are accumulated by job.

Cost Accumulation: Process Costing

Costs are accumulated by process.

Work-in-Process Inventory (Job Order)

One general ledger account with a subsidiary ledger containing individual job cost records.

Record Keeping: Job Order Costing

Job cost record for each job.

Timing of Cost Transfers: Job Order Costing

When each job is completed.

Job Cost Record

A document used to document the product costs for each job.

Materials Usage (Purchasing vs. Production)

Materials purchased and materials used in production are usually different amounts.

Materials Requisition

A request to transfer materials to the production floor.

Direct Materials Recording

When materials are received on the production floor, direct materials are recorded on the job cost record.

Indirect Materials Transfer

Indirect materials are transferred from Raw Materials Inventory to Work-in-Process through the Manufacturing Overhead account.

Direct Labor Tracking

Assigned to jobs using electronic labor/time tracking, or manually, by having each employee complete a labor time record.

Predetermined Overhead Allocation Rate

Managers use this rate to allocate costs to jobs before the end of the period because actual manufacturing overhead costs are not known until the end of the period.

Predetermined Overhead Allocation Rate Formula

Total estimated overhead costs divided by the Total estimated quantity of the overhead allocation base.

Allocation Base

A factor that links the overhead costs to jobs, often reflecting the primary cost driver.

Common Cost Drivers (Labor Intensive)

Direct labor hours or Direct labor costs.

Common Cost Drivers (Machine Intensive)

Machine hours.

Allocated Manufacturing Overhead Cost Formula

Predetermined overhead allocation rate multiplied by the Actual quantity of the allocation base used by each job.

Cost of Goods Manufactured (COGM)

The cost of all jobs completed during the period.

Unit Product Cost Formula

Cost of goods manufactured divided by Total units produced.

Underallocated Overhead

Occurs when actual manufacturing overhead costs are more than allocated manufacturing overhead costs.

Overallocated Overhead

Occurs when the actual manufacturing overhead costs are less than allocated manufacturing overhead costs.

Manufacturing Overhead Account Debits and Credits

During the year, the account is debited for actual overhead costs incurred and credited for overhead costs allocated to jobs.