job order costing

direct costs

costs that can be easily and efficiently traced to a unit of a product

• ex: direct material and direct labor

indirect costs

costs that cannot be easily and efficiently traced to a unit of a product

• ex: manufacturing overhead

predetermined overhead rate (PDR)

used to apply overhead to products is determined at the beginning of each year

PDR equation

estimated manufacturing overhead cost / estimated activity level

applied overhead

represents the amount of overhead cost assigned to each product

applied overhead equation

PDR x actual activity

PDR & actual overhead

• PDR allows an estimate of total cost of the products to be made sooner

• actual overhead for the period is not known until the end of the period

• PDR is based on estimates, amount of applied overhead will not equal actual overhead cost incurred

refining 2 equations

1. cost of goods manufactured:

beginning work in process + DM used + direct labor + applied overhead - ending work in process

2. conversion costs:

direct labor + applied overhead

under-applied overhead

when the amount of overhead applied to products using the PDR is less than the total amount of overhead incurred

• COGS increases

over-applied overhead

when the amount of overhead applied to products using the PDR is greater than the total amount of overhead incurred

• COGS decreases

overhead variance

closed directly into cost of goods sold

cost accounting system

represents the system used by a company to accumulate product cost information

1. job-order costing

2. process costing

process costing

• a company produces many units of a single product

• one unit of a product is indistinguishable from other units of product

• the identical nature of each unit of product enables assigning the same average cost per unit

job-order costing

• used by companies who produce separately identifiable products (referred to as jobs)

  • prints jobs

  • anything ‘custom made’

  • construction companies

  • landscapers

• product costs are accumulated ‘per job’ meaning each job is assigned its own set of product costs

accounting for direct materials

DM are purchased:

• DM inventory ——— XXX

  • cash / accounts payable ——— XXX

DM used in production:

• work in process inventory ——- XXX

  • DM inventory ————————— XXX

accounting for direct labor

direct labor cost is incurred:

• work in process inventory ——- XXX

  • cash / salaries payable ———— XXX

accounting for overhead

DM are purchased:

• overhead ——— XXX

  • cash / accounts payable — XXX

  • supplies ———————— XXX

  • accumulated dep ———— XXX

to record overhead applied to jobs:

• work in process inventory ——- XXX

  • overhead ————————— XXX