Job Order Costing & ABC

Process Costing

A costing system used when a company produces many units of a single, indistinguishable product.

Job Order Costing

A costing system used when many different, unique products are manufactured to order.

Allocation Base (MOH)

Used to assign overhead to jobs because MOH cannot be easily traced directly to a particular job.

Actual Costing

Costing method using actual DM + actual DL + actual MOH.

Normal Costing

Costing method using actual DM + actual DL + applied MOH.

Predetermined Overhead Rate (POHR)

Budgeted OH divided by Budgeted Cost Driver amount.

Applied MOH Formula

POHR multiplied by Actual Activity.

MOH Variance Formula

Actual MOH minus Applied MOH.

Adjusted COGS Formula

Normal COGS plus MOH variance.

Under-applied Overhead

Occurs when overhead applied using POHR is less than total overhead actually incurred.

Over-applied Overhead

Occurs when overhead applied using POHR is greater than total overhead actually incurred.

Effect of Under-applied MOH on COGS

Increases COGS.

Effect of Over-applied MOH on COGS

Decreases COGS.

Plantwide Overhead Rate

A single overhead rate used throughout an entire factory.

Why DL was historically used as an allocation base

DL was recorded, was a large component, and managers believed DL and OH were highly correlated.

Departmental Overhead Rates

Systems where each department has its own OH rate based on the nature of work in that department.

Activity-Based Costing (ABC)

A costing system that uses multiple allocation bases (activity measures) to assign costs to products.

Activity Cost Pool

A cost bucket in which costs related to a particular activity are accumulated.

Activity Measure

Expresses how much of an activity is carried out and serves as the allocation base for applying OH.

How ABC differs from traditional costing

Assigns non-manufacturing costs, excludes some manufacturing costs, and uses more cost pools.

Five Classifications of Activities in ABC

Unit-level, batch-level, product-level, customer-level, and organization-sustaining activities.

Unit-Level Costs

Costs that vary proportionally with the number of units produced (e.g., DM, DL, machine hours).

Batch-Level Costs

Costs incurred each time a batch of goods is processed (e.g., setups, material movements, inspections).

Product-Level Costs

Costs incurred to enable individual products to be produced and sold (e.g., process engineering).

Customer-Level Costs

Costs related to specific customers (e.g., sales calls, catalog mailings, customer support).

Organization-Sustaining Costs

Costs incurred to create productive capacity for all products (e.g., factory admin, maintenance, lighting).

Steps for Implementing ABC

Identify activities, assign OH to pools, calculate activity rates, assign costs to objects, prepare reports.

Customer Margin Formula

Sales revenue minus Manufacturing Costs (DM + DL + OH).

When are ABC systems most accurate?

When organizations use large indirect resources and have significant diversity in products and customers.

Why companies avoid ABC for external reporting

External reports are less detailed, changes are difficult, non-conformance to GAAP, and subjective allocations.

Limitations of ABC

Substantial resources required, resistance to unfamiliar numbers, and potential misinterpretation.