AFM 102: Winter 2017

Week 5 Chapter 5: Systems Design: Job-Order Costing

Introduction
Absorption (Full) Costing
Costing method that includes many manufacturing costsdirect materials, direct
labour, and both variable and fixed overheadas part of the cost of a finished
unit of product
Job-Order and Process Costing
Process Costing
Costing system used in those manufacturing situations where a single,
homogeneous product (such as cement or oil) flows in a continuous stream out
of the production process

Job-Order Costing
Costing system used in situations where many different products, jobs, or
services are produced each period
Example: For example, a Levi Strauss clothing factory may make many different
types of jeans for both men and women during a month. An order might consist
of 1,000 stonewashed mens blue denim jeans, style number A312, with a 32-
inch waist and a 30-inch inseam. This order of 1,000 jeans is called a batch or a
job.
Characterized by diverse outputs

Large-scale construction Greeting cards

projects Airline meals
Commercial aircraft

Used extensively in service industries and not-for-profit organizations

Hospitals Movie studios

Social service agencies Accounting firms
Law firms Advertising agencies
 An Overview of Job-Order Costing
Measuring Direct Materials Cost
Bill of Materials
Record that lists the type and quantity of each major item of the materials
required to make a product
Materials Requisition Form
Detailed source document that specifies the type and quantity of materials
that are to be drawn from the storeroom and identifies the job to which the costs
of materials are to be charged












Job Cost Sheet
Prepared for each job that records the materials, labour, and overhead costs
charged to the job

Measuring Direct Labour Cost
Time Ticket
Detailed source document that is used to record an employees hour-by-hour
activities during a day

EMPLOYEE TIME
TICKET

Computing Predetermined Overhead Rates

Allocation Base
Measure of activity used to assign costs to cost objects
Direct labour-hours or machine hours
Predetermined Overhead Rate
Used to charge overhead costs to jobs

Overhead Application
Charging manufacturing overhead cost to job cost sheets and to the Work in
Process account

Normal Cost System
Costing system in which overhead costs are applied to jobs by multiplying a
predetermined overhead rate by the actual amount of the allocation base
incurred by the job


Choice of An Allocation Base for Overhead Cost

Cost Driver
Causes overhead costs, such as machine-hours, beds occupied, computer time,
or flight-hours
Summary of Document Flows


Job-Order CostingThe Flow of Costs

Purchase and Issue of Materials
Issue of Direct and Indirect Materials
Issue of Direct Materials Only


Labour Cost

Manufacturing Overhead Costs

Application of Manufacturing Overhead
Manufacturing Overhead account operates as a clearing account


Non-Manufacturing Costs
Cost of Goods Manufactured
Cost of Goods Sold
Summary of Cash Flows
Complications of Overhead Application
Underapplied Overhead
Debit balance in the Manufacturing Overhead account that arises when amount
of overhead cost incurred is greater than amount of overhead cost applied to
Work in Process during a period
Overapplied Overhead
Credit balance in the Manufacturing Overhead account that arises when amount
of overhead cost applied to Work in Process is greater than amount of overhead
cost incurred during a period
Disposition of Underapplied or Overapplied Overhead Balances

Learning Aid

Variations from the General Model of Product Cost Flow


Multiple Predetermined Overhead Rates

Plantwide Overhead Rate
Single predetermined overhead rate used throughout a plant.
Multiple Predetermined Overhead Rate
There are multiple overhead cost pools with a different predetermined rate for
each cost pool, rather than a single predetermined overhead rate for the entire
company
Frequently, each production department is treated as a separate overhead
cost pool