Managerial Accounting Chapter 2 Job Costing

Discipline: Accounting

Type of Paper: Question-Answer

Academic Level: Undergrad. (yrs 3-4)

Paper Format: APA

Pages: 1 Words: 275


Managerial Accounting  Chapter 2 Job Costing

Why do companies assign costs to products? 2 reasons:    1. Help them with decision making purposes 2. Helps them determine ending inventory and cost of goods sold for external reporting

The costs associated with goods not sold yet are on the balance sheet in which account?    Ending inventory

The costs associated with goods sold are on the income sheet sheet in which account?   Cost of goods sold

Absorption costing    A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs. 

Job-order costing     A costing system used in situations where many different products, jobs, or services are produced each period.
An example of an industry where job order costing is used is the building construction industry since each building is unique. The manufacturers of custom equipment or custom cabinetry are also examples of companies that will keep track of production costs by item or job.

Bill of materials   A document that shows the quantity of each type of direct material required to make a product.

Materials requisition form   A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials.

Job cost sheet   A form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job

Direct labor costs    Labor costs that can be easily traced to the finished product

Labor costs that cannot be easily traced to a finished good are included in what?   Manufacturer overhead (indirect labor)

Time ticket   A document that is used to record the amount of time an employee spends on various activities.

Manufacturing over head is an indirect cost?   Yes

Predetermined overhead rate   A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period.

Pre-determined overhead rate   Estimated MOH / Estimated allocation base

What's the process of computing the predetermined overhead rate?   1. Estimate the total amount of the allocation base 2. Estimate the total fixed manufacturing overhead cost and the variable 3. Use the cost formula to estimate the total estimated manufacturing overhead cost 4. Compute the predetermined overhead rate

Y=a+bx    Y = The total estimated manufacturing overhead cost a = The total estimated fixed manufacturing overhead cost b = The total estimated variable manufacturing over head cost per unit of of the allocation base x = The estimated total amount of the allocation base

Manufacturing overhead are    manufacturing costs that are not direct materials or direct labor. 

The predetermined Overhead rate is determined when?    Before the period begins

Overhead application   The process of assigning overhead cost to specific jobs.

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

When allocation base is direct hour what does the equation become?      Overhead applied to a job = Predetermined overhead rate * actual direct labor hours applied to a job

Normal cost system    A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

Cost driver   A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

Plantwide overhead rate    A single predetermined overhead rate that is used throughout a plant.

Multiple predetermined overhead rates    A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Each production department may be treated as a separate overhead cost pool. More labor intensive departments, their overhead costs will be applied to jobs based on direct labor hours

Under applied overhead    When a company applies less overhead to a job than actually incurred 

Over applied overhead     When a company applies more overhead than it actually incurred 

Which journal entry do you use for over and under applied overhead    Cost of goods sold Underapplied increases cogs and decreases net operating income Over reverse the two

Job order costing in a service example (law)   Each client is a job. legal forms direct materials. Time put into case is direct labor. Legal aids, cost of secretaries overhead

Why have pre determined overhead rate?     We can trace direct materials and direct labor hours costs to a product. However we can't trace overhead costs directly back to particular job. Therefore, we estimate an overhead rate for a particular job per direct activity base such as direct labor hours. Say pre determined overhead rate is $20 per labor hour. 10 hours to complete job. We then can multiply this predetermined overhead rate * # of direct labor hours to get can get estimate over the overhead cost for a particular job. So for this example overhead cost for this particular job is $200. We can now price our product more accurately to make a profit
Overhead costs are ongoing expenses a business incurs to operate. Many expenses are considered overhead costs, including rent, utilities, depreciation and labor. An overhead rate, or predetermined overhead rate, is an equation that allocates a certain amount of manufacturing overhead to each direct labor or machine hour. This rate helps businesses allocate resources and set pricing.Definition
Manufacturing Overhead Bellevue College describes manufacturing overhead as costs that cannot be traced to specific units of production. These are costs, such as rent and utilities, indirect materials and indirect labor. Indirect materials are materials used in the support process, such as cleaning supplies and repair tools. Indirect labor encompasses wages paid to employees such as maintenance workers, who are not directly involved in the manufacturing process. Because the company cannot place a per-unit cost on these expenses, they are placed under total manufacturing overhead costs. Direct Labor and Machine Hours Direct labor and machine hours can be traced to specific production units. Workers and machines that are directly involved in the production process fall under this category. The company can calculate the time it takes a machine to produce a part or a worker to assemble a piece of machinery with a certain degree of accuracy. Predetermined Overhead Rate The predetermined overhead rate is the quotient of the estimated total manufacturing overhead cost for the coming period divided by the total labor hours or machine hours for the coming period. As an example, say Company XYZ expects total manufacturing costs to equal $400,000 in the coming period. Company XYZ expects the staff to work a total of 20,000 direct labor hours. The predetermined overhead rate for the coming period is $20 per hour. Applying this Rate Company XYZ determined that its overhead costs are $20 per labor hour. The organization is now aware that if a job takes 10 hours, the overhead cost for that job is $200. Say that Company XYZ is an auto repair shop. With a predetermined overhead rate, the company has a baseline cost-per-hour figure so that it may appropriately charge its customers for labor and earn a profit.

Total Manufacturing Cost     DM + DL + MOH

Job-order costing systems are used when:    Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Types of manufacturing costs that are assigned to products using a job-order costing system:    Direct costs Direct materials Traced directly to each job as the work is performed. Direct labor Traced directly to each job as the work is performed. Indirect costs Manufacturing overhead (including indirect materials and indirect labor). These costs are allocated to jobs rather than directly traced to each job.

The accounting department relies upon a job cost sheet for tracking the           direct and indirect costs associated with a given job.

Measuring direct materials cost   Once a sales order has been received and a production order issued, the Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials (e.g., $116) to be drawn from the storeroom, and the job number (e.g., A-143) to which the cost of the materials is to be charged.
For an existing product, the production department can refer to a bill of materials to determine the type and quantity of each item of materials needed to complete a unit of product. 8 The Accounting Department records the total direct material cost of $116 on the appropriate job cost sheet. Notice, the material requisition number (e.g., X7-6890) is included on the job cost sheet to provide easy access to the source document.

Measuring direct labor costs
Workers use time tickets to record the amount of time that they spent on each job and the total cost assigned to each job.
10 The Accounting Department records the labor costs from the time tickets of $120 on to the job cost sheet.

Manufacturing overhead is applied to jobs using the predetermined overhead rate multiplied by the ____ amount of the allocation base used completing the job (this is called a normal costing system).    Actual and not estimated

The average unit cost should or shouldn't be interpreted as the costs that would actually be incurred if another unit was produced.   Shouldn't 

cost driver   A cost driver is a factor that causes overhead costs

Plantwide overhead rateMany companies use a single predetermined plantwide overhead rate to allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours. It is often overly-simplistic and incorrect to assume that direct-labor hours is a company’s only manufacturing overhead cost driver. If more than one overhead cost driver can be identified, job cost accuracy is improved by using multiple predetermined overhead rates.

When a company instead creates overhead rates based on the activities that it performs, it is employing an approach called    activity-based costing.

Job-order costing systems are often used to create financial statements for    external parties.

Impact on the income statement when a company uses predetermined overhead rates:
The amount of overhead applied to all jobs during a period will differ from the actual amount of overhead costs incurred during the period.
When a company applies less overhead to production than it actually incurs, it creates what is known as underapplied overhead. When it applies more overhead to production than it actually incurs, it results in overapplied overhead. The cost of goods sold reported on a company’s income statement must be adjusted to reflect underapplied or overapplied overhead.   35 The adjustment for underapplied overhead increases cost of goods sold and decreases net operating income. The adjustment for overapplied overhead decreases cost of goods sold and increases net operating income.

The adjustment for underapplied overhead   increases cost of goods sold and decreases net operating income.

The adjustment for overapplied overhead   decreases cost of goods sold and increases net operating income.

All of a company’s job cost sheets collectively form a    subsidiary ledger.

job-order costing is also used in service companies?   Yes Law firms