Systems Design-Job-Order Costing Learning Objectives 1. Distinguish between process costing and job-order costing and identify companies that would use each costing method. Lecture Notes A. Costing Systems. Two major types of costing systems are used in manufacturing and many service firms: process costing and job-order costing. 1. Process Costing. A process costing system is used where a single, homogeneous product or service is produced. In a process costing system, total manufacturing costs are divided by total number of units produced during a given period. The unit cost that results is a broad, average figure. Examples of industries in which process costing is used include cement, flour, brick, and oil refining. B. Job-Order Costing-An Overview. The discussion in the text and below assumes that a paper-based manual system is used for recording costs. Cost and other data are recorded on materials requisition forms, time tickets, and job cost sheets. Of course, many companies now enter cost and other data directly into computer databases and have dispensed with these paper documents. Nevertheless, the data residing in the computer typically consists of a "virtual" version of the manual system. Since a manual system is easy for students to understand, we continue to rely on it when describing a job-order costing system. 1. Job Cost Sheet. Each job has its own job cost sheet on which are recorded the costs that have been charged to the job. The job cost sheet will have some code or descriptive data to identify the particular job and will contain spaces to collect costs of materials, labor, and overhead. Exhibit 3-4 provides an illustration of a job cost sheet. C. Job Order Costing-The Flow of Costs. Exhibit 3-14 in the text provides a model for the cost flows in a job-order costing system. 1. Overview of Cost Flows. The basic flow of costs in a job-order system begins by recording the costs of material, labor, and manufacturing overhead.a. Direct material and direct labor costs are debited to the Work In Process account. Any indirect material or indirect labor costs are debited to the Manufacturing Overhead control account, along with any other actual manufacturing overhead costs incurred during the period. Manufacturing overhead is applied to Work In Process using the predetermined rate. The offsetting credit entry is to the Manufacturing Overhead control account. D. Under- and Overapplied Overhead. Since the predetermined overhead rate is based entirely on estimated data, there will almost always be a difference between the actual amount of overhead cost incurred and the amount of overhead cost that is applied to the Work In Process account. This difference is termed underapplied or overapplied overhead, and as discussed above, can be determined by the ending balance in the Manufacturing Overhead control account. An underapplied balance occurs when more overhead cost is actually incurred than is applied to the Work In Process account. An overapplied balance results from applying more overhead to Work In Process than is actually incurred. 1. Cause of Under- and Overapplied Overhead. When a predetermined overhead rate is used, it is implicitly assumed that the overhead cost is variable with (i.e., proportional to) the allocation base. For example, if the predetermined overhead rate is $20 per direct labor-hour, it is implicitly assumed that the actual overhead costs will increase by $20 for each additional direct labor-hour that is incurred. If, however, some of the overhead is fixed with respect to the allocation base, this will not happen and there will be a discrepancy between the actual total amount of the overhead and the overhead that is applied using the $20 rate. In addition, the actual total overhead can differ from the estimated total overhead because of poor controls over overhead spending or because of inability to accurately forecast overhead costs. |