Disclaimer: This is a test on how the author will take study notes in the future and testing the lay-out of the website. Please do not use the below information or on this website for any subject matters or for use of examinations. Furthermore, the author is not rendered any service in accounting, taxation or similar professional services.
Job-Order Costing
I. Overview
It is appropriate when producing products with individual characteristics or when identifiable groupings are possible.
It is recorded when actual costs are incurred.
It is recorded using an estimated rate (by debiting manufacturing overhead control account), then applied (by crediting manufacturing overhead applied account) to each job based on a predetermined application rate for the period.
Normal spoilage is expected in the ordinary course of production and it is recorded as a product cost. Abnormal spoilage exceeds the amount expected in the ordinary course of production, and it is recorded as a period cost.
Actual costing and normal costing.
Both assign direct material and labor based on actual costs. But normal costing applies overhead based on predetermined rates and the actual usage of the base used to assign the costs.
- Overhead costs are production costs other than direct materials and direct labor.
- Overhead costs are assigned using predetermined rates.
- The denominator of a rate is a capacity measure.
Practical capacity.
Theoretical capacity is the level at which output is maximized assuming perfect efficient operation at all times.
Normal capacity is the level that approximates demand over the years, including seasonal, cyclical, and trend variations.
II. When To Use Job-Order Costing
Job-cost sheet.
- Subsidiary ledgers for the work in process and finished goods inventories are necessary for job-order costing.
- Costs are assigned to production runs and the number of units for which are averaged.
- Process costing is used for continuous process output of units that are relatively homogeneous.
- Job-order costing is used to account for the cost of specific jobs or projects when output is heterogeneous.
- Job-order costing is used for products or services that are readily identified by individual units or batches.
- Job-order costing systems accumulate costs for tasks or projects that are unique and non-repetitive.
It is a hybrid of job-order and process costing.
Note: It is commonly used by a manufacturer producing goods that have common characteristics plus some individual characteristics.
Extending costing assigns both direct costs and overhead to cost objects by using budget rates.
III. Cost Flow Among Accounts
Work-in-process (WIP).
Manufacturing overhead control.
Direct labor costs are recorded in the WIP account, whereas, indirect labor costs are recorded in the overhead control account.
It is ordinarily considered indirect costs.
Note: This cost is usually charged to overhead then allocated to all jobs.
If overtime directly results from the demand of a specific job.
Example: customers requested for early completion of the orders.
IV. Application Of Overhead
Annual overhead application rates smooth out seasonal variability of overhead costs and output levels.
Direct labor, direct labor costs, and machine hours.
- It should have a relatively close correlation with the incurrence of overhead.
- It should be assigned on the basis of some plausible relationship between the cost object and the incurrence of the cost.
Note: Preferably cause and effect.
When only one product is manufactured, all costs are assigned to a single product.
Machine hours.
Direct labor cost.
Practical capacity includes consideration of idle time resulting from holidays, downtime, change-over-time, and others.
Note: It does not consider the idle time from inadequate sale demand.
Sales – Cost of goods sold (- Under-applied overhead, or + over-applied overhead)= Gross margin – General selling and administrative expenses = Pretax income.
- Matches the firm’s resources with market opportunities.
- Maximizes the value delivered to customers.
- Minimize required future investments.
- Minimize waste in the short, intermediate, and long run.
Because theoretical capacity is the largest denominator in the overhead application rate (disregarding holidays, maintenance time, idle time, or downtime) and the lower the cost assigned to the product.
Because the total of the estimated indirect costs is divided by the base used for cost assignment and assigned the costs to the product based on actual output.
Credit to the cost of goods sold, finished goods, work-in-process inventory.
It can be based on the percentage of total overhead or the percent of total costs.
The overhead cost was composed chiefly of variable costs.
The actual volume is less than expected and the actual fixed cost is greater than expected.
Cost of goods sold (debit), Overhead applied (debit), and Overhead control (credit)
Normal capacity is the output level that will approximate demand over a period of years that includes seasonal, cyclical, and trend variations.
Note: deviation in one year will be offset in another year.
V. Work-In-Process Account Calculations
Direct material issued to production + Direct labor cost + Overhead applied.
Beginning work-in-process + prime costs + overhead costs – ending wok-in-process = COGM.
Note: It can also compute by the cost of goods sold – decreased in finished goods or + increased in finished goods = COGM.
Beginning finished good + Cost of goods manufactured – Ending finished good = Cost of goods sold.
VI. Journal Entries
Store control account.
Accrued payroll (debit), Cash(credit), Employee income tax payable(credit), and Employees’ FICA taxes payable (credit).
Work-in-process (debit), Overhead control (debit), Liability for vacation (credit), and Accrue payroll (credit).
Stored control (debit) and cash (credit).
WIP (debit), Overhead(debit), Accrued payroll (credit), and Employer payroll taxes payable (credit).
Work-in-process(debit), Overhead control(debit), and Store control (credit)
Cost of goods sold(debit), Finished goods(debit), Work-in-process(debit), Overhead applied (debit), Overhead control (credit).
Work-in-process (debit) and Overhead applied (credit).
Finished good (debit) and Work-in-process (credit).