3- Job Order costing, Overhead Allocation and Absorption

Question 1

2x Types of Costing Systems Used to

Determine Product Costs and x3 points to explain each

Answer 1

JOB costing (unique)
Many different products are produced each period
Products are manufactured to order
Cost records must be maintained for each distinct product or job

PROCESS costing (identical)
Masses of similar products are produced
Products produced in the same manner and consume the same amount of direct costs and overheads
Average cost per unit

Question 2

X2 Examples of Job order costing applications

and x2 industries used in

Answer 2

Typical job order cost applications:
Special-order printing
Building construction

Also used in the service industry
Accountancy firms
Law firms

Question 3

What is the Job Order costing composed of [3] and their traceability? Eg for each

Answer 3

Direct Material - directly traceable
E.g. Mirrors, lights, radio..

Direct Labour - directly traceable
E.g. Salary of workers on the assembly line

Manufacturing overhead - predetermined rate for each job
E.g. salary of cleaners/maintenance workers

Question 4

x2 stages of Assigning Overheads to Products

Answer 4

Stage 1: Overheads are assigned to departments or cost centres

Stage 2: Costs accumulated in cost centres are assigned to products

Question 5

There are two types of cost centre in a manufacturing company? …
Expenses are allocated to those cost centres to which ….
If expenses cannot be allocated, they are ….. state and explain

Answer 5

production cost centres and service cost centres

they obviously belong

apportioned – that is, divided up on a fair and logical basis, so that each cost centre gets an appropriate share

Question 6

Costs apportioned to service cost centres are re-apportioned to ____ cost centres
Total ____ costs of each production cost-centre are ____ within products by means of absorption rates as they pass through the ___ centres

Answer 6

production

overhead

absorbed

cost

Question 7

Stage 1 Allocation and Apportionment

Where a cost is directly ____ to a department, ____ can take place

Non-allocable costs, however, must be ___ on some logical basis

The basis of apportionment ___ according to the cost item

Answer 7

attributable, allocation

apportioned

varies

Question 8

Examples of Methods of Apportionment of Costs to Cost Centres
Cost item	=			Method of apportionment
Rent of building=			
Lighting			=	
Power for machines=		
Production supervisor’s salary =		
Canteen costs	= 	
Depreciation of machinery	=

Answer 8

Cost item: Method of apportionment
Rent of building: Floor area
Lighting: Floor area
Power for machines: Number of machines
Production supervisor’s salary: Number of employees
Canteen costs: Number of employees
Depreciation of machinery: Value of machinery

Question 9

Stage 2 Absorption:

Once costs have been ___/___ to departments, they must then be ____out to units

Information needed:

Total overhead costs must be charged to all units produced in ___to the amount of productive ____ used up in making each unit

Answer 9

allocated / apportioned, charged

1. OH cost for the period
2. Productive capacity available in that period

proportion, capacity

Question 10

Pre-determined Overhead Rate
Formula and definition
Do you use the same or different rates for each dept?

Answer 10

A set rate which, when applied to cost units passing through the cost centre, will absorb or “pick up” all the overheads attributable to that cost centre

Rate = estimated OH costs for period
estimated productive capacity for period

Use different rates for each department

Question 11

Bases for Calculating Absorption Rates [6]

Answer 11

- Machine hours
• Direct labour hours
• Direct wages
• Direct materials
• Prime cost
• No. of units

Question 12

Examples of Absorption Rates

Direct labour hour rate

Direct material percentage

Answer 12

= Estimated overheads for the year /
Estimated direct labour hours for the year
= Rate per hour

= [Estimated overheads for the year x 100] /
Estimated direct material costs
= The rate

Question 13

The primary document for tracking the costs associated with a given job is the…

What does it record?

Answer 13

job cost sheet

Direct material costs (£)
Direct labour costs (£)
Manufacturing overhead costs (£)

Question 14

Reason for a predetermined manufacturing overhead rate? [3]

Answer 14

Using a predetermined rate makes it possible to estimate total job costs sooner

Actual overhead for the period is not known until the end of the period

A second reason is that actual figures fluctuate over time and depending on the level of activity the estimate of the cost would change as well.

Question 15

What document is Direct materials and direct labour recorded on?

What document is Indirect materials and indirect labour recorded on?

Answer 15

Job order costing sheet

Manufacturing Overhead Account

Question 16

What is the formula for Applied Overhead costs?

Answer 16

Applied Overhead = POHR × Actual Direct labour Hours

Question 17

What does it mean if the Manufacturing Overhead is Underapplied? And what can be done to correct it?

What does it mean if the Manufacturing Overhead is Overapplied? And what can be done to correct it?

Answer 17

The applied OH is less than the actual OH.
Increase the ‘work in progress’, ‘Finished goods’ or ‘costs of goods sold’

The applied OH is more than the actual OH.
Decrease the ‘work in progress’, ‘Finished goods’ or ‘costs of goods sold’