Topic 5: Job Costing Flashcards
(18 cards)
What is the difference between job costing and process costing?
-Job costing is used when products or services are customized or made to order. Costs are tracked for each individual job or order. Each job has its own record. Direct materials, direct labor, and overhead are assigned to each specific job. e.g. customized furniture or professional services like law firms, consulting, or M&A Advisory
-Process costing is used when products are homogeneous and mass-produced in a continuous process. Costs are accumulated by a process or department over a time period, and averaged across all units produced in a period. E.g. oil refinery, or food processing.
What is the difference between actual costing and normal costing?
-Actual costing uses actual direct materials, actual direct labor, and actual manufacturing overhead costs.
-For actual costing the total product cost=Actual DM+Actual DL+Actual MOH.
-Actual costing reflects true costs, however overhead costs will not be known until the end of the period which delays decision making.
-Normal costing uses actual direct materials, actual direct labor, but applies manufacturing overhead using a predetermined rate.
-Predetermined Overhead Rate=Estimated Total Overhead/Estimated Total Allocation Base
-The formula with normal costing will be similar as total product cost=Actual DM+Actual DL+Applied MOH (predetermined).
-Normal costing allows timely cost estimation and better budgeting.
-Normal costing allows for timely cost estimation and better budgeting, but that may lead to overapplied or underapplied overhead, which will need adjustment at period-end.
What are the pros and cons of actual costing and normal costing?
-Actual costing is accurate in costing, but it is not timely because you will need to wait until the end of the period.
-Normal costing is not accurate in costing; however, it is timely because there is no need to wait until the end of the period.
Why do we estimate the overhead rate? How do we estimate the overhead rate?
-We estimate the overhead rate because overhead is an indirect cost and can be split into fixed costs or variable costs.
-Overhead is essential to the process of converting raw materials into finished goods.
-Because overhead is unknown until the end of the year, we need to use a predetermined or estimated overhead rate, so companies can calculate COGS.
-In a labour intensive environment, we can use labour as a base and estimate wage expense.
-In an automated environment, we use machine hours as a base.
What is the formula for predetermined (budgeted) Overhead Rate? When is this calculated?
-Predetermined (budgeted) OH Rate=Estimated Total MOH/Estimated Total Units in the allocation base (e.g. labour or machine hours)
-This is calculated at the beginning of the period.
What is the formula for Total Manufacturing Overhead Applied? When is this calculated?
-Total MOH Applied=Predetermined OH Rate*Actual Total Units incurred during the period.
-This is calculated during the period.
What is the formula needed to calculate if you overapplied or underapplied overhead? When is this calculated?
-Total MOH Applied or Allocated to All Jobs-Total MOH Actual Cost Incurred=Overapplied or Underapplied Overhead
-If the number is positive, then it’s overapplied.
-If the number is negative, then it’s underapplied.
What are the three approaches to make adjustments to the overhead during year-end-reconciliation? What are the benefits to each of them?
1) Write off to CGS: This method is the simplest, and fastest. We will make the write off to CGS when there are small differences between estimated and actual overhead.
2) Proration: This method helps to create accurate inventory and COGS. This method will be used when there is a significant amount of inventory in the Work in Progress or Fixed Goods account.
3) Recalculation: This method offers accurate job costing, and reflects the actual costs. The recalculation method is used when a high accuracy is needed, and there is less time pressure.
What are the three inventory accounts? Where do various materials fall on the t-accounts?
1) Material Control: Direct materials used carries a credit balance.
2) Work-In-Process: Direct materials carries a debit balance, and direct labour carries a debit balance. Another debit balance is the applied overhead cost, which is carried from the credit balance side of the MOH Allocated expense account. Cost of goods manufactured carries a credit balance.
3) Finished Goods: Cost of goods manufactured carries a debit balance, while cost of goods sold carries a credit balance.
What are the three expense accounts that measure manufacturing overhead allocated?
1) MOH Control: Indirect materials, indirect labour, insurance, taxes, and maintenance all fall under actual MOH. They all carry a debit balance.
2) MOH Allocated: Apply OH Cost carries a debit balance.
3) CGS: CGS carries a debit balance.
Why do we adjust overhead allocation if it is over or under our estimate?
-Overhead costs are applied to each job when the work is done.
-Overhead costs applied are based on the estimated rate.
-And since at the end of the year, we need to compare the actual OH costs and the OH costs applied to all jobs, the difference needs to be adjusted.
How do you adjust overhead allocation?
-Make a write off to CGS when the amount is small.
-Use a proration when you have underallocated or overallocated overhead cost, and divide it amongst WIP, FG, and CGS.
-Using the recalculation method, you would use the actual cost rate, and then recalculate the indirect costs for each job(it’s worthwhile to make a table with each of the jobs on the top axis going from left to right, and each of the modified costs on the horizontal axis going top to bottom.
How do you calculate total manufacturing costs?
Manufacturing Costs=Direct Materials+Direct Labour+Applied Manufacturing Overhead
What is the formula for cost of goods manufactured?
Cost of Goods Manufactured=WIP Beginning+Manufacturing Cost-Ending Work in Process
What is the formula for cost of goods sold?
Cost of Goods Sold=Beginning Balance Finished Goods+Cost of Goods Manufactured-Finished goods(ending).
How do you calculate the ending balance for work in process?
Work in process=Direct materials+Direct Labour+Manufacturing overhead-Work in process beginning balance
What is the formula for variable rate?
Variable rate=Variable overhead costs/Direct labour costs
What is the formula for fixed rate?
Fixed rate=Fixed overhead costs/Normal direct labour hours.
