Job Order Costing Flashcards

Questions and Answers

Why aren't actual manufacturing overhead costs traced to jobs just as direct materials and direct labor costs are traced to jobs?

By definition, manufacturing overhead consists of costs that cannot be practically traced to jobs. Therefore, if these costs are to be assigned to jobs, they must be allocated rather than traced.

Explain the four-step process used to compute a predetermined overhead rate.

Estimate the total amount of the allocation base for the next period's production. 2. Estimate total fixed manufacturing overhead cost and variable manufacturing overhead cost per unit of the allocation base for the coming period. 3. Use the cost formula Y = a + bX to estimate total manufacturing overhead cost for the coming period. 4. Compute the predetermined overhead rate.

What is the purpose of the job cost sheet in a job order costing system?

The job cost sheet is used to record all costs assigned to a particular job, including direct materials, direct labor, and applied manufacturing overhead. It helps compute the unit product cost upon job completion.

Explain why some production costs must be assigned to products through an allocation process.

Some production costs, like a factory manager's salary, cannot be traced directly to a particular product but are incurred due to overall production activities. Indirect materials cannot be easily traced to jobs, necessitating allocation. Signup and view all the answers

Why do companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs?

Using actual manufacturing overhead costs requires waiting until the end of the accounting period, which can lead to fluctuations in reported costs. Predetermined rates allow for consistent application throughout the period. Signup and view all the answers

What factors should be considered in selecting a base to be used in computing the predetermined overhead rate?

The allocation base should drive the overhead cost; it should cause the overhead cost to ensure accurate attribution to products and jobs. Signup and view all the answers

If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?

False Signup and view all the answers

What account is credited when overhead cost is applied to work in process? Would you expect the amount applied for a period to equal the actual overhead costs of the period? Why or why not?

The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount applied will not equal the actual overhead costs because the predetermined overhead rate is based on estimates. Signup and view all the answers

What is underapplied overhead? Overapplied overhead? What disposition is made of these amounts at the end of the period?

Underapplied overhead occurs when actual overhead costs exceed applied overhead costs. Overapplied overhead occurs when applied costs exceed actual costs. Underapplied overhead increases Cost of Goods Sold, while overapplied overhead decreases it. Signup and view all the answers

Provide two reasons why overhead might be underapplied in a given year.

Overhead might be underapplied due to poor control over overhead spending or if fixed overhead is greater than the estimated allocation base. Signup and view all the answers

What adjustment is made for underapplied overhead on the schedule of costs of goods sold? What adjustment is made for overapplied overhead?

Underapplied overhead is added to Cost of Goods Sold, while overapplied overhead is deducted from Cost of Goods Sold. Signup and view all the answers

What is a plantwide overhead rate? Why are multiple overhead rates, rather than a plantwide overhead rate, used in some companies?

A plantwide overhead rate is a single overhead rate used throughout a plant. Multiple rates are used for more accurate allocation among products, especially when departments have different cost structures. Signup and view all the answers

What happens to overhead rates based on direct labor when automated equipment replaces direct labor?

When automated equipment replaces direct labor, overhead increases and direct labor decreases, resulting in an increase in the predetermined overhead rate. Signup and view all the answers

Study Notes

Job Order Costing Overview

Actual manufacturing overhead costs cannot be traced to specific jobs and must be allocated instead.

Predetermined Overhead Rate Calculation

Step one: Estimate total allocation base for next period's production.
Step two: Estimate total fixed manufacturing overhead and variable overhead per unit.
Step three: Use cost formula Y = a + bX to estimate total manufacturing overhead cost.
Step four: Compute the predetermined overhead rate by dividing estimated overhead by the allocation base.

Job Cost Sheet Function

Records all costs associated with a specific job, including direct materials, direct labor, and applied manufacturing overhead.
Used to compute the unit product cost upon job completion.

Allocation of Production Costs

Some production costs, like a factory manager's salary, are incurred across various products and cannot be traced directly onto specific jobs.
Indirect materials also require allocation rather than direct tracing to jobs.

Use of Predetermined Overhead Rates

Companies prefer predetermined rates to avoid waiting until the end of the period for actual overhead application.
This prevents fluctuations in costs due to seasonal factors or output variations.

Selection of Allocation Base

The allocation base should directly influence overhead costs to ensure accurate assignment of costs to jobs and products.

Profit Assurance and Overhead Assignment

Assigning manufacturing overhead costs does not guarantee profit; selling prices and sales volume are critical factors.
Profit is realized only through sales, not merely through cost allocation.

Overhead Cost Application

The Manufacturing Overhead account is credited when applying overhead to Work in Process.
Applied overhead generally does not match actual costs as it is based on estimates.

Underapplied vs. Overapplied Overhead

Underapplied overhead occurs when actual costs exceed applied costs.
Overapplied overhead results when actual costs are less than applied.
At the end of the period, underapplied overhead increases Cost of Goods Sold, while overapplied decreases it.

Causes of Underapplied Overhead

Poor control over overhead spending can lead to underapplication.
Fixed overhead costs may remain constant while actual activity levels fall short of estimates.

Cost of Goods Sold Adjustments

Underapplied overhead increases Cost of Goods Sold to reflect more accurate job costs.
Overapplied overhead is deducted from Cost of Goods Sold.

Plantwide vs. Multiple Overhead Rates

A plantwide overhead rate applies a single rate across the entire plant.
Multiple overhead rates allow for more specific allocation based on departmental needs, beneficial for diverse production departments.

Impact of Automation on Overhead Rates

Replacing direct labor with automated equipment typically increases overhead costs while decreasing direct labor costs.
This shift results in a higher predetermined overhead rate if calculated based on direct labor.

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Description

This set of flashcards covers key concepts of job order costing, including the allocation of manufacturing overhead and the process for calculating predetermined overhead rates. Ideal for students looking to reinforce their understanding of accounting principles in practical scenarios.