Managerial Accounting: Chapter 2: Job Order Costing - Calculating Unit Product Costs
Managerial Accounting: Chapter 2: Job Order Costing - Calculating Unit Product Costs
Managerial Accounting: Chapter 2: Job Order Costing - Calculating Unit Product Costs
It is very common for external financial reporting requirements to heavily influence how
companies assign costs to their products and services. Because most countries (including the
United States) require some form of absorption costing for external financial reports, many
companies use some form of absorption costing for product costing purposes. In absorption
costing, all manufacturing costs, both fixed and variable, are assigned to units of product _ units
are said to fully absorb manufacturing costs. Conversely, all nonmanufacturing costs are treated
as period costs and they are not assigned to units of product.
Given these circumstances, an allocation method is used to assign overhead costs to products.
Allocation is accomplished by selecting an allocation base that is common to all of the
company’s products and services.
An allocation base is a measure such as direct labor-hours or machine-hours that is used to
assign overhead costs to products and services.
Cost-plus pricing is a pricing method in which a predetermined markup is applied to a cost base
to determine the target selling price.
In job-order costing a company’s product costs flow through three inventory accounts on the
balance sheet and then on to cost of goods sold in the income statement. Raw materials include
any materials that go into the final product. When raw materials are used in production as direct
materials, their costs are transferred to Work in Process inventory. Work in process consists of
units of product that are only partially complete and will require further work before they are
ready for sale to the customer.
To transform direct materials into completed jobs, direct labor cost is added to Work in Process
and manufacturing overhead cost is applied to Work in Process by multiplying the
predetermined overhead rate by the actual quantity of the allocation base consumed by each
job.
When jobs are completed, their costs are transferred from Work in Process to Finished Goods
inventory. Finished goods consist of completed units of product that have not yet been sold to
customers.
The amount transferred from Work in Process to Finished Goods is referred to as the cost of
goods manufactured. The cost of goods manufactured includes the manufacturing costs
associated with units of product that were finished during the period. As jobs are sold, their
costs are transferred from Finished Goods to Cost of Goods Sold.
All actual manufacturing overhead costs are debited to the Manufacturing Overhead account a s
they are incurred.
The Manufacturing Overhead account operates as a clearing account. As we have noted, actual
manufacturing overhead costs are debited to the account as they are incurred throughout the
year.
Only the applied overhead cost, based on the predetermined overhead rate, appear on the job
cost sheet and in the Work in Process account.
The schedule of cost of goods sold also contains three elements of product costs - direct
materials, direct labor, and manufacturing overhead - and it summarizes the portions of those
costs that remain in ending Finished Goods inventory and that are transferred out of Finished
Goods into Cost of Goods Sold.
If there is a debit balance in the Manufacturing Overhead account of X dollars, then the
overhead is underapplied by X dollars. On the other hand, if there is a credit balance in the
Manufacturing Overhead account of Y dollars, then the overhead is overapplied by Y dollars.