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4.10: Summary and Key Terms

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  • Section Summaries

    4.1 Distinguish between Job Order Costing and Process Costing

    • Job order costing (JOC) is the optimal costing method for producing custom goods or when it is easy to identify the cost directly with the product.
    • A JOC system assigns costs to each individual job as the costs are incurred, so that at all points in the manufacturing process, the costs assigned to that particular job are known.

    4.2 Describe and Identify the Three Major Components of Product Costs under Job Order Costing

    • Direct materials are requested on a materials requisition form and recorded on the job cost sheet when transferred from raw materials inventory to the work in process inventory.
    • Time tickets are used to accumulate the labor associated with particular jobs and assigned to those jobs on the job cost sheet.
    • Manufacturing overhead costs are accumulated in the manufacturing overhead account and assigned to the individual jobs using the predetermined overhead rate.

    4.3 Use the Job Order Costing Method to Trace the Flow of Product Costs through the Inventory Accounts

    • Materials used in production include the beginning raw materials inventory and purchases, less the ending inventory. This amount is the amount added to the work in process inventory.
    • The cost of goods manufactured includes the beginning work in process inventory, the materials used in production, the direct labor assigned to each job, and the manufacturing overhead costs assigned, less the costs remaining in the work in process inventory. This amount is transferred to the finished goods inventory.
    • The cost of goods sold include the beginning finished goods inventory and the cost of goods manufactured during the period, less the ending inventory.
    • When the job is completed, the costs are transferred from the work in process inventory to the finished goods inventory.
    • When the jobs are sold, the costs are transferred from the finished goods inventory to the cost of goods sold.

    4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production

    • Expenses are recognized when they have a direct relationship with the associated revenue, when there is a systematic and rational method to allocate them, or immediately when there is no expected benefit.
    • The estimated activity base is typically direct labor dollars or direct labor hours, and is based on an allocation base that increases or decreases as overhead increases or decreases.
    • The predetermined overhead rate is the estimated overhead divided by the activity base.

    4.5 Compute the Cost of a Job Using Job Order Costing

    • Costs from the materials requisition sheet and time tickets are recorded on the job cost sheet.
    • Overhead is allocated from the manufacturing overhead account to the individual jobs and recorded on the job cost sheet.
    • Each job has its own job cost sheet, showing the materials, labor, and overhead for each job.

    4.6 Determine and Dispose of Underapplied or Overapplied Overhead

    • Overhead is allocated to individual jobs based on the estimated overhead costs for the year and may be overapplied or underapplied for the year.
    • Overhead is underapplied when not all of the costs accumulated in the manufacturing overhead account are applied during the year.
    • Overhead is overapplied when more overhead is applied to the jobs than was actually incurred.
    • The amount of overhead overapplied or underapplied is adjusted into the cost of goods sold account.

    4.7 Prepare Journal Entries for a Job Order Cost System

    • Job cost sheets record the material, labor, and overhead costs for each job, whereas journal entries actually transfer the costs into the work in process inventory, the finished goods inventory, and cost of goods sold.

    4.8 Explain How a Job Order Cost System Applies to a Nonmanufacturing Environment

    • Job order costing can be used in nonmanufacturing companies and with the same techniques, even though there are not any inventory accounts.

    Key Terms

    conversion costs
    total of labor and overhead for a product; the costs that “convert” the direct material into the finished product
    cost driver
    activity that is the reason for the increase or decrease of another cost; examples include labor hours incurred, labor costs paid, amounts of materials used in production, units produced, machine hours, or any other activity that has a cause-and-effect relationship with incurred costs
    cost of goods manufactured
    manufacturing costs incurred less the ending work in process inventory
    cost of goods sold
    expense account that houses all costs associated with getting a product ready for sale
    direct labor
    labor directly related to the manufacturing of the product or the production of a service
    direct materials
    materials used in the manufacturing process that can be traced directly to the product
    estimated activity base
    total amount of the activity for the year
    expense recognition principle
    (also, matching principle) matches expenses with associated revenues in the period in which the revenues were generated
    indirect labor
    labor not directly involved in the active conversion of materials into finished products or the provision of services
    indirect materials
    materials used in production but not efficiently traceable to a specific unit of production
    job cost sheet
    document created for each job that includes all material, labor, and overhead costs for that job
    job order costing
    information system that traces the individual costs directly to the final product and not to production departments
    loss leader
    product sold at a price that is often less than the cost of producing it in order to entice customers to buy accessories that are necessary for its use
    manufacturing costs
    total of all costs expended in the manufacturing process; generally consists of direct material, direct labor, and manufacturing overhead
    manufacturing overhead
    costs incurred in the production process that are not economically feasible to measure as direct material or direct labor costs; examples include indirect material, indirect labor, utilities, and depreciation
    materials requisition form
    form showing which specific raw materials and costs are transferred from raw materials inventory to work in process inventory
    operating overhead
    overhead account used for service industries
    overapplied overhead
    situation when the overhead applied to the individual jobs is greater than the actual overhead; when overhead is overapplied, the manufacturing overhead has a credit balance
    period costs
    typically related to a particular time period instead of attached to the production of an asset; treated as an expense in the period incurred (examples include many sales and administrative expenses)
    prime costs
    direct material expenses and direct labor costs
    time ticket
    document used to record the particular job worked on by each employee
    underapplied overhead
    situation when the overhead applied to the individual jobs is less than the actual overhead; when overhead is underapplied, the manufacturing overhead has a debit balance