Question

Please discuss one of the following:

• Discuss cost systems and the flow of costs in a job order system
• Discuss how to determine and use a predetermined overhead rate - include how to calculate the predetermined overhead rate
• Discuss journal entries for assigning costs to jobs and what entries are needed when a jobs is completed and sold
• Discuss under and overapplied manufacturing overhead

Answer 1

1) A cost system is a frame work used by organizations to determine the cost of their product or service.

The two types of costing system are:

Job costing system

Process costing system

Flow of cost in a job order system : The basis flow of cost in a job order system begins by recording of cost of material,labour and manufacturing overhead.

2) determination and use a predetermined overhead rate -

In order to allocate overhead costs,management choose an allocation base such as direct labour hours,direct labour costs and machine hours .A predetermined overhead rate is computed by dividing the estimated total overhead by the estimated total amount of allocation base to example

Budgeted indirect cost rate= Budgeted annual indirect costs/ Budgeted annual quantity of cost allocation base

Actual amount of allocation base is applied to the predetermined overhead rate is determine the amount of overhead that is apllied to the job.

3) journal entries

Direct material a/c Dr.

Direct labour a/c Dr.

To work in progress a/c

Indirect material a/c Dr

Indirect labour a/c Dr

To manufacturing overhead allocated a/c

Work in process a/c Dr.

To manufacturibg overhead allocated a/c

Finished goods a/c Dr

To work in progress a/c

Cost of goods sold a/c Dr.

To finished good a/c

Account Receivable a/c Dr

To revenue a/c

4) Under and overapllied manufacturing overhead.

• There can be a discrepancy between the actual overhead and overhead that is applied using a predetermined rate.
• If overhead is underapplied ,less overhead has been applied to inventory than has actually been incurred
• Since costs of goods sold will have to be increased,it will reduce the net income.
• If overhead is overapplied ,more overhead has been applied to inventory than has been incurred.
• This will lead to increase in net income.