Question

1. What kind of firm would use a job order cost system?
2. Which account is used in the job order cost sys­tem to accumulate direct materials, direct labor, and factory overhead applied to production costs for individual jobs?
3. Discuss how the predetermined factory overhead rate can be used in job order cost accounting to assist management in pricing jobs.
4. What is (1) overapplied factory overhead and (2) underapplied factory overhead?
5. Cite and give credit to the author that you are citing

Answer 1

A)Job Order Cost System

Job order costing system is generally used by companies that manufacture a number of different products. It is a widely used costing system in manufacturing as well as service industries.

Manufacturing companies using job order costing system usually receive orders for customized products and services. These customized orders are known as jobs or batches. A clothing factory, for example, may receive an order for men shirts with particular size, color, and design.

When companies accept orders or jobs for different products, the assignment of cost to products becomes a difficult task. In these circumstances, the cost record for each individual job is kept because each job have a different product and, therefore, different cost associated with it.

What Kind of Businesses Can Use Job Costing

Job order costing is a system of expense monitoring in which a business only creates products to fill customer/client orders. Employees complete job order cost sheets for each order and usually separate expenses into three main categories: direct material, direct labor and manufacturing overhead. Companies in many industries can use job order costing, though a variety of product offerings/services complicates the tracking of expenses.

Job Order Costing in Manufacturing Companies

Manufacturing companies incorporate job order costing as a means of controlling usage of raw materials, production equipment and labor hours. These businesses consider each customer order a separate job for the purposes of job order costing. Alternatively, manufacturers may group smaller value projects together under a single job heading.

How manufacturers group jobs depends on the size of the company. For example, a small business manufacturer may consider any job valued over $1,000 as a single job, but they may group smaller customer orders together in blocks of $1,000 for costing purposes.

White Collar Businesses

Companies in the white collar sector of business, including law firms, accounting businesses and private investment companies, can utilize job order costing to manage individual client accounts. For example, accounting firms can consider each individual client a job. Firms complete job order cost sheets each business day, detailing how accountants are handling client accounts and how many hours a client's needs consume each day. This generates daily costs that businesses can use to measure how much money firms bring in each day versus the costs associated with job activities.

Medical Services Businesses

Medical services businesses, including hospitals, small doctor's offices and medical billing companies, can use job order costing to consider each patient or bill as an individual job. Record-keeping for job order costing in service industries, including the medical field, can be more complex than in other industries because these businesses offer a wide array of services, according to Accounting For Management, a business accounting information website.

This requires medical service businesses and other service companies to keep detailed records of each specific job to determine costs correctly. For example, a doctor's office may order patients based on the purpose of visits and the cost of treatments administered.

Film Studios/Retail Companies

Retail companies, including clothing producers and retail outlets, employ job order costing to track sales of clothing by size, individual articles and broader styles. This allows retail companies and other businesses to track expenses to create a variety of job order cost models to show how costs vary from product to product. Businesses in the entertainment industry, including film studios, can create separate job order cost sheets for each film the studios create.

Job order cost sheets for film companies contain actor salaries, director payments and crew wages as direct labor costs. Direct material costs can include props, costumes, utility costs for sound stages and set design fees.

Almost anything that requires a bluepring will work: Plumbing, Heating, building, especially modular homes, which can be customized require a job cost analysis: how much for lumber, the right permits, window treatments, aluminum siding etc. The home building market will use a job cost. Any home alterations and repair come with a job cost generally itemized. Think in terms of material costs and labor, as well as miscellanious materials. Writing and editing use job costs-per page, per word etc.

B) Job Cost Sheet

Job cost sheet is a document used to record manufacturing costs and is prepared by companies that use job-order costing system to compute and allocate costs to products and services.

The accounting department is responsible to record all manufacturing costs (direct materials, direct labor, and manufacturing overhead) on the job cost sheet. A separate job cost sheet is prepared for each individual job.

All necessary details about the job and costs incurred to complete the job are written on the job cost sheet.

The information about a job or order that is shown on job cost sheet usually includes job number, product name, starting date, completing date, number of units completed etc.

The information about manufacturing costs that is shown on job cost sheet usually includes materials requisition number, cost of direct materials issued, time tickets, direct labor hours, direct labor rate per hour and total cost, manufacturing overhead rate per direct labor or machine hour and total cost etc.

Job cost sheet is not only used to charge cost to jobs but is also a part of the company’s accounting record. It is used as a subsidiary ledger to the work in process account because it contains all details about the job in process.

C)How Does a Predetermined Factory Overhead Rate Help Managers?

A predetermined factory overhead rate acts as a benchmark for your indirect production costs. It gives you a way to measure if your factory overhead costs are running high or low for that particular production run. Predetermined factory overhead rates can be based on your direct labor hours, machine hours or units of production. You can also determine a predetermined factory overhead rate based on the actual factory overhead costs from similar jobs you recently completed. Using a predetermined factory overhead rate gives you greater control over your costs of production.

Factory Overhead Components

Factory overhead is the indirect costs of manufacturing your products. This includes the salaries paid to production supervisors and quality control supervisors, rent, utilities, building insurance, supplies and small tools. Your equipment set-up costs, maintenance and repair costs likewise belong to factory overhead. These costs cannot be matched against a specific production run or product. Instead, the costs are pooled and spread evenly over the total number of units produced.

Establish Uniform Per Unit Cost

Using a predetermined factory overhead rate ensures that the same amount of indirect cost is applied to each unit produced. This prevents your production costs from being skewed due to seasonal fluctuations or unusual changes in demand. Otherwise, jobs completed during a slack period would show abnormally high costs compared to those completed during times of heavy production. You would also have large price variations as you adjusted your selling price to cover your costs. This would make bidding on a project almost impossible since your overhead cost basis would change with each job.

Identify Factory Overhead Variance

The difference between your predetermined factory overhead costs and the actual costs is your factory overhead variance. If your actual costs are greater than the predetermined costs, you have an unfavorable factory overhead variance. You want to find out what is causing your actual factory overhead costs to be higher than your predetermined costs. If your actual costs are less than the predetermined costs, you have a favorable variance. Your actual costs are lower than your predetermined factory costs. By discovering why your costs are lower than expected, you can make cost-cutting changes to increase your profits.

Adjust Production

Using a predetermined factory overhead rate lets you know the costs and profits associated with producing your products. Use the information to compare the costs against the profit margin for each product. You can increase your production of the more profitable products and reduce production on those with a lower profit margin. Update your predetermined factory overhead rate to keep it current based on long-term changes in production costs.

D)Over or under-applied manufacturing overhead

The over or under-applied manufacturing overhead is defined as the difference between manufacturing overhead cost applied to work in process and manufacturing overhead cost actually incurred during a period.

If the manufacturing overhead cost applied to work in process is more than the manufacturing overhead cost actually incurred during a period, the difference is known as over-applied manufacturing overhead. On the other hand; if the manufacturing overhead cost applied to work in process is less than the manufacturing overhead cost actually incurred during a period, the difference is known as under-applied manufacturing overhead.

The occurrence of over or under-applied overhead is normal in manufacturing businesses because overhead is applied to work in process using a predetermined overhead rate. A predetermined overhead rate is computed at the beginning of the period using estimated information and is used to apply manufacturing overhead cost throughout the period.