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Unformatted text preview: CHAPTER 5 JOB-ORDER COSTING DISCUSSION QUESTIONS 1. Job-order costing accumulates costs by jobs, and process costing accumulates costs by processes. Job-order costing is suitable for operations that produce custom-made products that receive different doses of man- ufacturing costs. Process costing, on the other hand, is suitable for operations that produce homogeneous products that receive equal doses of manufacturing costs in each process. 2. Job-order costing is appropriate for many service firms. The key factor is that differing amounts of resources must be used for dif- ferent jobs. Examples of service firms that use job-order costing are law firms, account- ing firms, dental offices, automobile repair, and architectural firms. The key point is that the costs of each job are unique to the job and must be tracked by job. 3. Normal costing defines product cost as the sum of actual direct materials, actual direct labor, and applied overhead. The difference between actual costing and normal costing lies in the treatment of overhead. Actual costing uses actual overhead; normal cost- ing uses applied overhead. 4. Actual overhead rates are rarely used be- cause managers cannot wait until the end of the year to obtain product costs. Information on product costs is needed as the year un- folds for planning, control, and decision making. 5. Overhead is assigned to production using the predetermined rate. The predetermined overhead rate is equal to estimated over- head divided by estimated activity level. The predetermined overhead rate is multiplied by the actual activity level or the cost driver on which the rate is based. 6. Underapplied overhead means that the ap- plied overhead is less than the actual over- head. As a result, the unadjusted cost of goods is too small (because too little over- head has been applied). So, cost of goods sold will increase by the amount of underap- plied overhead. 7. Overapplied overhead means that the ap- plied overhead is more than the actual over- head. As a result, the unadjusted cost of goods is too large (because too much over- head has been applied). So, cost of goods sold will decrease by the amount of overap- plied overhead. 8. Unless all your jobs (lawns) are the same size and require the same services, you will need to use a job-order costing system. At minimum, you will need job-order cost sheets for each customer. You will need labor time tickets to record the amount of time spent on each job, both to cost the job and to pay the individual doing the work. A materials requisition form may be needed if fertilizer or weed control products are used (alternatively, it may be possible to just list the amount of product used directly on the job-order cost sheet). The more complicated your business becomes (e.g., mowing, trim- ming, fertilizing, trimming shrubbery, plant- ing shrubs and trees), the more source doc- uments will be needed to keep track of time, materials, and use of capital equipment (e.g., trimmers, brush hogs). Basically, as (e....
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- Fall '07