Choosing a cost system job order costing is used by

Choosing a Cost System
Job-order costing is used by companies with multiple unique products which
generally have a low to moderate annual production volume.

SILICON VALLEY COLLEGE ACCOUNTING AND BUDGET SERVICE
Example #1
Which method for assigning costs to products would be more appropriate
in each of the following cases?
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SILICON VALLEY COLLEGE
ACCOUNTING AND BUDGET SERVICE
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Applying Manufacturing Overhead
Manufacturing overhead is applied or added to each job while it is in process.
There are three kinds of overhead costs consider:
o Estimated overhead cost which is determined from the annual budget
prepared before the year begins and is used only in the pre-determined
overhead rate calculation
o Actual overhead cost which
cally throughout the year and
debited to the manufacturing overhead account
o Applied overhead cost which is added to jobs in the work-in-process
inventory account throughout the year and credited to the manufacturing
overhead account
The manufacturing overhead account is a holding account for the actual overhead
costs (debits) and applied over costs (credits).
o Actual overhead costs flow into the account as they are incurred
o Applied overhead costs flow out of the account as the jobs flow through the
production process.
o The account balance may be either debit (underapplied) or credit
(overapplied).
o Underapplied overhead represents an expense which must be transferred to
cost of goods sold.
o Overapplied overhead represents a reduction of expense charged to jobs
which must be transferred to cost of goods sold.
Manufacturing overhead is applied to jobs in work-in-process using the following
formula:
Overhead applied = Pre-determined
e incurred by the job
The predetermined overhead rate is computed before the period begins:
Estimated annual overhead cost
Pre-determined overhead rate =
Estimated amount of the allocation
base (denominator activity)

SILICON VALLEY COLLEGE
ACCOUNTING AND BUDGET SERVICE
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