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Direct Materials
Raw material, parts, and components that can be observed being used to make a specific product.
Direct Labor
The cost of paying employees who convert direct materials into finished product.
Overheads
Indirect material Indirect labor Other overhead
Manufacturing Companies
Prime Costs include:
Direct Materials
Direct Labor
Manufacturing Overhead
Manufacturing Companies
Conversion Costs include:
Direct Materials
Direct Labor
Manufacturing Overhead
Process Costing
Process Costing
Job-Order Costing:Examples
1) A manufacturer of luxury yachts
2) An automobile service centre (e.g. Honda
workshop)
3) A professional services firm (e.g. Accountancy firms like E&Y) 4) A landscape garden contractor, house builder etc.
Process Costing
Process Costing
Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill
Job-Order Costing
The primary document for tracking the costs associated with a given job is the job cost sheet.
Lets investigate
Job-Order Costing
In Job-Order Costing systems the primary document is called a job-cost sheet. It is used to capture costs of producing that product. Using the home builder example, a job-cost sheet would be prepared for each home. And the costs it captures are the usual suspects, materials, labor and overheads!
Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Cost
Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Cost
116
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Cost
$ $
116 88
direct labor costs by Manufacturing Overhead of a Hours means Rate Amount work record, such as a time card, for each Units Shipped Date Number Balance employee.
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Cost
$ $ $ $ $
Lets summarize the cost flows we have been discussing in a job order costing system.
Direct Labor
Direct allocation
Finished Job
Factory Overheads
Absorbed
which job.
Note that when several employees all work on the
same job, the time card data will be aggregated and then applied to each job.
Manufacturing Overheads
Unlike Direct Materials and Direct Labor which are directly traceable to the job, manufacturing overhead is added to each job in a slightly more complex manner.
Manufacturing Overhead is applied to specific
basis.
Activity Basis
The relevant bases used for the allocation of overhead are:
1) Units of output: if just one product or a line of very
Recording overheads
Recording Manufacturing Overhead is a two-step process.
1) First, overheads are applied to production based on
control account
Over-absorption or Under-absorption
As a result, unless estimates are perfect, there will be either an over-absorption or under-absorption of overheads.
1) If actual costs are more than applied overheads , we
Over-absorption or Under-absorption
There are three simple steps to compute any under/ over absorption at the end of an accounting period as follows: 1) Calculate overheads absorption rate using: OAR = Budgeted overheads ($)
3) Finally, calculate under/ over absorption using: Actual Production fixed overheads x Absorbed Production fixed overheads x under/ over absorption x
(units x OAR)
x
x