Job Costing
Cost Classifications: 
  • Cost is a financial measure of the resources used or given up to achieve a stated purpose.
  • Costs may be classified as manufacturing costs, which include
    • direct materials
    • direct labor
    • manufacturing overhead
  • They can also be classified as non-manufacturing costs, which include
    • selling and administrative costs.
  • Costs may be also be classified as either product costs or period costs.
  • Finally, costs may be classified according to the degree to which they are affected by the level of manufacturing activity. Fixed costs remain constant in total amount over wide variations in the level of activity, while variable costs vary in total amount directly with changes in the level of business activity.
Financial Reporting by Manufacturing Companies: 
  • Financial reporting by manufacturers is similar to that of merchandisers. The primary differences between manufacturer and merchandiser financial reporting are:
  1. a manufacturer prepares a Statement of Cost of Goods Manufactured to support the cost of goods sold figure on the income statement, and
  2. a manufacturer will typically have separate account balances for materials, work in process, and finished goods inventories, while a merchandiser has only a merchandise inventory account balance.
Job Costing: 
  • A job cost system is appropriate when the company manufactures products to meet customers’ unique specifications.
  • Each product is likely to be different.
  • The important point is that in job cost systems, each job or batch of product can be separately identified.
Predetermined Overhead Rate: 
  • Companies use a predetermined overhead rate to assign overhead as goods are produced.
  • This enables the company to determine the unit costs at any time during the period instead of having to wait until the end of the period.
  • The rate is calculated using the expected level of activity and estimated overhead costs.
  • The base for the expected level of activity can be direct labor hours, hours to set up the job, machine hours, units produced, or any other appropriate base or multiple bases (as proposed by advocates of activity based costing).
  • Overapplied or underapplied overhead occurs when the actual overhead cost is different from estimated overhead cost or the actual level of activity is different from the expected level of activity.
Variable versus Absorption Costing: 
  • Absorption costing allocates all manufacturing costs, variable and fixed, to the units of products produced.
  • Variable costing only allocates variable manufacturing costs to products produced, and treats fixed manufacturing costs as period costs.
  • While absorption costing is required for external reporting and tax purposes, variable costing can be very helpful to management in the decision making process.

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this page is maintained by Reed Fisher
last updated January 15, 2011