BUS105 Study Guide

Unit 2: Job Costing

2a. Describe how job costing systems assign direct material costs, direct labor costs, and manufacturing overhead costs to jobs

  • How does a manufacturer determine the cost of each unit of a good produced?
  • How are overhead costs such as electricity, rent, and insurance applied to individual goods?
  • Aside from tracking costs, what are some other benefits provided by job order costing?
  • What are some examples of jobs that would lend themselves well to using job order costing?

Companies that produce items or provide services that are unique, generally use job costing. In job costing, all costs of a particular job are traced and applied to that job. Direct material cost is traced using material requisition forms. Direct labor costs are traced using timesheets. Finally, manufacturing overhead costs are applied using a manufacturing overhead rate. Each job is assigned a unique number and the costs are accumulated on a job cost sheet

Job costing allows managers to track revenue and resulting profit from each job. Additionally, in a job costing system, companies can compare pre-production cost estimates with the completed job cost sheet. Inefficiencies can then be noted and addressed for the future.

Review How a Job Costing System Works.

2b. Use a job costing system to track costs and evaluate profitability for each job

  • What types of manufacturing jobs lend themselves well to job order costing?
  • What is the name of the paper that collects all the costs for a specific job?
  • How is a job costing system helpful in tracking profits?

A job costing system accumulates all costs for a specific job on a job cost sheet. These sheets serve as a subsidiary ledger for the work-in-process inventory account. Direct materials and direct labor are recorded on these cost sheets. Managerial overhead is also recorded by using a predetermined overhead rate

Managers can then apply revenue earned for each job and determine the profitability for that job. If there are differences between these amounts and what was originally estimated, further investigation into what caused these differences may be necessary. 

Review How a Job Costing System Works.

2c. Demonstrate how the plant-wide, departmental, and activity-based methods each allocate manufacturing overhead costs

  • What are some common cost drivers that are used in determining overhead allocation rates?
  • How should managers determine which cost driver to use?
  • Which method of allocating overhead costs, plant-wide or departmental, leads to a more precise allocation of costs?

Manufacturing overhead costs can be allocated in different ways. For any method, an allocation rate must be established. This is done by dividing the estimated overhead costs by some allocation base. This is usually done using a cost driver. The cost driver can be anything which is related to the overhead costs. Some common examples are labor hours, labor costs, or materials costs. Once the allocation rate is determined, overhead costs can be allocated based on actual activity.

In the plantwide allocation method, one predetermined overate rate is used across production. Each unit produced in the plant would have overhead costs added to it based on the same allocation rate. In departmental allocation, individual cost pools are formed for each department as opposed to the entire plant, resulting in separate predetermined overhead rates for each department. This leads to a more precise allocation of the overhead costs. Finally, activity-based costing (ABC) allocates overhead costs based on different activities and requires a number of different overhead allocation rates to be calculated.

Review Approaches to Allocating Overhead Costs and Using Activity-Based Costing to Allocate Overhead Costs.

2d. Use activity-based costing to make business and management decisions

  • What are the five steps of activity-based costing?
  • How can managers make use of ABC to improve efficiency?
  • What are the three steps of activity-based management?

Activity-based costing (ABC) uses the idea that since all production requires numerous activities, and these activities incur costs, the cost of various activities should be allocated to products based on the products' use of the activities. ABC makes use of cost pools, organized by activity, to allocate overhead costs. These activities can include anything such as purchasing materials, setting up machinery, assembling products, and inspecting finished products.

A cost driver, or action associated with each activity, is identified. A separate allocation rate is determined for each activity. When jobs are completed, overhead costs are allocated based on the numerous different cost pools in use. Since each activity has costs associated with it, managers can determine which activities are value-added and which are non-value-added. Thus, efficiency can be improved by trying to minimize the number of non-value-added activities. This is part of the process referred to as activity-based management (ABM).

Review Using Activity-Based Costing to Allocate Overhead Costs and Using Activity-Based Management to Improve Operations.

Unit 2 Vocabulary

This vocabulary list includes terms you will need to know to successfully complete the final exam. 

  • activity-based costing (ABC)
  • activity-based management
  • allocation base
  • allocation rate
  • cost driver
  • cost pools
  • departmental allocation
  • job costing
  • job cost sheet
  • manufacturing overhead rate
  • material requisition forms
  • non-value-added
  • plantwide allocation method
  • predetermined overhead rate
  • timesheets
  • value-added