A.

Definition of Job Order Costing

Job order costing or job costing is a system for assigning and accumulating manufacturing costs
of an individual unit of output. The job order costing system is used when the various items
produced are sufficiently different from each other and each has a significant cost. (When a
company's output consists of continuous flows of identical, low-cost units, the process costing
system is more appropriate.)
Since there is a significant variation in the items manufactured, the job order costing system
requires a separate job cost record for each item (or each job or special order). The job cost
record will report each item's direct materials and direct labor that were actually used and an
assigned amount of manufacturing overhead.
The job cost records also serve as the subsidiary ledger or documentation for the manufacturer's
cost of the work-in-process inventory, the finished goods inventory, and the cost of goods sold.

Examples of Job Order Costing

A few examples of the use of job order costing are:

 A company that designs and produces custom-made machines and/or machine tooling
 A company that constructs custom-designed buildings
 A company that modifies trucks to meet customers' special needs

Job order costing is used in situations where the company delivers a unique or custom job for its
customers. Every customer is treated uniquely and delivered products to specifically suit their
individual needs.

Job order costing system is generally used by companies that manufacture a number of different
products. It is a widely used costing system in manufacturing as well as service industries.

Manufacturing companies using job order costing system usually receive orders for customized
products and services. These customized orders are known as jobs or batches. A clothing factory,
for example, may receive an order for men shirts with particular size, color, and design.

When companies accept orders or jobs for different products, the assignment of cost to products
becomes a difficult task. In these circumstances, the cost record for each individual job is kept
because each job have a different product and, therefore, different cost associated with it.

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The job order cost system is used when products are made based on specific customer orders.
Each product produced is considered a job. Costs are tracked by job. Services rendered can also
be considered a job. For example, service companies consider the creation of a financial plan by
a certified financial planner, or of an estate plan by an attorney, unique jobs. The job order cost
system must capture and track by job the costs of producing each job, which includes materials,
labor, and overhead in a manufacturing environment.

B. Definition of Over-applied overhead

Over-applied overhead is excess amount of overhead applied during a production period over the
actual overhead incurred during the period. In other words, it's the amount that the estimated
overhead exceeds the actual overhead incurred for a production period.
Since overhead costs contribute to the production of inventory and are incurred throughout the
production process, they must be allocated to each job. In a perpetual inventory system,
inventory costs are updated in real time. This means management can’t wait until the end of the
period to add up all of the overhead costs incurred and allocate them to each job. Instead,
management needs to estimate the future overhead costs and allocate them throughout the
production process.

Example
This process is done by estimating a predetermined overhead rate that can be used to split costs
between jobs and departments. At the end of the period, the estimated costs and the actual costs
incurred are compared.

As with any estimation, the predetermined overhead rate isn’t always accurate. Sometimes the
estimate is more than the actual amount and sometimes it’s less than the actual amount. Over
applied overhead happens when the estimated overhead that was allocated to jobs during the
period is actually more than the actual overhead costs that were incurred during the production
process. In a sense, the production managers came in “under budget” and achieved a lower
overhead than the cost accountants estimated.

Over-applied overhead occurs when the total amount of factory overhead costs assigned to
produced units constitutes more overhead than was actually incurred in the period. This usually
happens when a business uses a standard long-term overhead rate that is based on an estimate of
the average amount of factory overhead that a business is likely to incur, and the average number

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of units produced. In some periods, either the number of units produced will be greater than
expected, or actual factory overhead costs will be lower than expected. In these situations, the
use of a standard overhead rate will result in over-applied overhead.

Over the long-term, the use of a standard overhead rate should result in some months in which
overhead is over-applied, and some months in which it is under-applied. On average, however,
the amount of overhead applied should approximately match the actual amount of overhead
incurred.

C. Definition of Under-applied Overhead

Under-applied overhead occurs when an accounting record in the cost accounting method
includes overhead costs that are assigned to a work-in-progress product does not reach the
amount of the actual overhead costs. Under-applied overhead is reported as a prepaid expense on
the company's balance sheet and, at the end of the year, it is balanced by inputting a debit to cost
of goods sold. Costs of goods sold are the direct cost associated with the production of goods
sold by a company. The amount of under-applied overhead is referred to as an unfavorable
variance.

A situation in which the overhead applied to a work in progress (WIP) product is less than the
overhead that the WIP actually incurs. This results in the manufacturing overhead having a debit
balance. Under-applied overhead is reported on the balance sheet as a prepaid expense. At the
end of the year, under-applied overhead is balanced by creating a debit to Cost of Goods Sold.
Opposite of over-applied overhead.

Under-applied overhead occurs when the estimated overhead applied during the period is less
than the actual overhead incurred during the period. In other words, not even overhead was
booked in the original estimate.

During the course of the year many businesses choose to budget and project future expenses.
This helps management plan for cash flows throughout the year as well as establish goals. One
expense that is often projected into the future periods is overhead. Many businesses book
estimated overhead amounts every week or month to evaluate the profitability for the period.
Even though overhead doesn’t affect cash flows, it still shows up in the bottom line or net
income. Most managers want to be able to show a profit even after overhead expense, so an

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estimated amount of overhead is applied for each period. The problem is sometimes the
estimated overhead applied is not always right.

D. Definition of Job cost sheet

Job cost sheet is a document used to record manufacturing costs and is prepared by companies
that use job-order costing system to compute and allocate costs to products and services.
The accounting department is responsible to record all manufacturing costs (direct materials,
direct labor, and manufacturing overhead) on the job cost sheet. A separate job cost sheet is
prepared for each individual job.

All necessary details about the job and costs incurred to complete the job are written on the job
cost sheet.

The information about a job or order that is shown on job cost sheet usually includes job number,
product name, starting date, completing date, number of units completed etc.

The information about manufacturing costs that is shown on job cost sheet usually includes
materials requisition number, cost of direct materials issued, time tickets, direct labor hours,
direct labor rate per hour and total cost, manufacturing overhead rate per direct labor or machine
hour and total cost etc.

Job cost sheet is not only used to charge cost to jobs but is also a part of the company’s
accounting record. It is used as a subsidiary ledger to the work in process account because it
contains all details about the job in process.

Job cost sheet is a complete sheet, which is prepared by the factory accountant for every job
started in the factory. It is a primary document for accumulating all costs related to a particular
job. In a job order costing system, we maintain a job cost sheet for each job. It tells about the
total cost of a particular job. Each job sheet breaks the costs down in terms of direct materials,
direct labor, and manufacturing overhead assigned to individual jobs. Following information
normally appears in a particular job cost sheet.

 Job Number (It is a number, assigned to each job by the factory accountant)
 Date started (When the job is started)
 Date completed (When the job is completed)
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  Description (It’s a complete name of the product which is to be manufactured)
 Number of units completed
 Total cost of raw material (With date, requisition #, quantity and rate)
 Total cost of Direct labor (With time card #, labor hours, rate)
 Total applied manufacturing overhead (With activity base, quantity and application rate)
 Cost summary (Total cost of material, labor and manufacturing overheads for particular
job an cost per unit)
 Shipping summary (How many units have been sold and how many are in stock with
cost)
Advantages of a job cost sheet
 It shows the total cost and cost per unit of the product produced during the given period.
 It helps the producers to control over the cost of production.
 It acts as a guide to the manufacturers and helps them in formulating a definite and
profitable production policy.
 It helps the management in fixing up the selling price of their products.
 It helps management in the comparative study of the various elements of cost with the
past result and standard cost.

2. What is cost allocation?

Cost allocation is a process of providing relief to shared service organization's cost centers that
provide a product or service. In turn, the associated expense is assigned to internal clients' cost
centers that consume the products and services.

Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A
cost object is any activity or item for which you want to separately measure costs. Examples of
cost objects are a product, a research project, a customer, a sales region, and a department.
Cost allocation is used for financial reporting purposes, to spread costs among departments or
inventory items. Cost allocation is also used in the calculation of profitability at the department
or subsidiary level, which in turn may be used as the basis for bonuses or the funding of
additional activities. Cost allocations can also be used in the derivation of transfer prices between
subsidiaries.

Cost Allocation Methods

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The very term "allocation" implies that there is no overly precise method available for charging a
cost to a cost object, so the allocating entity is using an approximate method for doing so. Thus,
you may continue to refine the basis upon which you allocate costs, using such allocation bases
as square footage, headcount, cost of assets employed, or (as in the example) electricity usage.
The goal of whichever cost allocation method you use is to either spread the cost in the fairest
way possible, or to do so in a way that impacts the behavior patterns of the cost objects. Thus, an
allocation method based on headcount might drive department managers to reduce their
headcount or to outsource functions to third parties.

Cost Allocation and Taxes

A company may allocate costs to its various divisions with the intent of charging extra expenses
to those divisions located in high-tax areas, which minimizes the amount of reportable taxable
income for those divisions. In such cases, an entity usually employs expert legal counsel to
ensure that it is complying with local government regulations for cost allocation.

Reasons Not to Allocate Costs

An entirely justifiable reason for not allocating costs is that no cost should be charged that the
recipient has no control over. Thus, in the African Bongo Corporation example above, the
company could forbear from allocating the cost of its power station, on the grounds that none of
the six operating departments have any control over the power station. In such a situation, the
entity simply includes the unallocated cost in the company's entire cost of doing business. Any
profit generated by the departments contributes toward paying for the unallocated cost.

3. How do you compute the factory overhead rate?

 There are 5 Steps to compute the factory Overhead
To calculate the overhead costs of a business, add all the ongoing business expenses that keep
your business running but do not contribute to the revenue generation process. These are indirect
costs such as administrative expenses, selling and marketing costs and production expenses.
Calculating and recording the overhead costs regularly will help you save money, get a better
price for your products and services and allow you to streamline the business operations.

How to Calculate Overhead Costs

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To calculate overhead costs, follow the steps below:
 List the Expenses

Make a comprehensive list of indirect business expenses including items like rent, taxes, utilities,
office equipment, factory maintenance etc. These are your overhead costs. Direct expenses
related to the production of goods and services, such as labor and raw materials, are not included
in overhead costs.

While categorizing the direct and overhead costs, remember that some items cannot be attributed
to a specific category. Some business expenses might be overhead costs for others but a direct
expense for your business.

 Add the Overhead Costs

Total the monthly overhead costs to calculate the aggregate overhead cost. This is the amount of
money that you need for running your business

 Calculate the Overhead Rate

The overhead rate or the overhead percentage is the amount your business spends on making a
product or providing services to its customers. To calculate the overhead rate, divide the indirect
costs by the direct costs and multiply by 100.

If your overhead rate is 20%, it means the business spends 20% of its revenue on producing a
good or providing services. A lower overhead rate indicates efficiency and more profits.

 Compare to Sales
When setting prices and making budgets, you would need to know the percentage of a dollar that
is allocated to overheads. To calculate the proportion of overhead costs compared to sales, divide
the monthly overhead cost by monthly sales, and multiply by 100.

For example, a business with monthly sales of $100,000 and overhead costs totaling $40,000 has
($40,000/ ($100,000) x 100 = 40% overheads.

 Compare to Labor Cost

To measure the efficiency with which business resources are being utilized, calculate overhead
cost as a percentage of labor cost. The lower the percentage, the more effectively your business
is utilizing its resources.

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Divide the total overhead cost by the total labor cost for the month and multiply by 100 to
express it as a percentage.

4. Explain the difference between direct and indirect Labour

The difference between direct labor and indirect labor is that only labor involved in the hands-on
production of goods and services is considered to be direct labor. All other labor is, by default,
classified as indirect labor. This distinction is important from an accounting perspective, since
the two types of labor are treated differently. The accounting is as follows:

Direct labor: This cost is charged to all units produced during the reporting period. The basis
for charging the cost is the number of hours of labor actually used in the production process.

Indirect labor: (factory).This cost is assigned to a cost pool, from which it is allocated to the
units produced during the reporting period. Depending on the level of allocation sophistication,
several cost pools may be used, each of which has a separate allocation methodology. For
example, a cost pool for real estate costs could accumulate factory rent, and then be allocated out
based on the amount of square footage used. Meanwhile, another cost pool for maintenance costs
could accumulate maintenance labor and equipment costs, and be allocated based on machine
hours used.
Indirect labor (administrative). This cost is charged to expense in the period incurred. It never
appears in the balance sheet as an asset.

The only type of labor that should be included in the direct labor classification is for those
employees directly involved in the manufacturing process, such as people working on an
assembly line or operating machinery. It does not include any support or supervisory staff, such
as the factory janitorial, maintenance, administrative, and management employees.

Direct labor should vary in concert with the amount and types of units produced, since this type
of labor is considered to be entirely variable. Indirect labor is much less likely to change with
production volume, since it represents the overhead of a business that is needed to support any
level of operations.