1. Managerial Accounting
Chapter 3

2. Costing Systems Process Costing
Used when a single, homogeneous product or service is produced.
Total manufacturing costs are divided by total number of units produced during a given period.

3. Costing systems (cont.)
Job-Order Costing
Used when different types of products, jobs, or batches are produced.
Direct materials plus direct labor are traced directly to specific products, jobs, or batches.
Overhead is applied to jobs using a predetermined rate. Actual overhead costs are not traced to job.

4. Job-Order Costing
Job Cost sheet – used to accumulate all costs relative to a particular job.
Cost of materials are debited to the Work-in-Process inventory account.
Time tickets or time sheet is used to add the cost of direct labor which is debited to the Work-in-Process inventory account.

5. Manufacturing overhead added to job costing sheet
Generally applied by direct labor-hours, direct labor costs, or machine hours.
Indirect material, indirect labor, and any other actual manufacturing overhead costs incurred during the period costs are debited to the Manufacturing Overhead control account.

6. Manufacturing overhead (cont.)
Manufacturing overhead is applied to Work-in-Process on a predetermined rate. The offsetting credit entry is to the Manufacturing Overhead control account.

7. Transfer of goods through the accounting process
When materials are completed, the Finished Goods inventory is debited and the Work in Process inventory is credited.
When the units are sold, debit Cost of Goods Sold, credit Finished Goods inventory.

8. Manufacturing Overhead Control Account
The account is a temporary account.
Debit the account for the actual overhead incurred. (credit supplies inventory, prepaid insurance, Accum. Depr. etc.)
Debit Work in Process to apply the overhead on a predetermined rate. Credit the control account.
Any discrepancy between actual cost and overhead applied is generally transferred to the Cost of Goods Sold account.

9. Under- and over-applied overhead
A debit balance in the control account (under-applied) indicates that actual costs exceed the amount applied to work in process.
A credit balance in the control account (over-applied) indicates that the amount applied to work in process exceeded the actual costs.

10. Causes for under/over-applied overhead
Not all costs vary directly with the application method (eg. Direct labor hours)
Actual total overhead can differ from the estimated total overhead
Due to poor controls
Inability to accurately forecast overhead costs.