Job Order Costing

Job-order costing is used in situations where the organization offers many different products or

services, such as in furniture manufacturing, hospitals, and legal firms. Materials requisition forms

and labor time tickets are used to assign direct materials and direct labor costs to jobs in a joborder

costing system. Manufacturing overhead costs are assigned to jobs using a predetermined

overhead rate. All of the costs are recorded on a job cost sheet. The predetermined overhead rate

is determined before the period begins by dividing the estimated total manufacturing overhead

cost for the period by the estimated total amount of the allocation base for the period. The most

frequently used allocation bases are direct labor-hours and machine-hours. Overhead is applied to

jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base

recorded for the job.

Because the predetermined overhead rate is based on estimates, the actual overhead cost

incurred during a period may be more or less than the amount of overhead cost applied to production.

Such a difference is referred to as underapplied or overapplied overhead. The underapplied

or overapplied overhead for a period can be either closed out to Cost of Goods Sold or

allocated between Work in Process, Finished Goods, and Cost of Goods Sold. When overhead

is underapplied, manufacturing overhead costs have been understated and therefore inventories

and/or expenses must be adjusted upwards. When overhead is overapplied, manufacturing overhead

costs have been overstated and therefore inventories and/or expenses must be adjusted