What is job order costing

Job order costing is a system in which costs are assigned to batches or job order of production. Job cost sheet has to be made under this costing system.

Costing procedure under job order costing system

Materials requisition forms and labor time tickets are used to assign direct materials and direct labor costs to jobs in a job order costing system. Manufacturing overhead costs are assigned to jobs through use of a predetermined overhead rate. The predetermined overhead rate is determined before the period begins by dividing the estimated total manufacturing cost for the period by the estimated total 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 used by the job.

Since 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 under- or overapplied overhead. The under- or overapplied overhead for a period can be either:

  1. Closed out to Cost of Goods Sold; or
  2. 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 downwards.
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