CB2101 Chap.3 Job Order Costing and Overhead
Job Order Costing and Overhead
Trace direct inputs and apply indirect cost
Job-order costing accumulates materials, labour and applied overhead for distinct jobs. The predetermined rate is estimated for a period, then multiplied by each job's actual driver use.
Actual overhead is recorded separately and compared with applied overhead at period end, producing underapplied or overapplied overhead.
Keep the rate and job on different levels
The predetermined overhead rate uses estimated pool cost and estimated activity for the whole period. Application uses that rate and the actual driver quantity consumed by one job.
Mixing job hours into the period denominator or actual overhead into the application step breaks the method. Write the rate above the job cost sheet, with its driver unit visible.
Select a base that reflects consumption
Labour hours may work in a labour-intensive department, while machine hours may fit an automated one. Separate departmental rates can represent mixed production better than a plantwide average.
The strongest justification names the resource behaviour: explain why the chosen activity causes or accompanies overhead consumption, and identify the product pattern that a weaker base would distort.
Follow the job through inventory
Materials requisitions, time records and applied overhead accumulate in work in process under one job identifier.
Completion moves the total to finished goods, and sale moves it to cost of goods sold. The movement occurs at the full accumulated job cost. A unit cost is calculated only after dividing by the output of that job, not by estimated plant activity.
Reconcile actual and applied overhead
Actual overhead records resources incurred; applied overhead records cost assigned to production.
Actual minus applied provides a reliable sign convention. A positive difference is underapplied because too little cost reached production, while a negative difference is overapplied.
Closing an underapplied balance to cost of goods sold raises expense; an overapplied balance lowers it.
Separate total control from job accuracy
Actual and applied overhead can agree in total even when the driver shifts cost between jobs. A labour-hour base may overcost labour-heavy work and undercost machine-heavy work while the control account balances.
Reconciliation therefore checks the aggregate, whereas departmental rates or activity-based costing address whether individual jobs consumed the assigned share.
What this chapter covers
- 01
Job cost sheets
- 02
Direct materials and labour
- 03
Predetermined overhead rates
- 04
Allocation-base selection
- 05
Applied overhead
- 06
Underapplied and overapplied balances
Worked example · free
Apply overhead to one job
- 2Compute the predetermined rate.
- 2Apply overhead to the job.
- 2Total the job cost.
Key terms
- Job Cost Sheet
- A record that accumulates direct and applied manufacturing cost for one job.
- Predetermined Rate
- An overhead rate based on estimated pool cost and estimated allocation activity.
- Underapplied Overhead
- The amount by which actual overhead exceeds overhead applied to production.
Job Order Costing and Overhead FAQ
Why is overhead applied instead of traced?
Manufacturing overhead contains indirect resources that cannot be economically traced to one job. A predetermined rate assigns the pool using an activity base and makes timely job costs possible before all actual invoices are known.
How do I distinguish underapplied and overapplied overhead?
Calculate actual overhead minus applied overhead. A positive amount is underapplied because production received too little cost; a negative amount is overapplied because production received too much.
Can total applied overhead be correct while job costs are distorted?
Yes. A poor driver can shift cost between jobs even when the aggregate applied amount matches actual overhead. Departmental rates or activity pools address assignment between jobs, while reconciliation tests only the total.
When should a company use departmental overhead rates?
Use them when departments consume different resources and their costs follow different activity bases. A cutting department may follow machine hours while finishing follows labour hours. Calculate each rate independently and apply it to the job's activity in that department. The extra detail is justified when one plantwide rate would systematically shift cost between unlike jobs.
Exam move
Draw the job cost sheet and overhead control account beside each other. Practise rate calculation, job application and period reconciliation as three distinct steps. Label the predetermined rate with dollars per driver unit and keep period estimates away from the job's actual activity. Work one job through materials, labour, applied overhead, completion and sale so the inventory movement stays visible.
Then calculate actual minus applied and state the underapplied or overapplied direction before considering the closing effect. Compare a plantwide rate with two departmental rates and explain which jobs gain or lose cost. Finish by defending the allocation base in causal language and distinguishing a balanced control account from accurate assignment between individual jobs.
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