Job Order Costing Systems Design

Absorption costing:
A costing method that includes all manufacturing costs - direct materials, direct labour, and both variable and fixed manufacturing overhead - in the cost of a unit of product. Absorption costing is also referred to as the full cost method.

Allocation base:
A measure of activity such as direct labour-hours or machine-hours that is used to assign costs to cost objects.

Backflush costing:
A term used under JIT that refers to flushing costs out of the system after goods are completed and the charging of these costs directly to the Finished Goods inventory account.

Bill of materials:
A document that shows the type and quantity of each major item of materials required in making a product.

Cost driver:
A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

Full cost:
See Absorption costing: A costing method that includes all manufacturing costs - direct materials, direct labour, and both variable and fixed manufacturing overhead - in the cost of a unit of product.

Job cost sheet:
A form prepared for each job that records the materials, labour, and overhead costs charged to the job.

Job-order costing system:
A costing system used in situations where many different products, jobs, or services are produced each period.

Materials requisition form:
A detailed source document that specifies the type and quantity of materials that are to be drawn from the storeroom and identifies the job to which the costs of materials are to be charged.

Multiple predetermined overhead rates:
A costing system in which there are multiple overhead cost pools with a different predetermined rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Frequently, each production department is treated as a separate overhead cost pool.

Normal cost system:
A costing system in which overhead costs are applied to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

Overapplied overhead:
A credit balance in the Manufacturing Overhead account that arises when the amount of overhead cost applied to Work in Process is greater than the amount of overhead cost actually incurred during a period.

Overhead application:
The process of charging manufacturing overhead cost to job cost sheets and to the Work in Process account.

Plant-wide overhead rate:
A single predetermined overhead rate that is used throughout a plant.

Predetermined overhead rate:
A rate used to charge overhead cost to jobs in production; the rate is established in advance for each period by use of estimates of total manufacturing overhead cost and of the total allocation base for the period.
Process costing system:
A costing system used in those manufacturing situations where a single, homogeneous product (such as cement or flour) is produced for long periods of time.

Raw and In-Process inventory:
An account used in a JIT system that is a combination of the Raw Materials and Work in Process inventory accounts found in a job-order costing system.

Time ticket:
A detailed source document that is used to record an employee's hour-by-hour activities during a day.

Underapplied overhead:
A debit balance in the Manufacturing Overhead account that arises when the amount of overhead cost actually incurred is greater than the amount of overhead cost applied to Work in Process during a period.