Starting up around 6:08. We’ve got a few folks in class we haven’t seen before.Chapter 3 today.
Types of Product Costing Systems
- Process Costing
- Job Order Costing
Process costing is typically used when a company produces many units of a single product, and the units are indistinguishable from each other.
Job-Order Costing is typically used by companies who perform mostly unique jobs or services.
Companies using job-order costing allocate direct labor and direct materials to jobs as those resources are utilized. Manufacturing overhead is allocated between jobs as a best estimation. Often overhead is assigned in proportion to direct labor hours or machine hours.
The Predetermined Overhead Rate (POHR) is the ratio of the estimated overhead costs to the units of the scaling metric, such as machine hours or labor hours. If a company estimated overhead costs for a job to be $50,000, and estimated that 5,000 labor hours would be required, the POHR would be $10/labor hour. The final cost for the job would be the POHR * the scaling unit, not the estimate, accounting for overruns or underruns on time.
If the overhead applied during the period is larger than actual overhead or smaller than actual overhead, adjusting entries will need to be made at end of period. This is to be expected with most jobs.
There may be multiple predetermined overhead rates in use by a single company. Individual departments have there own POHR, or different jobs may have their own rates, or some other criteria may determine rates.