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1

Job-order costing

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

2

Absorption costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product. 

3

Allocation base

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

4

Predetermined overhead rate

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed using the following equation:
Predetermined overhead rate = Estimated total
manufacturing overhead cost ÷ Estimated total
amount of the allocation base

5

Overhead application

the process of assigning overhead costs to specific jobs using the following formula:
Overhead applied to a particular job = Predetermined overhead rate x Amount of allocation base incurred by the job

6

Normal costing

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

7

Job cost sheet

A form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job.

8

Flow of Costs: Raw Materials

include any materials that go into the final product.

9

Flow of Costs: Work in Process

consists of units of production that are only partially complete and will require further work before they are ready for sale to customers.

10

Flow of Costs: Finished Goods

consist of completed units of product that have not been sold to customers.

11

Flow of Costs: Cost of goods manufactured

includes the manufacturing costs associated with the goods that were finished during the period.

12

Underapplied Overhead

exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.

13

Overapplied Overhead

exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

14

Disposition of Overapplied and Underapplied Overhead

In summary, there are two methods for disposing of underapplied and overapplied overhead:
- Close out to Cost of Goods Sold.
- Allocate between Work in Process, Finished Goods, and Cost of Goods Sold. (more accurate, but more complex to calculate)