Question

How do you compute product costs using a job order costing system?

How do you dispose of under– and over–applied manufacturing overhead?

Answer 1

Solution:-

1. How do you compute product costs using a job order costing system:-

Product unit cost in a job order costing system is calculated as follows:

• Total all manufacturing costs recorded on a particular job order cost card.
• Divide total manufacturing costs by the number of units produced for that job.

2. How do you dispose of under– and over–applied manufacturing overhead:-

Disposition of over or under-applied manufacturing overhead:

At the end of the year, the balance in manufacturing overhead account (over or under-applied manufacturing overhead) is disposed off by either allocating it among work in process, finished goods and cost of goods sold accounts or transferring the entire amount to cost of goods sold account. These two methods have been discussed below:

Method 1:-Allocation among work in process, finished goods and cost of goods sold account:

Under this method, the amount of over or under-applied overhead is disposed off by allocating it among work in process, finished goods and cost of goods sold accounts on the basis of overhead applied in each of the accounts during the period. The following journal entry is made to dispose off an over or under-applied overhead:

When overhead is under-applied:

When overhead is over-applied:

This method is more accurate than second method. The only disadvantage of this method is that it is more time consuming.

Method 2:- Transferring the entire amount of over or under-applied to cost of goods sold:

Under this method the entire amount of over or under applied overhead is transferred to cost of goods sold. The following entry is made for this purpose:

When overhead is under-applied:

When overhead is over-applied: