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In: Accounting

When is by-product/scrap cost considered in setting the predetermined overhead rate in a job order costing system? When is cost not considered?

When is by-product/scrap cost considered in setting the predetermined overhead rate in a job order costing system? When is cost not considered?

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Expert Solution

If a company using job order costing produces a by-product or a scrap item continuously from normal production, the net realizable value of that by-product or scrap should be considered in setting the predetermined overhead rate. The estimated net realizable value of the by-product or scrap should be deducted from total estimated overhead costs in setting the rate. When the by-product or scrap is actually sold, its net realizable value should be credited to Manufacturing Overhead. If a company using job order costing only produces a by-product or a scrap item during a particular job, then the net realizable value of the byproduct/scrap should not be considered in setting the predetermined overhead rate. The net realizable value should be credited to the particular job that gave rise to the by-product/scrap. 

Samantha Mae Cerdeño answered 2 years ago
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