Question

Define the term Job-Order Costing?

What is a predetermined overhead rate? How is it computed?

What is under-applied overhead? What is over-applied overhead? What happens to these amounts at the end of the period?

What is the fundamental difference between absorption costing and variable costing?

What is a segment of an organization? Provide three examples of segments.

What costs are assigned to a segment under the contribution approach?

How is the segment margin different from the contribution margin?.

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

1. Job-Order Costing:

It is a costing method where each job is referred as cost unit, and costs are computed separately for each and every job. This type of costing system is implemented in industries or entities producing unique products or services.

2. Predetermined Overhead Rate:

It is the rate at which the overhead is applied to the production during the period. It is computed at the beginning of the period. It is computed by dividing the estimated overhead by the allocation base. The allocation base may be direct labor hours or machine hours or direct labor cost.

3. Under or Over Applied Overhead:

Overhead is applied to the production using the predetermined overhead rate. But actual overhead may be different. If the actual overhead incurred is more than the overhead applied, it is a case of under-applied overhead. If the actual overhead incurred is less than the overhead applied, it is a case of over-applied overhead. In both the cases, if the overhead is not material, this can be adjusted through Cost of Goods Sold.

4. Fundamental difference between absorption costing and variable costing:

In absorption costing Fixed manufacturing overhead is treated as product cost and it is included in the cost of the product or inventory. In variable costing Fixed manufacturing overhead is treated as period cost and is not carried forward to next year through inventory.

5. What is a segment of an organization?

A segment is a part or activity of an organization. Management generally seeks cost and revenue information of the segments. Examples of segments are departments, product lines, sales division etc.

6. Costs assigned to segment under contribution approach:

The costs which are traceable to a particular segment are only assigned to a segment.

7. Segment margin Vs. Contribution Margin:

Segment margin refers to the profit margin earned within the segment. Contribution margin is the overall contribution to the total sales of the entity or organization.