Management Notes

Reference Notes for Management

In a job-order costing system, indirect labor cost is usually recorded as a debit to:

In a job-order costing system, indirect labor cost is usually recorded as a debit to:

A) Cost of Goods Sold.
B) Manufacturing Overhead Control.
C) Finished Goods.
D) Work in Process.

Answer Explanation

Job Order Costing System

Job order costing occurs when customers order small, unique batches of products. It determines the price for each product and ensures that it is reasonable enough for a customer to purchase the product and makes a profit for the company. There are two general types of costing systems used by management accounting to assign costs to products or services provided by a company: “job order costing” and “process costing”. An organization uses job order costing when it provides a unique or custom job to its customers. Each customer is treated as an individual and products are tailored to fit their needs.

Financial resources like material costs, payroll records, supplier invoices, and overhead allocations can be used to gain and track information from job order costing systems. An accountant will use these resources to collect data and track it using a job cost sheet. Each product may also be tracked by using an identifying number in a job order database. Every item tracked in the job order costing system should have a job cost record that lists the materials used to make that item, the number of people who made it, the number of minutes it took to make it, and the amount of manufacturing overhead associated with that item. It helps an accountant keep track of the money spent on each item and the current inventory to prevent unexpected losses.

In order to determine the profit for each unique job being produced, job order costing compares the revenue gained against the expenses incurred during the production process. A job order costing system assigns the cost of production to a specific manufacturing job; this system is used when each output is unique. It is mainly used by organizations that provide customer-specific jobs, which means other organizations cannot use the product—for example, Manufacturing of machinery and equipment according to customer specifications. The cost of professional services such as Doctors, Lawyers, and Chartered Accountants is determined based on the job order costing method.

In a job-order costing system, indirect labor cost is usually recorded as a debit to Manufacturing Overhead Control. The manufacturing overhead includes all manufacturing costs that are not directly related to a specific job. A manufacturing overhead is basically any manufacturing cost that is not associated with direct labor or materials. Since manufacturing overhead costs cannot be traced to jobs, they must be allocated to jobs if absorption costing is used. Management must choose an allocation base in order to allocate overhead costs. Direct labor hours, direct labor costs, and machine hours are the most widely used allocation bases.

Critics have charged that overhead is not directly linked to machine hours or direct labor hours. In the allocation system illustrated in the chapter, a predetermined overhead rate is calculated by dividing the estimated total overhead during the upcoming period by the estimated total amount of the allocation base.

Job-order costing is a more detailed system of costing that provides the company with more accurate reporting of production costs. It is based on the idea that each order is unique and must be tracked individually to ensure all costs are accurately accounted for. The price of an ordered product or service is determined by multiplying total direct labor hours (including administrative and indirect labor) by direct labor cost per hour and adding the total overhead cost incurred on the job.

The goal of job costing The Job Order Costing System is a method of costing whereby the unit cost of an item is determined only when the order has been placed. This system is most commonly used in manufacturing environments where the exact quantity of items to be produced is not known. This system can also be used in operations that need to be completed on an as-needed basis, such as with certain construction or service projects.

Indirect labour is defined as all the tasks an organization undertakes that are deemed to be outside of the scope of their main business. In this case, indirect labour can be subdivided into two distinct types: internal and external. Internal labour, as the name suggests, consists of those tasks undertaken by employees which are not directly related to generating revenue from sales, such as administrative work. In the business world, it is common for organizations to hire contractors to provide goods or services. In these cases, a company would be considered a client and the contractor would be considered an indirect supplier. In some cases, this relationship becomes more complicated when a company hires a contractor that supplies labour to fulfill a contract for another company. Indirect labour refers to the work of employees who are indirectly hired by one company but whose services may be used by a different company.

Direct labour is the labour that is directly involved in the production of goods, raw materials or services. Indirect labour can be loosely defined as everything else that is needed to produce goods, including the workers who are responsible for indirect processes.Indirect labour is often overlooked when considering the value of an employee. Indirect labour is work that cannot be assigned to any one specific person or unit because it takes many people and different departments to complete the task. This type of work is crucial in creating and providing a company’s products or services.The production line requires many people to complete; however, the actual labourer on an assembly line may not know what they are assembling.

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