Job 115 Job 116 Job 117 Cost of direct materials Cost of direct labor (5 hours) $250.00 $250.00 $250.00 25.00 25.00 25.00 Cost of overhead 200.00 $475.00 $593.75 400.00 $675.00 $843.75 400.00 $675.00 $843.75 Total cost Total price Number of announcements 500 500 500
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Reynolds Printing Company specializes in wedding announcements. Reynolds uses an actual
job-order costing system. An actual overhead rate is calculated at the end of each month using
actual direct labor hours and overhead for the month. Once the actual cost of a job is determined, the customer is billed at actual cost plus 50%.
During April, Mrs. Lucky, a good friend of owner Jane Reynolds, ordered three sets of
wedding announcements to be delivered May 10, June 10, and July 10, respectively. Reynolds
scheduled production for each order on May 7, June 7, and July 7, respectively. The orders were
assigned job numbers 115, 116, and 117, respectively.
Reynolds assured Mrs. Lucky that she would attend each of her daughters’ weddings. Out
of sympathy and friendship, she also offered a lower price. Instead of cost plus 50%, she gave her
a special price of cost plus 25%. Additionally, she agreed to wait until the final wedding to bill
for the three jobs.
On August 15, Reynolds asked her accountant to bring her the completed job-order cost
sheets for Jobs 115, 116, and 117. She also gave instructions to lower the price as had been
agreed upon. The cost sheets revealed the following information:
Reynolds could not understand why the overhead costs assigned to Jobs 116 and 117 were
so much higher than those for Job 115. She asked for an overhead cost summary sheet for the
months of May, June, and July, which showed that actual overhead costs were $20,000 each
month. She also discovered that direct labor hours worked on all jobs were 500 hours in May
and 250 hours each in June and July.
Required:
1. How do you think Mrs. Lucky will feel when she receives the bill for the three sets of
wedding announcements?
2. Explain how the overhead costs were assigned to each job.
3. Assume that Reynolds’s average activity is 500 hours per month and that the company
usually experiences overhead costs of $240,000 each year. Can you recommend a better
way to assign overhead costs to jobs? Recompute the cost of each job and its price, given
your method of overhead cost assignment. Which method do you think is best? Why?
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