341. Under this approach, known as cost-plus pricing, the managers establish a markup percentage that they believe will generate enough revenue to cover all of a job’s manufacturing costs and a portion of the company’s nonmanufacturing costs, while generating some residual profit.342. While job-order costing systems can accurately trace direct materials and direct labor costs to jobs, they often fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs.343. They use a single predetermined overhead rate, or what is called a plantwide overhead rate, to allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours.344. When companies can identify more than one overhead cost driver they can improve job cost accuracy by using multiple predetermined overhead rates.345. The appeal of using predetermined departmental overhead rates is that they presumably provide a more accurate accounting of the costs caused by jobs, which in turn, should enhance management planning and decision making.346. The next chapter will provide a more in-depth numerical explanation of how to compute underapplied or overapplied overhead.347. A share of the studio’s overhead costs, such as utilities, depreciation of equipment, wages of maintenance workers, and so forth, is also charged to each film.348. In sum, job-order costing is a versatile and widely used costing method that may be encountered in virtually any organization that provides diverse products or services.349. Notice that the capacity-based amounts per second and per unit are lower than the absorption-based amounts.350. Generally speaking, a company’s managers should respond to large unused capacity costs by either seeking new business opportunities that consume the capacity, or by cutting costs and shrinking the amount of available capacity.351. Work in process consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer.352. To transform direct materials into completed jobs, direct labor cost is added to Work in Process and manufacturing overhead cost is applied to Work in Process by multiplying the predetermined overhead rate by the actual quantity of the allocation base consumed by each job.353. For the moment, we can conclude from Exhibit 3 that the cost of a completed job consists of the actual direct materials cost of the job, the actual direct labor cost of the job, and the manufacturing overhead cost applied to the job.354. By this time, the accounting department will have charged the job with direct materials and direct labor cost, and manufacturing overhead will have been applied using the predetermined overhead rate.355. A transfer of costs is made within the costing system that parallels the physical transfer of goods to the finished goods warehouse.356. Because the predetermined overhead rate is established before the period begins and is based entirely on estimated data, the overhead cost applied to Work in Process will generally differ from the amount of overhead cost actually incurred.357. Basically, the method of applying overhead to jobs using a predetermined overhead rate assumes that actual overhead costs will be proportional to the actual amount of the allocation base incurred during the period.358. Keep in mind that unadjusted cost of goods sold is based on the amount of manufacturing overhead cost applied to jobs, not the amount of actual manufacturing overhead cost incurred.359. As can be seen from this comparison, much of what you have already learned about costing is applicable to a process costing system.360. Process costing is used when a company produces a continuous flow of units that are indistinguishable from one another.
