Question

Job-order costing systems often use allocation bases that do not reflect how jobs actually use overhead resources. True or False True False

Answer 1

Answer: TRUE Reason: Companies use job order accounting if their products and services are not identical in nature. That is, if each product requires different set of manufacturing processes to complete its production activity in a manufacturing firm, manufacturing companies use job order costing. In case of service companies, if each client requires different set of services to be rendered by the service providing firm, such companies use job order costing. Job cost sheet refers to a statement that classifies and summarizes total manufacturing costs incurred to complete production of output units for the reporting period concerned. It segregates total production costs into direct materials used, direct labor cost and manufacturing overhead costs. As direct materials and direct labor are the basic costs to be incurred to carry out any production process, they are termed as prime costs on job cost sheet. Direct labor costs and manufacturing overhead costs are incurred to convert direct materials into another form such as work in process or finished goods inventory and so they are termed as conversion costs on job cost sheet. Direct materials plus conversion costs is equal to total manufacturing cost incurred during the reporting period. Beginning balance in work in process inventory shall be added to current period's total manufacturing costs so that total cost of work in process will be calculated. If ending balance in work in process inventory is deducted from total cost of work in process to calculate manufacturing costs incurred for the period. Cost of beginning finished goods inventory shall be added to and ending finished goods inventory shall be deducted from cost of goods manufactured to calculate cost of goods sold for the period. It is observed from above lines that Job-order costing systems often use allocation bases that do not reflect how jobs actually use overhead resources because overhead costs are allocated between jobs using common allocation base like direct labor hours or machine hours or direct labor cost, etc.