Job-order costing is best suited for a business that manufactures or produces many different products each period, has products are manufactured-to-order, and the unique nature of each order requires tracing or allocating costs to each job and maintaining a cost record for each job.
In job order costing, costs are traced or allocated to each job, and then divided by the number of units in that job to determine the cost per unit. The predetermined overhead rate is then used to apply overhead to work in progress. At the end of the period, under- or overapplied overhead is closed out to the cost of goods sold. However, if the amount of under-or overapplied overhead is significant, it should be closed out to cost of goods sold, work in progress and finished goods respectively.
Predetermined Overhead Rate: Used to apply manufacturing overhead to jobs or processes and determined before the period begins.
Predetermined Overhead Rate (POHR) = Estimated Total Manufacturing Overhead (MOH)/Estimated Total Units in Allocation Base
Allocation base: The cost driver of overhead such as direct labor hours, direct labor dollars, or machine hours.
Allocated Overhead = POHR * the amount of the allocation base incurred
Over/Under Applied Overhead: Overapplied overhead occurs when the actual amount of overhead incurred is less than the amount of overhead applied and vice versa.
Over/Under Applied Overhead = Actual Total MOH – Total MOH applied
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