Job-Order Costing

• Job-Order Costing is used when different products are produced, especially in low volumes, to more accurately determine the cost per unit for each product. This can be achieved through the Absorption Costing System.
• In the first step of absorption costing, direct costs are allocated to cost centres.
• In the second step of absorption costing, overhead costs are apportioned to cost centres.
• In the third stage of absorption costing, costs are taken from the service cost centres and reapportioned to the production cost centres.
• Service departments do not produce goods, so their overheads must be reasonably recharged (reapportioned) to production departments.
• In the fourth stage of absorption costing, the cost object absorbs costs through an overhead absorption rate.
• Classification for Reapportionment

  1. Whichever department serves the most people goes first.
  2. If departments are equal, whichever department has the highest cost to reapportion goes first.
• Overhead Absorption Rate = Total Overhead Costs / Total Production Volume
• Total Overhead Absorbed = OAR * Activity Hours
• The overhead absorption rate determined how much overhead is absorbed by a unit