Job-order costing

Job-order costing suits businesses that make distinct, identifiable outputs: a bespoke boardroom table, a print run, a building repair, an audit engagement. Each job has a job cost sheet that collects three things:

1. Direct materials from materials requisitions.
2. Direct labour from time sheets (hours booked × wage rate).
3. Applied manufacturing overhead — the job's share of indirect costs.

Why a predetermined rate? Actual overhead isn't known until the year ends, and much of it is fixed while output varies by month. Waiting would make job costs late and erratic. So at the start of the year the business sets a predetermined overhead rate (POHR):

> POHR = budgeted overhead ÷ budgeted level of the allocation base (direct labour hours, machine hours…)

Overhead is then applied to each job as actual base units × POHR. Choose a base that drives overhead: machine hours in an automated plant, labour hours in a craft workshop.

The accounts. Costs flow Raw materials → Work in progress → Finished goods → Cost of sales. Actual overhead is debited to a Manufacturing overhead control account as it's incurred (indirect materials, indirect labour, factory rent, depreciation); applied overhead is credited to it and debited to WIP. At year end the control account's balance is the difference between actual and applied: - Under-applied (debit balance): actual > applied — jobs were undercosted. - Over-applied (credit balance): applied > actual — jobs were overcosted.

If the difference is small it is closed to cost of sales. If it is material, it is prorated across WIP, finished goods and cost of sales in proportion to the overhead applied in each balance, so inventory isn't misstated.

External reporting check. The disposal method is a management choice, but inventory in published accounts must still follow IAS 2 (US GAAP: ASC 330 is similar). IAS 2.13 allocates fixed production overhead on normal capacity: fixed overhead left unabsorbed because output was low (or idle plant) is expensed in the period, not pushed into inventory; in periods of abnormally high production, the fixed overhead per unit is reduced so inventory isn't carried above cost. So prorating an over-applied balance is consistent with IAS 2, but under-applied overhead caused by low volume should go to cost of sales rather than be prorated into inventory.