• Global Frameworks: AICPA / CIMA Management Accounting Standards.

1. Job-Order Costing Systems
Job-Order Costing traces distinct manufacturing costs to unique, custom-made products or batches (e.g., custom construction, aerospace manufacturing, specialized auditing engagements).
Firms use a Predetermined Overhead Rate (POHR) to assign indirect manufacturing overhead to specific jobs during production, rather than waiting for actual year-end utility bills:

POHR = Estimated Total Manufacturing Overhead Costs / Estimated Total Allocation Base (e.g., Direct Labor Hours, Machine Hours)
Overhead is applied to production jobs as work progresses:

Applied Overhead = POHR × Actual Allocation Base Units Used
At fiscal year-end, any difference between actual overhead incurred and overhead applied to production is cleared out:
  • Underapplied Overhead (Actual > Applied) is debited to COGS, which decreases gross margins.
  • Overapplied Overhead (Applied > Actual) is credited to COGS, which increases gross margins.

2. Process Costing Systems and Equivalent Units of Production (EUP)
Process Costing is used when homogeneous, identical products are manufactured in a continuous stream through automated production departments (e.g., oil refining, chemical processing, beverage bottling).
Because manufacturing is continuous, some units are only partially complete at the end of an accounting period. To distribute production costs fairly, these partially complete units are converted into Equivalent Units of Production (EUP) using two tracking methods:
  • Weighted-Average Method: Blends work and costs from the prior period with work and costs from the current period. It does not separate completion stages:

    EUP (Weighted Average) = Units Completed and Transferred Out + (Ending Work-in-Process Units × % Completion stage)
  • FIFO Method: Separates production periods cleanly. It assumes that units from the prior period’s beginning inventory are completed first, meaning current costs are allocated only to current production:

    EUP (FIFO) = (Beginning Work-in-Process Units × % Needed to Complete) + Units Started and Completed in Current Period + (Ending Work-in-Process Units × % Completion stage)

 
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