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Chapter 3
Costing Systems: Job Order Costing
Uses of Information About Costs in the Management Cycle
Product Costing Systems
• Organizations have a range of
choices in order to distribute product
costs. Two ends of that spectrum
are:
Job order costing systems.
Process costing systems.
Product Costing Systems
• The kind of production process that
an organization uses determines
which of the two approaches is used.
• Organizations that make large,
unique, or special-order products
typically use job order costing.
A Job Order
• A job order is a customer order for a
specific number of specially designed,
made-to-order products.
• Job order costing measures the cost
of each complete unit.
Job Order Costing Systems
• Under a job order costing system, the
costs of:
 Direct materials
 Direct labor
 Manufacturing overhead
are traced or assigned to specific job
orders or batches of products.
Process Costing Systems
• Organizations that produce large amounts or
similar products or liquids that have a
continuous product flow use process costing.
Examples include:
Bricks
Beverages
Paper
Sauces
Paint
Process Costing Systems
• Under a process costing system, the cost
of direct materials, direct labor, and
manufacturing overhead are first traced to
processes or work cells and then
assigned to the products produced by
that process or work cell.
Hybrid Systems
• The typical product costing system
combines parts of both job order
costing and process costing to create
a system for an organization’s
particular production process.
Job Order Costing System
• A job order costing system records
information on the following cost flows:
The costs of materials and supplies are first
charged to the Materials Inventory Control
account and to the respective materials
accounts in the subsidiary ledger.
Labor costs are first accumulated in the
Factory Labor account.
Job Order Costing System
• The various manufacturing overhead
costs are charged to the Manufacturing
Overhead Control account.
• As products are manufactured, the costs
of direct materials and direct labor are
transferred to the Work in Process
Inventory Control account.
Job Order Costing System
• Manufacturing overhead costs are
applied and charged to the Work in
Process Inventory Control account using
a predetermined overhead rate. Those
charges are used to reduce the balance
in the Manufacturing Overhead Control
account and increase the Work in
Process Inventory Control account.
Job Order Costing System
• When products and jobs are
completed, the costs assigned to
them are transferred to the Finished
Goods Inventory Control account.
• When the products are sold and
shipped, their costs are transferred
to the Cost of Goods Sold account.
Cost Flow
• Any balance in the Manufacturing
Control account at the end of the
period is closed to Cost of Goods
sold.
• The effective use of procedures and
documents facilitates a timely flow of
information through the accounting
records.
Reconciliation of Manufacturing
Overhead
• If the Manufacturing Overhead
Control account has a balance at the
end of the period:
Overhead was either over or under
applied.
• Given that the amount is minor:
Close the account to Cost of Goods
Sold.
Account for materials, labor and
overheads in a manufacturer’s
job costing system.
Materials Cost Example
• Alec Clothing Corp. purchased raw materials
on account for $15,000.
• Materials costing $10,000 were requisitioned
for production.
• Of this total, $2,000 was indirect materials.
Materials Cost Example
Materials Inventory
15,000 10,000
Direct materials
WIP Inventory
8,000
Manufacturing Overhead
2,000
Indirect materials
Labour Costs
• Labour costs are accumulated using payroll
registers and time tickets.
• Labour time records identify the employee,
the amount of time spent on each job, and
the labour cost charged to the job.
Labour Cost Example
• The company incurred $30,000 of
manufacturing wages for all jobs.
• Assume that $25,000 can be traced directly
to the jobs and $5,000 is for indirect labour.
Labour Cost Example
Manufacturing Wages
30,000 30,000
Direct labour
WIP Inventory
25,000
Manufacturing Overhead
5,000
Indirect labour
Manufacturing Overhead Costs
• The company incurred $20,000 of plant and
equipment amortization.
Manufacturing Overhead
(Plant and equipment)
20,000
Accumulated Amortization
(Plant and equipment)
20,000
To record plant and equipment amortization
Manufacturing Overhead Costs
• The general term cost assignment refers to
both tracing direct costs and allocating
indirect costs to cost objects.
Direct
materials and
direct labour
Cost Tracing
Cost assignment
Manufacturing Cost Allocation
overhead
Cost
Object
(Job)
Manufacturing Overhead Rate
• At the beginning of the year, a budgeted
overhead application rate is estimated.
• This budgeted rate is used to apply
overhead to all jobs completed during the
year.
Budgeted overhead ÷ Estimated base = Rate
Six Steps in Allocating
Manufacturing Overhead Cost
1 Estimate the total overhead costs for the
period.
2 Identify a cost allocation base.
3 Budget the total units of the cost allocation
base.
4 Compute the predetermined overhead
application rate.
Six Steps in Allocating
Manufacturing Overhead Cost
5 Obtain actual quantities of the overhead
allocation base.
6 Allocate manufacturing overhead to jobs
by multiplying the predetermined
manufacturing overhead rate by the actual
quantity of the allocation base used by
each job.
Manufacturing Overhead Example
• Alec Clothing Corp.’s total budgeted
overhead for the year equals $243,000.
• The allocation rate is based on 4,500 direct
labour hours.
• What is the allocation rate?
$243,000 ÷ 4,500 = $54
Manufacturing Overhead Example
• Assume that Job 51 used 200 direct labour
hours.
• What is the journal entry to record the
manufacturing overhead applied?
Work-in-Process Inventory
10,800
Manufacturing Overhead
10,800
To record overhead applied to Job 51
Accounting for Finished Goods,
Sales, and Cost of Goods Sold
• As jobs are completed they are transferred
to finished goods inventory.
• In addition to the overhead applied to Job
51, direct labour was $4,000 and direct
materials totaled $30,000.
• How much was transferred to Finished
Goods Inventory?
Accounting for Finished Goods,
Sales, and Cost of Goods Sold
Direct materials
Direct labour
Manufacturing overhead
Work in Process
44,800
$30,000
4,000
10,800
$44,800
Finished Goods
44,800
Accounting for Finished Goods,
Sales, and Cost of Goods Sold
• Assume that Job 51 was sold for $74,800.
• What are the journal entries?
Accounts Receivable
74,800
Sales Revenue
Cost of Goods Sold
44,800
Finished Goods Inventory
To record sale of Job 51
74,800
44,800
Accounting for Finished Goods,
Sales, and Cost of Goods Sold
Work in Process
44,800
Finished Goods
44,800 44,800
Cost of Goods Sold
44,800
Disposing of Underallocated or
Overallocated Overhead
• Suppose that the company incurred
$232,000 of actual manufacturing overhead
during the year, and that actual direct labour
hours worked were 4,000.
• The actual manufacturing overhead rate
would have been $232,000 ÷ 4,000 = $58.
• The predetermined rate was $54.
Disposing of Underallocated or
Overallocated Overhead
• How much overhead was allocated to the
various jobs?
• 4,000 direct labour hours × $54 = $216,000
• What is the underallocated amount?
• $232,000 actual – $216,000 allocated
= $16,000
Disposing of Underallocated
Overhead to Cost of Goods Sold
Manufacturing Overhead
232,000 216,000
16,000
0
Cost of Goods Sold
16,000
Disposing of Overallocated
Overhead to Cost of Goods Sold
• Assume the opposite situation, in which
allocated overhead is $232,000 and actual
overhead is $216,000.
• How do we dispose of overallocated overhead?
• Debit the Manufacturing Overhead account
and credit the Cost of Goods Sold account to
decrease the costs that went to the income
statement.
Disposing of Overallocated
Overhead to Cost of Goods Sold
Manufacturing Overhead
216,000 232,000
16,000
0
Cost of Goods Sold
16,000
The Job Order Cost Card
• All costs of
direct materials
direct labor
manufacturing overhead
for a particular job are accumulated on
a job order cost card.
The Job Order Cost Card (cont’d)
• It also shows:
Job order number
Product specifications
Customer name
Order date
Projected completion date
A cost summary
Job Order Cost Card – Manufacturing Company
Job Order Cost Card – Service Organization
The Job Order Cost Card
• Because all manufacturing costs are
accumulated in the Work in Process
Inventory Control account, individual job
order cost cards serve as subsidiary
ledgers so that costs are identified to
specific jobs.
• Ending balance in the Work in Process
Inventory account equals the totals of costs
shown on job order cost cards.
Computing Product Unit Costs
• Product unit cost in a job order system is
calculated by:
1. Totaling all manufacturing costs
accumulated on a particular job order cost
card.
2. Dividing total manufacturing costs by the
number of units produced for that job.
Job Order Cost Card - Service Organization
Job Order Costing in a Service
Organization
• In service organizations, costs are not
associated with a product that can be
assembled, stored and valued.
• Services cannot be held in inventory.
• The most important cost is labor, which is
carefully tracked.
• Other costs include materials, supplies and
service overhead.
• Cost-plus contracts add a pre-determined profit
to the total costs incurred on the job
Project Costing
Projects are complex, multidisciplinary
approaches to the production of goods and
services. Examples: building construction,
software development.
Project Costing links many different job orders
and processes by transferring costs from
one job or process to another. Costs are
accumulated and summarized in various
ways to provide internal controls.
Transaction Analysis -Job Order Cost Flow
• (T1) Purchased cart frames ($572) and wheels ($340) from supplier A
• (T2) Indirect material costing $82 was purchased from supplier B
• (T3) Total direct material used (both jobs CC and JB) is $1880. Details as
follows: cart frames $ 1240 , cart wheels $640; Job CC a work-in-process
require $1038 of additional direct material and job JB require $842;
Indirect material required is $96.
• (T4) Total labor (direct and indirect) required is $2400
• (T5) Job CC and JB require $1320 and $320 of direct labor
• (T6) Other indirect overheads paid is $295
• (T7) Factory depreciation for period is $ 240
• (T8) Overhead is applied using a pre-determined rate of 85% of direct labor
• (T9) Job CC is completed and transferred to finished goods storage area,
Job JB is partially complete
• (T10) Company sold general purpose golf carts worth $2040. The cost of
the carts sold is $1940
• (T11) At the end of the period company reconciles the overhead account
Required: Prepare the T accounts and show the job order cost flow