BA213: Chapter 17Job Order Costing

JOB-ORDER COSTING
Study Objectives for Job-Order Costing:
1. Explain the characteristics and purposes of cost accounting.
2. Describe flow of costs in a job order cost accounting system.
3. Explain the nature and importance of a job cost sheet.
4. Indicate how the predetermined overhead rate is determined and used.
5. Prepare entries for jobs completed and sold.
6. Distinguish between under- and overapplied manufacturing overhead.

I. COST ACCOUNTING SYSTEMS:

A. Explain the characteristics and purposes of cost accounting
1. Cost accounting involves the measuring, recording, and
reporting of product costs.
2. Both the total cost and the unit cost of each product are
determined from the accumulated data.
3. A cost accounting system consists of accounts for the various
manufacturing costs. These accounts that are fully integrated into the
general ledger of a company.
a) An important feature of a cost accounting system is the
use of a perpetual inventory system. Such a system provides
immediate, up-to-date information on the cost of a product.
b) There are 2 basic types of cost accounting systems:
1) A job order cost system.
2) A process cost system.
B. JOB ORDER COST SYSTEM
1. Under a job order cost system, costs are assigned to each job
or to each batch of goods.
a) An example of a job would be the manufacture of a
high-speed drilling machine.
b) An example of a batch would be the printing of 225
wedding invitations.
2. An important feature of job order costing is that each job
(or batch) has it own distinguishing characteristics:
a) Each house is custom built.
b) Each motion picture is unique.
c) Each printing job is different.
d) The objective is to calculate the cost per job.

C. PROCESS COST SYSTEM

1. A process cost system is used when a series of connected
manufacturing processes or departments produce a large volume of
similar products.

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 2. Process costing accounts for and accumulates product-
related costs for a period of time (such as a month) instead of
assigning costs to specific products or job orders.

D. A company may use both types of cost systems.

1. For example General Motors uses process cost accounting
for its standard model cars, such as Saturns and Corvettes.
2. General Motors used job order cost accounting for a
custom-made limousine for the President of the United States.
3. The objective of both systems is to provide unit cost
information for:
a) product costing,
b) cost control,
c) inventory valuation, and
d) financial statement presentation.
4. End-of-period inventory values are computed by using
unit cost data.

II. JOB ORDER COST FLOW:

A. Describe the flow of costs in a job order cost accounting system.
1. The flow of costs in job order cost accounting parallels the
physical flow of the materials as they are converted into finished goods.
2. There are 2 major steps in the flow of costs:
a) accumulating the manufacturing costs incurred and
b) assigning the accumulated costs to the work done.
c) Manufacturing costs incurred are accumulated in entries 1-3 by
debits to:
1) (1) Raw Materials Inventorypurchase raw materials.
2) (2) Factory Laborincur factory labor.
3) (3) Manufacturing Overheadincur manufacturing overhead.
d) The remaining entries pertain to the assignment of manufacturing
costs incurred:
1) (4) Raw materials are used (ASSIGNED).
2) (5) Factory labor costs are used (ASSIGNED).
3) (6) Overhead is applied (ASSIGNED).
4) (7) Completed goods are recognized (ASSIGNED).
5) (8) Cost of goods sold is recognized (ASSIGNED).
B. ACCUMULATING MANUFACTURING COSTS:
1. In a job order cost system, manufacturing costs are recorded
in the period in which they are incurred.
2. The costs of raw materials purchased are debited to Raw
Materials Inventory when the materials are received.
3. No effort is made at this point to associate the cost of
materials with specific jobs or orders.

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 4. Example: Wallace Products Inc. purchases 2,000 handles at
$5 per unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total
cost of $42,000:
General Journal Page 1
Date Account Title P.R Debit Credit
201X (1)
Jan. 4 Raw Materials Inventory 42,000
Accounts Payable 42,000
(Purchase of raw materials on account)

5. Raw Materials Inventory is a control account. The

subsidiary ledger consists of individual records in the form of:
a) mechanically or manually prepared accounts or cards
or
b) data files maintained electronically on disks or
magnetic tape.
c) Postings are made daily to the subsidiary ledger. After
all postings have been completed, the sum of the balances in the raw
materials subsidiary ledger should equal the balance in the Raw
Materials Inventory control account.
6. Factory Labor Costs:
a) In a manufacturing company, the cost of factory labor
consists of:
1) Gross earnings of factory workers.
2) Employer payroll taxes on such earnings, and
3) Fringe benefits incurred by the employer.
b) Labor costs are debited to Factory Labor when they are
incurred.
c) Example: Wallace Products incurs $32,000 of factory
labor costs, of which $27,000 relates to wages payable and $5,000
relates to payroll taxes payable in January. The entry is:

General Journal Page 1

Date Account Title P.R Debit Credit
201X (2)
Jan. 31 Factory Labor 32,000
Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000
(To record factory labor costs)

7. Manufacturing Overhead Costs:

a) Overhead costs may be recognized daily, as in the case
of machinery repairs and the use of indirect materials and indirect
labor.

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b) Overhead costs may also be recorded periodically
through adjusting entries. Property taxes, depreciation, and insurance
are recorded periodically for example.
c) A summary overhead entry for Wallace Products
Company:

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 General Journal Page 1
Date Account Title P.R Debit Credit
201X (3)
Jan. 31 Manufacturing Overhead 13,800
Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated Depreciation 3,000
Property Taxes Payable 1,400
(To record overhead costs)
d) Manufacturing overhead is a control account. The
subsidiary ledger consists of individual accounts for each type of cost,
such as Factory Utilities, Factory Insurance, and Factory Repairs.

C. ASSIGNING MANUFACTURING COSTS

1. Entries to assign manufacturing costs to Work in Process
Inventory (WIP):
a) Raw materials are used:
General Journal Page 1
Date Account Title P.R Debit Credit
201X (4)
Mon. Day Work in Process Inventory XXXX
Manufacturing Overhead XXXX
Raw Materials Inventory XXXX
(To assign materials to jobs)

b) Factory labor is used or ASSIGNED:

General Journal Page 1
Date Account Title P.R Debit Credit
201X (5)
Mon. Day Work in Process Inventory XXXX
Manufacturing Overhead XXXX
Factory Labor XXXX
(To assign labor to jobs)

c) Overhead is applied:
General Journal Page 1
Date Account Title P.R Debit Credit
201X (6)
Mon. Day Work in Process Inventory XXXX
Manufacturing Overhead XXXX
(To assign overhead to jobs)

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 d) Completed goods are recognized:
General Journal Page 1
Date Account Title P.R Debit Credit
201X (7)
Mon. Day Finished Goods Inventory XXXX
Work in Process Inventory XXXX
(To record completion of Job No. ___)

e) Cost of goods sold is recognized:

General Journal Page 1
Date Account Title P.R Debit Credit
201X (8)
Mon. Day Accounts Receivable XXXX
Sales XXXX
(To record sale of Job No.____)

Day Cost of Goods Sold XXXX

Finished Goods Inventory XXXX
(To record the cost of Job No.___)

2. Explain the nature and importance of a job cost sheet.

a) A job cost sheet is a form used to record the costs
chargeable to a specific job and to determine the total and unit cost of
the completed job.
b) Postings to job cost sheets are made daily.
c) A separate job cost sheet is kept for each job:
1) The job cost sheets make up the subsidiary
ledger for the Work in Process Inventory account.
2) Each entry to the Work in Process Inventory
account requires a posting to one or more job cost sheets.
3. Raw Materials Costs
a) The authorization for issuing raw materials is made on
a prenumbered materials requisition slip. The requisition should
indicate whether:
1) the quantity and type of materials (direct or
indirect) withdrawn and
2) the amount to be charged.
3) Requisitions for direct materials are posted daily
to the individual job cost sheets.
4) After all postings have been completed, the sum
of the direct materials columns on the job cost sheets should
equal the direct materials debited to the Work in Process
Inventory.

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 4. Factory Labor Costs
a) Factory labor costs are assigned to jobs on the basis of
time tickets prepared when the work is performed.
b) The time ticket should indicate the employee, the hours
worked, the account and job to be charged, and the total labor cost.
c) Work in Process Inventory is debited for direct labor
and Manufacturing Overhead is debited for indirect labor.
d) The postings to the direct labor columns of the job
cost sheets should equal the posting of direct labor to Work in Process
Inventory.

5. Manufacturing Over head Costs

a) Indicate how the predetermined overhead rate is
determined and used.
b) Manufacturing overhead is estimated and assigned to
work in process and to specific jobs on an estimated basis through a
predetermined overhead rate.
c) This rate is established by the beginning of the year and
is based on the relationship between estimated annual overhead
costs and expected annual operating activity.
d) This relationship is expressed in terms of a common
activity base such as:
1) direct labor costs,
2) direct labor hours,
3) machine hours, or
4) any other measure that will provide an equitable
basis for applying overhead costs to jobs.
e) Refer to handout, page 4 showing the formula and
application to the example problem for the predetermined
overhead rate. The formula for a predetermined overhead rate is:
Estimated Annual Expected Annual Predetermined Overhead
Overhead Cost Operating Activity = Rate

Applying the formula to Wallace Manufacturing who uses direct labor cost as the
activity base where the expected annual overhead costs are $280,000 and $350,000 of
direct labor costs are anticipated for the year, the predetermined overhead rate is
calculated as follows:
Estimated Annual Expected Annual Predetermined Overhead
Overhead Cost Operating Activity = Rate
$280,000 $350,000 = 80%

f) To assign the overhead costs to work in process, the

predetermined overhead rate is used so that managers do not have to

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 wait until the actual overhead costs are determined because they come
in at times throughout the year and some like insurance and property
taxes may only occur once a year.
1) The use of a predetermined overhead rate
enables the company to determine the approximate total cost of a
job when the job is completed.
2) The activity base that is used should be highly
correlated to the manufacturing overhead costs.
a. Historically, direct labor costs or direct
labor hours have often been used.
b. But, machine hours may be the proper
activity base if a company is highly automated.
c. A company can use more than one
activity base for different types of overhead costs which might
have be driven by different activities.
3) The formula to assign overhead costs to jobs is
where the costs are added to the job cost sheet and then
journalized by debiting the Work in Process account is as follows:
Predetermined Amount of Overhead Costs to
Activity Base x Overhead Rate = Assign (Apply) to a Job

For Wallace Manufacturing which uses direct labor costs would calculate the
amount of overhead to assign if the direct labor costs are $28,000 for three jobs:
Job 101; Job 102; and Job 103:
Predetermined Amount of Overhead Costs to
Activity Base x Overhead Rate = Assign (Apply) to a Job
$28,000 x 80% = $22,400

g) The debit of $22,400 to Work in Process Inventory

equals the sum of the overhead assigned to jobs: Job 101 $12,000 +
Job 102 $7,200 + Job 103 $3,200 as follows:
General Journal Page 1
Date Account Title P.R Debit Credit
201X (6)
Jan. 31 Work in Process Inventory 22,400
Manufacturing Overhead 22,400
(To assign overhead to jobs)
h) At the end of each month, the balance in Work in
Process Inventory should equal the sum of the costs shown on the
job cost sheets of unfinished jobs.

6. FLOW OF DOCUMENTSJOB COST SYSTEM:

a) Jobs are charged through:
1) Material Requisition Slips

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 2) Labor Time Tickets
3) Predetermined Overhead Rate
b) Cost of Jobs is Summarized on a Job Cost Sheet:
1) The Job Cost Sheet summarizes the cost of jobs
completed and not completed at the end of the accounting period.
2) Jobs completed are transferred to Finished
Goods to await the sale.

D. ASSIGNING COSTS TO FINISHED GOODS:

1. Prepare entries for jobs completed and sold.
2. When a job is completed, the costs are summarized and the
lower portion of the applicable job cost sheet is completed.
3. If Job No. 101 is completed on January 31, the job cost sheet
will show the entries.
4. When a job is finished, an entry is made to transfer the total
cost to finished goods inventory. The entry for Wallace Manufacturing is:
General Journal Page 1
Date Account Title P.R Debit Credit
201X (7)
Jan. 31 Finished Goods Inventory 39,000
Work in Process Inventory 39,000
(To record completion of Job No. 101)
5. Finished Goods Inventory is a control account. It controls
individual finished goods records in a finished goods subsidiary ledger.
6. Postings to the receipts columns are made directly from
completed job cost sheets.

E. ASSIGNING COSTS TO COST OF GOODS SOLD:

1. Cost of goods sold is recognized when each sale occurs.
2. The entries to record a sale of Job 101, costing $39,000, for
$50,000 for Wallace Manufacturing are:
General Journal Page 1
Date Account Title P.R Debit Credit
201X (8)
Jan 31 Accounts Receivable 50,000
Sales 50,000
(To record sale of Job No.101)

31 Cost of Goods Sold 39.000

Finished Goods Inventory 39,000
(To record the cost of Job No.101)

III. REPORTING JOB COST DATA

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 A. At the end of the period, financial statements are prepared that
present aggregate data on all jobs manufactured and sold.
B. The cost of goods manufactured schedule in job order costing is
prepared:
C. The cost of goods manufactured ($39,000) agrees with the amount
transferred from Work in Process Inventory to Finished Goods Inventory.

IV. UNDER- OR OVERAPPLIED MANUFACTURING OVERHEAD

A. Distinguish between under- and overapplied manufacturing
overhead.
1. Underapplied overhead means that:
a) Manufacturing overhead has a debit balance and
b) The overhead assigned to work in process is less
than the overhead incurred.
2. Overapplied overhead means that:
a) Manufacturing overhead has a credit balance and
b) The overhead assigned to work in process is greater
than the overhead incurred.

B. INTERIM BALANCES
1. The existence of under- or overapplied overhead at the end of
a month usually does not require corrective action by management
because monthly differences between actual and applied overhead will
usually be offsetting over the course of the year.
2. Under- or overapplied overhead is on the monthly balance
sheet:
a) Underapplied overhead is a prepaid expense (current asset) and
b) Overapplied overhead is unearned revenue (current liability).
C. YEAR-END BALANCES
1. At the end of the year, there are no more offsetting events to
occur since all manufacturing overhead transactions are complete.
2. Therefore, any balance in Manufacturing Overhead is
eliminated by an adjusting entry to Cost of Goods Sold as follows:
a) If actual is greater than applied, manufacturing
overhead is underapplied and has a debit balance. To adjust for the
underapplied overhead, then Cost of Goods Sold will be debited and
Manufacturing Overhead will be credited to reduce its balance to
zero as follows:
General Journal Page 1
Date Account Title P.R Debit Credit
201X Adjusting Entry
Mon. day Cost of Goods Sold XXXX
Manufacturing Overhead XXXX

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 (To transfer underapplied overhead
to the cost of goods sold)

b) If actual is less than applied, manufacturing overhead

is overapplied and has a credit balance. To adjust for the overapplied
overhead, then Manufacturing Overhead will be debited and Cost
of Goods Sold will be credited to reduce its balance to zero as
follows:
General Journal Page 1
Date Account Title P.R Debit Credit
201X Adjusting Entry
Mon. day Manufacturing Overhead XXXX
Cost of Goods Sold XXXX
(To transfer overapplied overhead to
the cost of goods sold)

3. Under- or overapplied overhead can also be allocated to work in process,

finished goods, and cost of goods sold.
a) This would be done if the balance in the Manufacturing Overhead
account is material.
b) However, most management accountants do not believe allocation is
worth the cost and effort and the balance should not be material if
the correct activity or activities were used to determine the
predetermined overhead rate.

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