BA213: Chapter 17—Job 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.
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.