Unit 1, Topic 2: Job Order Cost System

COST ACCOUNTING
& CONTROL
Unit 1, Topic 2: JOB ORDER COST SYSTEM

INTRODUCTION
Job order costing is used when many different products with different features are
produced during a particular period. This process allows companies to allocate all of the
costs incurred in a business, whether direct or indirect to jobs. We will discuss
manufactured jobs, and follow a couple jobs from the beginning to end.

LEARNING OUTCOMES/TOPIC OBJECTIVES

 Define Job order costing;

Explain the flow of costs in a job order costing system;
Demonstrate the mechanics of a job order costing system;
Prepare a job order cost sheet;
Prepare a cost of goods sold statement.

PRESENTATION OF CONTENT

Job order costing or job costing is a system for assigning and accumulating
manufacturing costs of an individual unit of output. (Couch)

Job order costing is a system that takes place when customers order small, unique
batches of products. This system determines the price of each individual product and
ensures that the cost for each product is reasonable enough for a customer to
purchase it while still allowing the company to make a profit. (indeed.com)
 Unit 1, Topic 2: Job Order Cost System

CHARACTERISTICS OF JOB ORDER COSTING –

(a) A job consists of a single order or contract.
(b) It is a cost unit by itself.
(c) Each job is unique in nature.
(d) Products are not manufactured for general-consumption.
(e) Under job costing, the cost of each job is ascertained after the completion of the
job.
(f) The costs of each job are ascertained by adding materials, labor, and overheads.
(g) Each order is given a job number.
(h) Costs are accumulated with reference to this number.
(i) Costs are ascertained for each order.
(j) Generally, the duration of the job order is comparatively short (products).
(k) Work-in-progress may or may not exist at the end of the accounting period.
(l) An important feature of job costing is that it is possible to identify a job at each
stage of its manufacturing process.
(m) By comparing the actual cost of each job against the price charged for each job, the
profit or loss made on each job is ascertained.
(n) Under this method, the cost of each job and the profit or loss made on each job
undertaken is found out separately.
In job costing, it is not necessary that each job will flow through all the production
cost centers in a predetermined manner. The purpose of job costing is to bring
together all the costs incurred for completing a job. The industries need not to incur
selling and distribution expenses as the customers themselves come to place orders
and collect the goods after production. (qsstudy.com)

MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING

Materials requisition form

To track materials being used in current items/orders, companies use a materials
requisition form. This form states that certain materials have been taken from
inventory and put toward the creation of the job order. Sections you may find on the
materials requisition form can include:

● The date the material was retrieved from inventory

● The unique job number
● The exact amount of material retrieved
● Item number and description
● How much each material item costs
● Total of all items retrieved
● Who requested the item(s)
● Who priced the item(s)
● Who the item(s) was given to
 Unit 1, Topic 2: Job Order Cost System

Sample of Materials requisition

When an employee inputs information into the materials requisition form, they may
need to find the requested information from other sources. For instance, when trying
to figure out how much the material items cost, they might ask the accounting
department for updated pricing.

Job cost sheet

This sheet is the main source for tracking an item to keep pricing an inventory
accurate. To maintain this accuracy, this job cost sheet needs to track information
including:

● The date the job was started

● The date employees completed the job
● The date the order was shipped to the customer
● Customer information, usually their address
● Job records information, including overhead cost, what materials were used and
labor information
● The summary of the final cost of the job

Sample of Job cost sheet

 Unit 1, Topic 2: Job Order Cost System

Each of the job information details above will have its own section to clearly show the
reader what information is needed and what is currently being tracked.

Time ticket
As an employee works on a unique order, they are often required to fill out a timesheet
recording the work they have completed. Sections of a time ticket can include:

● Employee's name and ID number

● The specific job number they're completing
● A list of each job
● The date each job started
● How many hours each job took the employee to complete
● The employee's hourly rate
● The total cost of the job
● Accounting and supervisor approval

Sample of Time ticket

Predetermined overhead rate

Factory overhead costs are allocated to jobs in process using a predetermined

overhead rate. The predetermined overhead rate is determined by estimating
(during the budget process) total factory overhead costs and dividing these total costs
by direct labor hours or direct labor rate. For example, assume a company using direct
labour cost for the allocation of overhead estimated its total overhead costs to be
P300,000 and total direct labour cost to be P250,000. The company's predetermined
overhead rate for allocating overhead to jobs in process is 120% of direct labor dollars,
and is calculated as follows:
 Unit 1, Topic 2: Job Order Cost System

Predetermined overhead rate = P300,000 = 1.2 or 120%

P250,000
If direct labor costs are P20,000 for the month, overhead of P24,000 (P20,000 × 120%)
would be allocated to work‐in‐process inventory. Factory overhead would be allocated
to individual jobs based on the portion of the P20,000 direct labor cost that is assigned
to each job. If job number 45 had P9,000 in direct labor cost for the month, factory
overhead of P10,800 (P9,000 × 120%) would also be allocated to the job.

Once a job is completed, the total costs assigned to the job are transferred from
workin‐process inventory to finished goods inventory. Once the job is sold and
delivered, the job costs are transferred from finished goods inventory to cost of goods
sold.

THE FLOW OF COSTS IN A JOB ORDER COST SYSTEM (CliffsNotes.com)

Key:
● A Purchased raw materials
● B Direct material requisition to be used on jobs
● C Direct labor payroll based on time ticket
● D Indirect materials used
● E Indirect labor payroll
● F Other overhead costs incurred
● G Overhead applied to jobs (direct labor cost x 80% predetermined overhead
rate)5
● H Transfer completed jobs to finished goods inventory
● I Transferred sold jobs to cost of goods sold
● J Paid wages

ILLUSTRATIVE PROBLEM:

The Joana Company had the following inventories on August 1 of the current year.
Finished goods P50,000
Work in process 37,000
Materials 44,000
 Unit 1, Topic 2: Job Order Cost System

The Works in process account controls two jobs

Job 401 Job 402
Materials P6,000 P11,200
Labor 5,000 6,000
Factory overhead 4,000 4,800
P15,000 P22,000
====== ======
The following information pertains to August operations:
1) Materials purchased on account, P56,000.
2) Materials issued for production P50,000. Of this amount, P6,000 was for indirect
materials; the difference was distributed: P11,000 to Job 401; P14,000 to Job 402;
and P19,000 to Job 403
3) Materials returned to the warehouse from the factory, P1,600, of which P600 was
for indirect materials, the balance is from Job 403.
4) Materials returned to vendors, P2,000.
5) Payroll after deducting P6,050 for withholding taxes, P3,200 for SSS premiums,
P750 for Medicare, and P2,400 for Pag-ibig, was P65,600. The payroll due to the
employees was paid during the month.
6) Payroll was distributed as follows: P20,800 to Job 40; P25,000 to Job 402; P21,000
to Job 403 and the balance represents indirect labor.
7) The share of the employer for payroll was recorded – P4,000 for SSS premiums,
P750 for Medicare contributions and P2,400 for Pag-ibig funds.
8) Factory overhead, other than any previously mentioned, amounted to P30,000.
Included in this figure were P6,000 for depreciation of factory building and
equipment, and P1,900 for expired insurance on the factory. The remaining
overhead was unpaid at the end of August.
9) Factory overhead was applied to production at the rate of 80% of direct labour
cost.
10) Job 401 and 402 were completed and transferred to the finished goods warehouse.
11) Job 401 was shipped and billed at a gross profit of 40% of cost.
12) Cash collections from accounts receivable during August were P70,000.
Requirements:
1. Journal entries to record the above transactions
2. Job order cost sheets.
3. Cost of Goods sold statement. (De Leon, 2019 edition)

1. JOURNAL ENTRIES

1. Materials 56,000
Accounts payable 56,000
Materials purchased.

2. Work in process 44,000

Factory overhead control 6,000
Materials 50,000
Materials issued to production.

Job 401 P11,000

Job 402 14,000
Job 403 19,000
P44,000
=======
 Unit 1, Topic 2: Job Order Cost System

3. Materials 1,600
Work in process (Job 403) 1,000
Factory Overhead Control 600
Materials returned to warehouse from factory.

4. Accounts payable 2,000

Materials 2,000
Materials returned to vendors.

5. Payroll 78,000
Withholding taxes payable 6,050
SSS Premiums payable 3,200
Phil Health contributions payable 750
Pag-ibig funds contributions payable 2,400
Accrued payroll 65,600
Payroll for the month.

Accrued payroll 65,600

Cash 65,600
Payment of payroll due to the employees.

6. Work in process 66,800 Factory overhead

control 11,200
Payroll 78,000
Classification of Payroll.
Job 401 P20,800
Job 402 25,000
Job 403 21,000
P66,800
=======

7. Factory Overhead Control 7,150

SSS Premiums payable 4,000
Phil Health cont. payable 750
Pag-ibig cont. payable 2,400
Recognize employer share on payroll.

8. Factory Overhead Control 30,000

Accumulated Depreciation 6,000
Prepaid insurance 1,900
Accounts payable 22,100
Actual factory overhead incurred.

9. Work in process (P66,800x80%) 53,440

Factory Overhead Applied 53,440
Factory overhead applied to production.

Job 401 P16,640

Job 402 20,000
Job 403 16,800
 Unit 1, Topic 2: Job Order Cost System

P53,440
=======

10. Finished goods 144,440

Work in Process 144,440
Cost of completed Jobs.
Job 401 63,440
Job 402 81,000

11. Accounts receivable 88,816

Sales (63,440 x 140%) 88,816
Sale of Job 401.

Cost of goods sold 63,440

Finished Goods 63,440
Cost of Job 401 to cost of sale.

12. Cash 70,000

Accounts receivable 70,000
Collections.

13. Cost of goods sold 310

Factory overhead applied 53,440
Factory overhead control 53,750
Closing of Factory overhead Control and Factory
overhead applied.

2. COST SHEETS
Job 401
Direct materials Direct labour Factory overhead
6,000 5,000 4,000
11,000 20,800 16,640
17,000 25,800 20,640

Job 402
Direct materials Direct labor Factory overhead
11,200 6,000 4,800
14,000 25,000 20,000
25,200 31,000 24,800

Job 403
Direct materials Direct labor Factory overhead
19,000 21,000 16,800
(1,000)
 Unit 1, Topic 2: Job Order Cost System

3. COST OF GOODS SOLD STATEMENT

Joana Company
Cost of Goods Sold Statement
For the month ended August 31, 2020

Direct materials used

Materials, August 1 P44,000
Purchases P56,000
Less. Purchase returns 2,000 54,000
Total available for use 98,000
Less: Materials, Aug. 31 49,600
Ind. Materials 5,400 55,000 P43,000
Direct labor 66,800
Factory overhead 53,440
Total manufacturing costs 163,240
Work in process, Aug. 1 37,000
Cost of goods put into process 200,240
Less: Work in process, Aug. 31 55,800
Cost of goods manufactured 144,440
Finished goods, Aug. 1 50,000
Total goods available for sale 194,440
Less: Finished goods, Aug. 31 131,000
Cost of goods sold - normal 63,440
Add. Under applied factory overhead 310
Cost of goods sold P63,750

LEARNING ASSESSMENT

MULTIPLE CHOICE

____ 1. Under job order cost accumulation, the factory overhead control account
controls:
A. factory overhead analysis sheets
B. all general ledger subsidiary accounts
C. job order cost sheets
D. cost reports by processes
E. materials inventories

2. Supplies needed for use in the factory are issued on the basis of:
 Unit 1, Topic 2: Job Order Cost System

A. job cost sheets

B. materials requisitions
C. time tickets
D. factory overhead analysis sheets
E. clock cards

3. Finished Goods is debited and Work in Process is credited for a:

A. transfer of completed goods out of the factory
B. transfer of completed production to the finished goods storeroom
C. purchase of goods on account
D. transfer of materials to the factory
E. return of unused materials from the factory

4. In job order costing, when materials are returned to the storekeeper that were
previously issued to the factory for cleaning supplies, the journal entry should
be made to: (AICPA adapted) A. Materials
Factory Overhead
B. Materials
Work in Process
C. Purchases Returns
Work in Process
D. Work in Process
Materials
E. Factory Overhead
Work in Process
5. Under a job order cost system, the dollar amount of the entry to transfer the
inventory from Work in Process to Finished Goods is the sum of the costs
charged to all jobs: (AICPA adapted)
A. completed during the period
B. started in process during the period
C. in process during the period
D. completed and sold during the period
E. none of the above

6. When a manufacturing company has a highly automated plant producing many

different products, probably the most appropriate basis of applying factory
overhead costs to Work in Process is:
A. units processed
B. machine hours
C. direct labor hours
D. direct labor dollars
E. none of the above

7. At the end of the year, Paola Company had the following account balances after
applied factory overhead had been closed to Factory Overhead Control:
(ICMA adapted)

Factory Overhead Control........................................................ $ 1,000 CR

Cost of Goods Sold................................................................ 980,000 DR
Work in Process.............................................................. 38,000 DR
Finished Goods............................................................... 82,000 DR
 Unit 1, Topic 2: Job Order Cost System

The most common treatment of the balance in Factory Overhead Control would be to:
A. carry it as a deferred credit on the balance sheet
B. report it as miscellaneous operating revenue on the income statement
C. credit it to Cost of Goods Sold
D. prorate it between Work in Process and Finished Goods
E. prorate it among Work in Process, Finished Goods, and Cost of Goods Sold

8. In service businesses using job order costing, the most commonly used base for
applying overhead to jobs is:
A. machine hours
B. direct materials consumed
C. direct labor cost
D. meals, travel, and entertainment
E. none of the above

9. In service businesses using job order costing, the hourly rate used to charge
costs to a job usually includes:
A. both labor and overhead cost
B. labor cost only
C. overhead cost only
D. labor, overhead, and miscellaneous costs
E. none of the above

10. Work in Process is debited and Materials is credited for:

A. the issuance of direct materials into production
B. the issuance of indirect materials into production
C. the return of materials to the storeroom
D. the application of materials overhead
E. none of the above

11. Factory Overhead Control is debited and Payroll is credited for:

A. the recording of payroll
B. the distribution of indirect labor costs
C. the distribution of direct labor costs
D. the distribution of withholding taxes
E. none of the above

12. Applied Factory Overhead is debited and Factory Overhead is credited to:
A. close the estimated overhead account to actual overhead
B. record the actual factory overhead for the period
C. charge estimated overhead to all jobs worked on during the period
D. to record overapplied overhead for the period
E. none of the above

13. The best overhead allocation base to use in a labor-intensive manufacturing

environment probably would be:
A. materials cost
B. machine hours
C. direct labor hours
D. units of production
 Unit 1, Topic 2: Job Order Cost System

E. none of the above

14. Finished Goods is debited and Cost of Goods Sold is credited for:
A. transfer of completed goods to the customer
B. sale of a customer order
C. return of materials to the supplier
D. return of goods by the customer
E. none of the above

15. Overapplied factory overhead would result if: (AICPA adapted)

A. the plant were operated at less than normal capacity
B. factory overhead costs incurred were less than costs charged to production
C. factory overhead costs incurred were unreasonably large in relation to units produced
D. factory overhead costs incurred were greater than costs charged to production
E. a firm incurred a significant amount of overhead

PROBLEM

During June, the following transactions took place at the Cassandran Corp.

June 3 Purchased materials, P30,000.

5 Requisitioned materials from inventory, P20,000 (75% of these
were direct; 25% were indirect). Direct materials of P3,000 and
indirect materials of P1,000 were for Job 00-1. The remainder
were for Job 00-2.
7 For Job 00-2, returned P150 of direct materials and P200 of
indirect materials.
8 Recorded liabilities for payroll: direct labor, P15,000 and indirect
labor, P5,000. Of the direct labor cost, 60% was for Job 00-1; the
remainder was for Job 00-2.
10 Incurred other factory overhead costs, P20,000 (all applicable to
Jobs 00-1 and 00-2).
14 Applied overhead at the rate of 200% of direct labor cost to Jobs
00-1 and 00-2, which were completed and transferred to the
finished goods account today.
Required: Assuming that Jobs 00-1 and 00-2 were the only jobs during the period and
that all overhead (as recorded above) is the total applicable overhead for these
projects:
(1) Journal entries to record above transactions.
(2) Prepare a job order cost sheet for each job.
(3) Determine the difference between applied and actual overhead for the month.

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 Unit 1, Topic 2: Job Order Cost System

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