AE4 Strategic Cost Management

Module 4

What is job order cost system?

- It accumulates costs applicable to each specified job order or lot of similar goods
manufactured on a specific order for stock or for a customer. When production on a job
begins, the job is assigned a number, and a form called a job cost sheet is set up. As direct
materials are used, their costs are entered on the job cost sheet. Similarly, direct labor
costs incurred on a job are recorded periodically. When the job is completed (or
periodically as the job is worked on), manufacturing overhead costs applicable to the job
are estimated and entered on the job cost sheet. The job cost sheet, when complete, shows
the total costs of the completed job. The cost per unit may then be obtained by dividing
the total cost of the job by the number of units completed.

Work Flow
- The steps in a typical cycle of operations of a firm using Job Order Cost Systems are:

1) Procurement: Materials and supplies needed for manufacturing are ordered, received, and
stored. Direct and indirect factory labor and services are obtained.
2) Production: Materials are transferred from the storeroom to the factory. Labor tools,
machines power, and other costs are applied to complete the product.
3) Warehousing: Finished goods are moved from the factory to the warehouse to be held
until they are sold.
4) Selling: Customers are found. Merchandise is shipped from the warehouse. Sales to
customers are recorded.

Recording costs as incurred

1) Procurement: Account must be provided to record the purchase of materials, labor, and
overhead. These costs will later be charged to production.
2) Production: An account is required to gather procurement costs as they chargeable to
manufacturing operations.
3) Warehousing: An account must be set up to record the cost of goods that have completed
manufacturing process.
4) Selling: The account of the completed goods that have been sold must be recorded.
Matching cost flow and work flow

1) Procurement: Purchases of materials, labor, and overhead are recorded as debits to

materials, factory payroll and manufacturing overhead control. As these costs are used, or
applied, in factory operations, they are credited to these accounts and transferred to
production.
2) Production: Costs of materials, labor, and overhead transferred into production are
debited to work in process. As goods are finished and moved from the factory, their total
cost is removed from the Work in Process account by a credit entry and charged (debited)
to Finished Goods.
3) Warehousing: The cost of finished goods transferred from Work in Process is recorded as
a debit to Finished Goods. The cost of merchandise shipped from the warehouse to
customers is credited to Finished Goods and charged (debited) to Cost of Goods Sold.
4) Selling: As Finished Goods are sold and shipped from the warehouse, their cost is debited
to Cost of Goods Sold. At the end of the accounting period, this account is closed by
crediting Cost of Goods Sold and debiting Income Summary.

What are the three (3) major source documents for job order costing?

1) Materials acquisition form

2) Job cost sheet
3) Time ticket
What is materials acquisition 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
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.

What is job cost sheet?

- This sheet is the main source for tracking an item to keep pricing and 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
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.
What is 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:
o Employee's name and ID number
o The specific job number they're completing
o A list of each job
o The date each job started
o How many hours each job took the employee to complete
o The employee's hourly rate
o The total cost of the job
o Accounting and supervisor approval