What Is A Job Order Cost System?

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What is a job order cost system?

The job order cost system is a system used when the company produces custom-made goods or goods
that are made according to customer’s specification. It is also used when several items produced are
significantly different from each other and are produced by lots. It can also apply to the performance of
a specific service such as the provision of legal services to a particular client. It may also be used even if
the products are identical with the other orders but are produced only by lots to fill the orders of
specific customers or a batch intended for stock at the finished goods warehouse

Some companies that use the job order cost system are apparel factories; custom-made furniture
manufacturers; printed forms and other printed materials: car and air-craft manufacturers. Service
businesses also use job order costing such as repairs shops, accounting firms and law firms on
engagement with specific clients.

In job order casting, the costs of each job are tracked by job. The costs are collected and tracked through
a job order cost sheet. A job order cost sheet normally contains the following information:

1. Job order number to facilitate tracking and monitoring 2. Customer’s name and address
2. The description and quantity of the products ordered
3. Date ordered and the promised date of completion
4. Sections containing the detailed information of the costs of raw materials used, the direct labor
and the corresponding applied factory overhead.
5. Job cost summary and the unit cost of production.

In a job order cost system, every customer’s order is called a job order or a batch if such is intended for
stock in the finished goods warehouse for retail customers. Each order should be differentiated for each
other. This is done through a different cost sheet for each job or batch..

Cost accumulation in job order costing

Companies using job order costing accept jobs for different products from different customers. In this
case, the total cost of each job and eventually the unit cost of the items in each job would be difficult to
determine if there is no system of tracking them. Thus, the company uses the job cost sheet for this
purpose

The Job Order cost sheets serve as subsidiary records for the different job orders. The control account in
the general ledger, which is the Work-in-process account is supported by the job orders that are still
outstanding or are still in process. Every debit or credit entry in the control account is also entered in the
job cost sheets accordingly. Thus, the balance of the Work in Process control account in the general
ledger should be equal to the total of the balances of the job order cost sheets and the ending Work in
Process inventory should be equal to the total of the cost sheets of the unfinished jobs.

Job Cost Sheet Details

Elegant Furniture, Inc. Is engaged in the manufacture of customized furniture. The production costs of
each customer’s order are accumulated using the job order cost sheet. Job Order Cost sheet no. 275 is
for the order of My ABC Store for 180 units of office tables. Which should be produced according to the
specifications given by the customer.

There is no suggested format or design for a job order cost sheet Any company using job order cost
system may design its own cost sheet. What is important, just like in any other costing system, is that
every cost pertaining to a particular order is recorded and accumulated in their respective job order cost
sheets.

The company may also accept orders that are of the same design as the other orders but the order is for
a specific customer or the particular lot may be intended for stock for retail orders by individual
customers

The Job Costs Sheets as Subsidiary Ledgers:

In the following examples, it is shown that the job cost sheets serve as the subsidiary ledgers or
supporting records of the control accounts for Work-in-process inventory accounts in the General
Ledger. The total of the unfinished jobs should be of equal amounts to the Work-in process Inventory
accounts in the General Ledger.

Journal entries

For every raw material requisitioned, direct labor used and factory overhead applied for each job order,
the journal entries are as follows:

At the end of the period, the balance of the factory overhead control is either the over or under-applied
factory, which has to be closed. If the amount is immaterial, the entire amount is closed to cost of goods
sold. If the amount is material, it will have to be allocated betwee Work-in-process and Finished goods
inventories and cost of goods sold. As to what would constitute a material amount depends on the
policy of the company.

If the Factory overhead control account has a debit balance, there is an under application overhead.
Conversely, if it has a credit balance, there is an over-application of overhead.

The entry will be the reverse in case of a credit balance or an over- applied factory overhead meaning
that the Over-applied Overhead is debited and the Cost of Sales is credited.
The Forms used in a Job Order Cost System The forms used in the Job Order System are the following:

A Job Cost sheet. This is prepared for every job order. Stores Requisition Slip (SRS).

Every material requested from the raw materials warehouse must be supported by a properly
accomplished Stores Requisition Slip. A journal entry is prepared for the SRS and every SRS must be
recorded in the corresponding job cost sheet and the applicable inventory records. This is supposed to

Done by every worker on a particular job. At the end of every payroll period, a journal entry is prepared
and the c. Job tickets. Job tickets are recorded in the corresponding job order cost sheet.

Be a record of the work

a. Job order cost sheet. Samples of the Job Cost Sheet have been given in the early part of this
book. It must be emphasized that there is no specific or suggested format of the form. What is
important is that all the costs pertaining to a job order

Forms in use

Are captured and correctly recorded.

b. Materials requisition form.. Materials requisition form has been illustrated and

Shown on the chapter in accounting for raw materials. This form is used in any kind of cost system. The
form servers as a source document not only in charging to production but also in recording on the raw
material stock cards. C. Job tickets. The sample form was shown on the chapter on accounting for labor.

The form is no longer popularly used

Accounting for Production Losses and Scraps in Job Order Cost System The losses that occur in
production are due to either of the following:

1. Over-usage of materials. This happens when more materials than what should be used are
actually consumed for the job order. This is due to simply a mistake in production as a result of
poor control.
2. Reworks or defective units. This happens when workers are not properly trained and there is
laxity in supervision of workers.

Losses that are directly identified with a particular job order are automatically charged to the job order
as materials requisitions or job tickets are accomplished. Accordingly, this results to a higher unit cost of
the items covered in the job Losses that are not identified with a particular job order are allocated
among the jobs worked on during the period Scraps or the left-overs of the jobs are normally charged to
Miscellaneous income if the amount is not substantial. Otherwise, the amount of scraps is credited to
Cost of goods sold.

Whether the proceeds from scraps is credited to Cost of goods sold or to Miscellaneous income, the
over-all effect will be the same.
Accounting for reworks

Rework is making good a defective item. A defective item is a finished unit that did not meet the
company’s quality standards or the specifications of a customer. After rewo defective item loses its
defects and become acceptable as a good unit.

Normally, in a job order costing system, defective units can be traced to a specific job. In such case, the
cost of rework is charged to that job making the unit cost change below is a comparison of job with
rework and without rework.

In case the cost of rework cannot be traced to a specific bob, the cost shall be charged to Manufacturing
overhead control account or to be treated as a separate job and to be allocated to the different jobs

Example:

Modern Furniture Inc. Employs the job order costing system and applies overhead based on a pre-
determined rate of P28 per direct labor hours. It has Job Order No. 125 for 250 cabinets which used up
500 labor hours and materials and labor of P242,500 and P41,100 respectively. Including all the other
jobs, the total direct labor hours used were 5,250 hours The company treats the rework as a separate
job to be allocated later to all the jobs. During the month, rework cost amounted to P10,800. Following
is a comparison of cost of Job Order No, 125, without rework and with share on the cost of rework.

Accounting for proceeds from scrap

Scraps are excess materials which cannot serve the purpose or use the materials were originally
intended for. They can, however be used by other parties for another purpose. Thus, very often, they
can still be sold.

The accounting for scraps is very much like that of accounting for reworks. The difference, however is
that the treatment is the opposite. While the cost of rework is an additional cost. The proceeds from
scraps or spoiled goods is a reduction to cost.

The accounting, however, depends on the time of occurrence, its amount and whether or not it is
attributable to a specific job.

When the amount of proceeds from scrap is of no significant amount, the easiest way to take it up in the
record it is to credit it to Miscellaneous income with the following entry.

The item is presented in the income statement among the other income items.

When the scrap is of material amount and is sold immediately during the time it occurred, the entry will
depend on whether or not it is attributable to a particular job. When it can be Attributed to a particular
job order, the entry is as follows:
It will be recorded as a deduction from the cost of the specific job as a parenthetical entry in The column
of raw materials When the scrap cannot be identified with a specific job, the proceeds will be credited to
the Manufacturing Overhead Control to reduce the total production costs through the following entry.

There are times, however, when the scraps are of material amount and takes some time to # be sold.
They have to be temporarily stored in the warehouse or other storage area. The accounting treatment
depends also on whether or not the scraps are identified with a specific job. In either case, the scraps
shall be temporarily debited to an inventory account and the credit account depends on whether or not
the scrap is identified with a specific job.

If the scrap is identified with a specific job, the entry will be a credit to Work in Process as a deduction to
the cost of the particular job. It is to be entered also in the job cost sheet as deduction from the cost of
raw materials. The entry is as follows:

Upon sale, the entry is the same as in the previous one.

At times, the scraps may be sold at more or less than the amount originally recorded in the inventory. In
such case, the difference s debited or credited to the Work in process inventory account and recorded
accordingly to the corresponding job order cost sheet if the scrap is attributed to a specific job order.
Otherwise, the debit or credit will be to the Manufacturing Overhead Control.

To simplify the accounting process, there is no need for an accounting entry if such was immediately
used in production. There is no need to debit it and credit it later.

Waste is the amount of raw materials that are left over in the production process. They are of usually no
value. Thus, they are just disregarded. If, however, they are sold for an immaterial amount, the simplest
way to treat the proceeds is just to credit it to miscellaneous income

Accounting for spoilage

Spoiled units are those that did not meet the company's quality standards. They cannot be reprocessed
and turned into good units either because they can no longer be corrected of correcting them will be
more costly.. They are usually sold as second grade items at a price very much less that the intended
selling price for the good units.

When the spoilage is attributed to a specific job, the job identified will shoulder the cost of spoilage less
the value that may be realized from the sale of the spoiled goods. For example, the job is for 200 units
and the total cost is for P490,600. Five spoiled units were found but each unit can still be sold for
P1,517. The loss from the sale of the spoiled units shall be charged to the job order itself with the
following entry:

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