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Managerial Accounting
Tools for Business Decision-Making

Sixth Canadian Edition
Weygandt Kimmel Aly
Chapter 3
Job-Order Cost Accounting
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Copyright ©2021 John Wiley & Sons Canada, Ltd.

Learning Objectives
1. Explain the characteristics and purposes of cost accounting.
2. Describe the flow of costs in a job-order cost accounting
system.
3. Use a job cost sheet to assign costs to work in process.
4. Demonstrate how to determine and use the predetermined
overhead rate.
5. Prepare entries for manufacturing and service jobs completed
and sold.
6. Distinguish between under- and over-applied manufacturing
overhead.
Copyright ©2021 John Wiley & Sons Canada, Ltd. 3

Cost Accounting Systems (1 of 2)
Cost accounting Cost accounting system

Measuring, recording, and reporting of - Fully integrated manufacturing/product
product costs cost accounts within the company’s
general ledger
- Uses a perpetual inventory system

Cost Accounting Systems (2 of 2)
There are two basic types of cost accounting systems:
• Job-order cost system
o Each job or batch is assigned its individual
manufacturing costs
• Process cost system
o Each process within the manufacturing process is
assigned its costs
o With each individual unit then assigned an average cost

Cost Accounting Systems: Job Order Cost
System (1 of 3)
Costs are assigned to each Requires that each job or batch

individual job or batch can be easily identified
To calculate the cost per

The objective job/batch
Job – Netflix making a new movie, building a house, law firm client work
Batch – printing 100 labels for a new baker to label their cookies

Cost Accounting Systems: Job Order
Cost System (2 of 3)
• At the end of a given accounting period job costs are
held in:
o Work in process inventory
o Jobs that are not complete
o Finished goods inventory
o Jobs that are complete but not yet sold

Cost Accounting Systems: Job Order
Cost System (3 of 3)
XYZ Printing Job-Order Cost System
Two Jobs: Wedding Invitations and Menus

Cost Accounting Systems: Process Cost
System (1 of 2)
Used when a large volume Cereal

of similar products are Some cars
manufactured Paint
Costs are accumulated over Individual unit or batch costs

a specific time period (e.g. are calculated based on total
week, month) cost and total production

Cost Accounting Systems: Process Cost
System (2 of 2)
Process cost system

Let’s Review 1
Which of the following would most likely use job order
costing?
a) an oil refinery.
b) a paper company.
c) a custom-home builder.
d) a bottled water company.

Job-Order Cost Flows (1 of 2)
The flow of the manufacturing costs
Mirror the physical flow of inputs into finished goods
• All manufacturing costs are assigned to Work in Process
Inventory as the costs are incurred
• Cost of completed jobs is transferred to Finished Goods
Inventory
• When units are sold, cost is transferred to Cost of Goods Sold

Job-Order Cost Flows (2 of 2)

Two Major Steps in Flows of Costs
1. Accumulate all manufacturing costs as incurred
• Raw materials
• Factory Labour
• Manufacturing Overhead
2. Assign costs to each specific job or unit

Accumulating Manufacturing Costs: Raw
Materials Costs
• Raw materials are debited to Raw Materials Inventory

when purchased
DR Raw Materials Inventory

CR A/P or Cash
o Raw Material Inventory = direct + indirect raw materials

• Can choose to separate direct RM from indirect RM by
having two separate inventory accounts

Accumulating Manufacturing Costs: Raw
Materials Costs (continued)
Example: On January 4, Wallace Manufacturing purchased:
• 2,000 handles on account at $5/unit ($10,000)
• 800 modules at $40/unit ($32,000)
• Total cost = $42,000

Accumulating Manufacturing Costs:
Factory Labour Costs
• Factory labour includes both direct and indirect labour costs
a. Gross earnings or wages (of factory workers)
b. Employer portion of payroll taxes (e.g. CPP and EI)
c. Fringe benefit costs (e.g. insurance, pension, vacation) incurred
by the employer
• All costs are debited to Factory Labour as incurred
DR Factory Labour
CR Payroll Liabilities
• Factory Labour acts as a clearing account
• Should have a zero balance at the end of the accounting period

Manufacturing Overhead Costs
• Manufacturing overhead:
• All manufacturing/product costs that are not direct
costs
• Costs will be accumulated in the Manufacturing
Overhead account
o A clearing account
• Should have a zero balance at the end of the accounting period
• Costs assigned to Work in Process as work is done on each unit/batch

Manufacturing Overhead Costs
• We DR Manufacturing OH and CR the related entry
DR MOH
CR Liabilities (e.g. utilities payable, prop tax payable, A/P)
CR Prepaids (e.g. prepaid insurance)
CR Accumulated depreciation

Assigning Manufacturing Costs to Work
in Process (1 of 2)
• Manufacturing costs are assigned to WIP with:
o Debits to Work in Process Inventory (increasing)
o Credits to (decreasing):
• Raw Materials Inventory
• Factory Labour
• Manufacturing Overhead

in Process (2 of 2)
DATE ACCOUNT DR. CR.
Work in Process Inventory xx
Manufacturing Overhead xx
Raw Materials Inventory xx
To assign direct and indirect materials used in production

Factory Labour xx
To assign direct and indirect labour used in production

Alternate Entries
To assign direct materials used in production

Factory Labour xx
To assign direct labour used in production
To allocate indirect materials used in production
Factory Labour xx
To allocate indirect labour used in production
in Process and Specific Jobs (1 of 2)
As work is completed, and costs are accumulated in Work
in Process Inventory:
• Simultaneous entries are made to the job cost sheet
o Used to record the costs of each specific job
o Used to determine the total and unit costs of a
completed job
o Postings to job cost sheets are made daily
• The total of all job cost sheets must agree (balance) to
Work in Process Inventory
in Process and Specific Jobs (2 of 2)
A sample job cost sheet - maintained either manually,
electronically, or combination.
Job cost sheet

Assigning Manufacturing Costs to Work in
Process and Specific Jobs: Raw Materials
Cost (1 of 4)
• Raw materials assigned to a job as materials are issued
• Issued via materials requisition slip
o The authorization for issuing raw materials
o Direct materials issued/used are debited to Work in
Process Inventory
• And to the respective Job Cost Sheet
o Indirect materials issued/used are debited to
Manufacturing Overhead

Cost (2 of 4)
e.g. $1,000 of direct raw materials were issued to Job No.
101.
Materials requisition slip

Cost (3 of 4)

Work in Process Inventory 1,000
Raw Materials Inventory 1,000
To assign direct materials used in production for Job 101

Cost (4 of 4)
Next we update the job cost sheet

with the information

Assigning Manufacturing Costs to
Specific Jobs: Factory Labour Cost (1 of 2)
• WIP Inventory is debited for direct labour costs (increase)
o Factory Labour account is credited (decrease)
o Individual job cost sheets are updated with labour cost
information
• Manufacturing Overhead is debited with indirect labour
costs (increase)
o Factory Labour is credited
• Factory Labour is left with a zero balance

Specific Jobs: Factory Labour Cost (2 of 2)
Example: If the $32,000 total factory labour cost incurred
consists of $28,000 of direct labour and $4,000 of indirect
labour, the entry is:

Process and Specific Jobs: Factory Labour
Cost (1 of 3)
Costs are assigned to jobs based on time tickets prepared
when the work is performed
Time ticket
Cost (2 of 3)

Work in Process Inventory 40
Factory Labour 40
To assign direct labour used in production for Job 101

Cost (3 of 3)

Specific Jobs: Manufacturing Overhead
• MOH = production costs that are not prime costs
o i.e. not direct materials or direct labour
o Cannot be easily or economically assigned to specific
jobs based on actual costs incurred
• Assigned to work in process and to specific jobs by
using a Predetermined Overhead Rate (POR)

Assigning Manufacturing Costs to Work in Process:
Predetermined Overhead Rate (1 of 6)
• Based on the relationship between:
o Estimated annual overhead costs and expected annual
operating activity (i.e. cost driver)
• The operating activity base may be:
o Direct labour costs
o Direct labour hours
o Machine hours
o Any other activity that is an equitable base for applying
overhead costs to jobs

• Typically set at the beginning of the year
• May use a single, company-wide predetermined rate
• May use a different rate for each department
o Each department may have a different activity base
Predetermined Overhead Rate =
Estimated Annual Overhead Costs ÷ Estimated Annual Operating Activity

• POR used to assign overhead to different jobs in
process during the period
• Get timely information about the cost of a completed job
Using predetermined overhead rates

Example: At Wallace Mfg. direct labour (DL) cost is the chosen
activity base. Estimated annual costs:
Manufacturing Overhead costs $280,000
Direct labour costs $350,000
POR = Estimated Annual MOH Costs ÷ Estimated Annual Operating Activity
The POR is then $280,000 ÷ $350,000 = 80% of DL cost.

So for every $1.00 in DL cost incurred by a job, $1.00 x 80% (or
$0.80) in MOH will be applied to that job, and to WIP Inventory

Journal entry to recognize overhead applied to WIP:

To allocate manufacturing overhead
For each unit of the activity base, or cost driver used or

consumed, a ‘unit’ of manufacturing overhead is applied.

Wallace Manufacturing cont’d
The POR is $280,000 ÷ $350,000 = 80% of direct labour cost.
If DL costs were $28,000 in January, what is the MOH?
MOH = $22,400 ($28,000 X 80%) and is recorded through the

following entry:

Costing Systems (1 of 2)
• There are three (3) costing systems used to

recognize and accumulate product costs
1. Actual costing system
2. Normal costing system
3. Standard costing system (outside the scope of this
chapter)

Costing Systems (2 of 2)
Costs Actual Costing System Normal Costing System
Direct costs • actual direct raw • actual direct raw
Direct material material cost rate x the material cost rate x the
actual quantity of direct actual quantity of direct
material used material used
Direct labour • actual direct labour cost • actual direct labour cost
rate x the actual hours rate x the actual hours
used used
Indirect costs • actual factory overhead • predetermined factory
Factory overhead rate (s) x the actual overhead rate (s) x the
quantity used of the actual quantity used of
activity base (s) the activity base (s)
Time and accuracy • more accurate, but • less accurate, but more
untimely information timely information

Let’s Review 2
Sunburst Manufacturing uses a normal costing system. The
company has provided the following information:
Estimated manufacturing overhead $240,000
Actual manufacturing overhead $295,000
Estimated machine hours 25,000
Actual machine hours 25,500
What is the predetermined overhead rate that Sunburst would be using to apply
overhead?
a) $9.60 per machine hour
b) $9.41 per machine hour
c) $11.80 per machine hour
d) $11.57 per machine hour

Let’s Review 3
Which of the following is true about a normal costing
system?
a) Direct and indirect costs are allocated based on an
actual rate
b) Direct and indirect costs are allocated based on a
budgeted rate
c) Direct costs are applied using a budgeted rate, indirect
costs are allocated based on an actual rate
d) Direct costs are applied using an actual rate, indirect
costs are allocated using a budgeted rate

Assigning Costs to Finished Goods (1 of 3)
• When a job is completed:
• Job cost sheet is completed
• Unit cost may be determined
• The total cost of the job is transferred from Work in
Process Inventory to Finished Goods Inventory
o The Job Cost Sheet also moves from Work in Process Inventory to
Finished Goods Inventory
o The sum of all jobs in Finished Goods Inventory must equal the
total amount in the Finished Goods Inventory general ledger

• For Job 101 for Wallace Manufacturing the Total Cost of
$39,000 is transferred from Work in Process Inventory to
Finished Goods Inventory

Finished Goods record
Info is from the completed After sale occurs

job cost sheets

The entry for Wallace Manufacturing to transfer its total cost
to finished goods is:

Assigning Costs to Cost of Goods Sold
(1 of 2)
• The cost of each completed unit or job remains in
Finished Goods Inventory until it is sold
• Cost of goods sold is recognized when a sale occurs
o Assuming a perpetual inventory system is used

Assigning Costs to Cost of Goods Sold
(2 of 2)
Example:
On January 31 Wallace Manufacturing sells Job No. 101,
costing $39,000, for $50,000, on credit. The entries are:

Summary of Job-Order Cost Flows
Flow of costs in a job-order cost system

Flow of Documents
Materials
Requisition Slips
Job
Cost
Sheet
Predetermined Labour Time
Overhead Rate Tickets

Let’s Review 4
The cost of items finished and transferred from work in
process inventory to finished goods inventory is:
a) cost of goods sold.
b) work in process.
c) cost of goods manufactured.
d) materials inventory.

Job Order Costing for Service
Companies (1 of 2)
• Job order costing is applicable to service industries
• Even though they typically do not have Work in Process
Inventory or Finished Goods Inventory
o Service Contracts in Process and Completed Service Contracts replace these
accounts
• The cost of a service job must be determined for pricing
and decision purposes
• e.g. cost of completing a clients year-end financial
statements
o e.g. The cost of providing a cut and colour at a hair salon

Job Order Costing for Service
Companies (2 of 2)
• Direct labour hours can be traced to specific jobs or
contracts
• Similar to a manufacturing setting
• Overhead can be applied
• Direct labour hours or direct labour cost as activity base
• Job cost sheets can be adapted to fit a service
environment

Job Order Costing
Advantages Disadvantages
• More precise cost • Significant amount of
assignment than data entry
process costing • Accuracy of overhead
• Useful for unique allocation may vary
products
• Improves management
ability to control and
manage costs

Reporting Job Cost Data
• The cost of goods manufactured schedule now shows
manufacturing overhead applied
• Rather than actual overhead costs

Under-applied or Over-applied
Manufacturing Overhead (1 of 2)
• There will always be a difference between the actual
amount of manufacturing overhead costs incurred and the
amount of overhead applied
o Because applied overhead is based on estimated amounts
rather than actual amounts
• The difference between the actual total cost and the
amount applied is the Under-Applied or Over-Applied
overhead

Under-applied or Over-applied
Manufacturing Overhead (2 of 2)
• A debit balance in MOH means that overhead is under-applied.
o Overhead applied is less than overhead incurred.
• A credit balance in MOH means that overhead is over-applied.
o Overhead applied is greater than overhead incurred.

Cost of Goods Sold (COGS) Method
• Most common method for treating under/over applied
overhead
• Any under/over applied OH is adjusted through COGS
o Because all costs will eventually work their way through to COGS
• Under-applied overhead is debited to COGS
• Increases COGS, decreases MOH account
• Over-applied overhead is credited to COGS
• Reduces COGS, increases MOH account

Cost of Goods Sold Method
Cost of Goods Sold Method – Wallace Mfg.
23,800
The adjusting entry for the under-applied overhead is:

Proration Method (1 of 4)
• Pro-ration method:
• Under-applied or over-applied overhead is pro-rated
to Work in Process Inventory, Finished Goods
Inventory and Cost of Goods Sold
• This is based on the ending balance in each account
• The ending account balances will then equal the
actual costs incurred.
• Not as commonly used as the COGS method because
of the additional cost and effort.

Example: Wallace Mfg. has $10,000 of under-applied
overhead in Manufacturing Overhead at December 31.
The ending balances were:

Account Ending Balance Weighting
Work in Process $ 10,000 10 ÷ 100 = .10 First: determine the

Finished Goods 20,000 20 ÷ 100 = .20 ratio of each account’s
balance to the total of
COGS 70,000 70 ÷ 100 = .70 the three accounts
Total $100,000

Example:
Based on the ending balances, the amount of under applied
overhead to be adjusted to each account is:
Account Ending Balance Weighting Adjustment Amount

Work in Process $ 10,000 10 ÷ 100 = .10 $10,000 x .10 = $ 1,000
Finished Goods 20,000 20 ÷ 100 = .20 $10,000 x .20 = 2,000
COGS 70,000 70 ÷ 100 = .70 $10,000 x .70 = 7,000
Total $100,000 $10,000

Example:
The adjusting entry to close the account would be:

Let’s Review 5
Suppose a firm has under-applied overhead at year-
end. Which accounts are affected when using the
proration approach?
a) Cost of Goods Sold
b) Work in Process Inventory
c) Finished Goods Inventory
d) All of the above

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Managerial Accounting

Tools for Business Decision-Making

Job-Order Cost Accounting

Copyright ©2021 John Wiley & Sons Canada, Ltd.

Copyright ©2021 John Wiley & Sons Canada, Ltd. 3

Cost accounting Cost accounting system

Copyright ©2021 John Wiley & Sons Canada, Ltd. 4

Copyright ©2021 John Wiley & Sons Canada, Ltd. 5

Costs are assigned to each Requires that each job or batch

To calculate the cost per

Copyright ©2021 John Wiley & Sons Canada, Ltd. 6

Copyright ©2021 John Wiley & Sons Canada, Ltd. 7

Copyright ©2021 John Wiley & Sons Canada, Ltd. 8

Used when a large volume Cereal

Costs are accumulated over Individual unit or batch costs

Copyright ©2021 John Wiley & Sons Canada, Ltd. 9

Process cost system

Copyright ©2021 John Wiley & Sons Canada, Ltd. 11

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2. Assign costs to each specific job or unit

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• Raw materials are debited to Raw Materials Inventory

DR Raw Materials Inventory

o Raw Material Inventory = direct + indirect raw materials

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Work in Process Inventory xx

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Work in Process Inventory xx

Job cost sheet

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Materials requisition slip

DATE ACCOUNT DR. CR.

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Next we update the job cost sheet

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DATE ACCOUNT DR. CR.

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Predetermined Overhead Rate =

Estimated Annual Overhead Costs ÷ Estimated Annual Operating Activity

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Using predetermined overhead rates

POR = Estimated Annual MOH Costs ÷ Estimated Annual Operating Activity

The POR is then $280,000 ÷ $350,000 = 80% of DL cost.

Copyright ©2021 John Wiley & Sons Canada, Ltd. 39

DATE ACCOUNT DR. CR.

For each unit of the activity base, or cost driver used or

Copyright ©2021 John Wiley & Sons Canada, Ltd. 40