Chapter 3

Job , batch and contract

costing methods
 Cost Accounting Systems

 Cost Accounting involves the measuring,

recording, and reporting of product costs.
 A cost accounting system consists of manu-
facturing cost accounts that are fully inte-
grated into the general ledger of a company.
 Cost Accounting Systems
 An important feature of a cost accounting system is the use
of a perpetual inventory system that provides information
immediately on the cost of a product.
 Costing methods are designed to match the production
process of products manufactured or services provided.
There are two basics types of cost accounting systems:
– a job order cost system, and
– a process cost system.
 Job Order Cost System
 Under a job order cost system, costs are assigned to each
job or batch of goods.
 An important feature of job order costing is that each job
(or batch) has its own distinguishing characteristics.
 The objective of job order costing is to calculate the cost
per job, rather than for a time period.
 Features of Job Costing
 Based on customer’s own specifications
 Production for customer order not for maintaining stock
 Products manufactured are distinguishable
 Every job can be identified clearly
 Cost is for the job and not related to the unit of production
 Every job is charged with its own cost.
 WIP is the number of incomplete jobs.
 Separate job numbers are allotted to each job.
 A separate cost record is maintained for each job from the time pro-
duction begins till it is complete.
 Job is usually carried out in the factory premises
 Features Of Job Order Costing

 The production is generally against customer’s order but

not for stock.
 Each job has its own characteristics and needs special
treatments.
 There is no uniformaty in the flow of the production
from department to department.
 Each job is treated as a cost unit under the method of
costing.
 Con,t
 Each job is distinctively identified by a production
order throughout the production stage.
 The cost of production of every job is ascertained
after the completion of job.
 The work-in-progress differs from period to pe-
riod according to the number of jobs in hand.
 Examples- Job Costing

 Special orders made for printing press

 Repair workshops
 Plumbing works
 Furniture on customer’s special requirements
 Automobile repairs
 General engineering work
 Printing Press,
 Batch Costing

 A form of job costing specific whereby identical units are

manufactured in batches.
 Each batch of similar units is distinct and separately identi-
fiable.
 The batch is considered as a job and treated as a cost unit.
 Cost per unit in the batch is computed by dividing the batch
cost by the number of good completed units.
 Features Of Batch Costing

 Each Batch is treated as a cost unit.

 All costs are accumulated and ascertained for each batch.
 A separate Batch Cost sheet is used for each batch and is assigned a
certain number.
 The cost per unit is ascertained by dividing the total cost of each
batch by the number of items produced in that batch.
 Batch Costing is applied in those industries where the similar articles
are produced in definite batches for internal consumption or for sale
to customers.
 Examples of Batch Costing

 Production of engineering parts/components

 Manufacture of footwear.
 Manufacture of toys.
 Manufacture of clothing.
 Manufacture of food items.
 Readymade Garments Industry.
 Pharmaceutical Industry.
 Contract costing
 Contract costing—a special type of job costing which is site based
and is over a relatively longer duration.
 Contract costing is that form of specific order costing which applies
where work is undertaken to customer's special requirements and
each order is of long-term duration.“ Contract costing is applicable
in:
 Building construction
 Road construction
 Bridge construction
 Features of Contract Costing

 Contracts are generally of large size and, therefore, a contractor

usually carries out a small number of contracts at a particular point
of time.
 A contract generally takes more than one year to complete,
 Work on contracts is carried out at the site of contracts and not in
factory premises.
 Each contract undertaken is treated as a cost unit.
 A separate contract account is prepared for each contract.
 Nearly all labor cost will be direct.
 Cost Accounting Systems

 Cost accounting systems differ widely from com-

pany to company. A company may use both types
of cost systems.
 The objective of both systems is to provide unit
cost information for product pricing, cost control,
inventory valuation, and financial statement pre-
sentation.
 Job Order Cost Flow
 The flow of costs (direct materials, direct labor, and manu-
facturing overhead) in job order cost accounting parallels
the physical flow of the materials as they are converted
into finished goods.
 As jobs are worked on, manufacturing costs are assigned to the
Work in Process Inventory account. When a job is completed, the
cost of the job is transferred to Finished Goods Inventory. When
the goods are sold, their cost is transferred to Cost of Goods Sold.
 General Approach to job or-
der costing system
 Seven-step procedure to assign actual costs to individual jobs. This
procedure applies equally to job costing in manufacturing, merchan-
dising, and service sections.
Step 1. Identify the chosen cost object(s)
Step 2. Identify the direct costs of the job.
Step 3. Select the cost-allocation Base(s) to use for allocating indirect
costs to the job
Step 4. Identify the indirect costs associated with the cost object
Step 5. Compute the rate per unit of each cost – allocation base used to
allocate indirect costs to the job.
 Con,t

Step 6. Compute the indirect costs allocated to the job.

Step 7- Compute the total costs of the job by adding all direct and in-
direct costs assigned to it.
Ex. Assume AB. Company estimated that the yearly manufacturing
over head cost to be Br. 80,000 and its machine hours to be operated
for the year is 4,000 hours. The machine hours is selected as an al-
location base (cost driver) for over head costs. Suppose the com-
pany has operated the following machine hours on each job during
the year.
 Con,t
 Job Machine hours operated
A ………………………….20 hours
B …………………………30 hours
C …………………………..40 hours
Required:-
a. Compute the predetermined over head rate.
b. Determine the manufacturing over head applied
(allocated) to each job.
c. Present the necessary journal entry to apply
manufacturing over head to production.
 Flow of Costs in Job Order
Cost Accounting
Manufacturing Work in Process Finished Goods Cost of Goods
Costs Inventory Inventory Sold

Materials

Labor Assigned to Completed Sold

Overhead
 Job Order Cost Flow
There are 2 major steps in the flow of costs:
– accumulating the manufacturing costs incurred
and
– assigning the accumulated costs to the work
done.
 Manufacturing costs incurred are accumulated in
entries by debits to Raw Materials Inventory, Fac-
tory Labor, and Manufacturing Overhead.
 The remaining entries pertain to the assignment of
manufacturing costs incurred.
 Job Order Cost Accounting
System
Flow of Costs
R a w M a te ria ls In v e n to ry W o r k in P r o c e s s In v e n to r y F in is h e d G o o d s In v e n to ry
8
(1 ) 4 2 ,0 0 0 (4 ) 3 0 ,0 0 0 4 (4 ) 2 4 ,0 0 0 (7 ) 3 9 ,0 0 0 7 (7 ) 3 9 ,0 0 0 (8 ) 3 9 ,0 0 0
B a l. 1 2 ,0 0 0 (5 ) 2 8 ,0 0 0
(6 ) 2 2 ,4 0 0
B a l. 3 5 ,4 0 0

F a c to ry L a b o r C o s t o f G o o d s S o ld
(2 ) 3 2 ,0 0 0 (5 ) 3 2 ,0 0 0 5 (8) 39,000

Key to Entries:
Accum ulation Assignm ent
M a n u fa c tu r in g O v e r h e a d 1. Purchase raw m aterials 4. R aw m aterials are used
2. Incur factory labor 5. Factory labor is used
(3 ) 1 3 ,8 0 0 (6 ) 2 2 ,4 0 0 6
3. Incur m anufacuring 6. O verhead is applied
(4 ) 6 ,0 0 0 overhead 7. C om pleted goods are
(5 ) 4 ,0 0 0 recognized
8. C ost of goods sold is
B a l. 1 ,4 0 0 recognized
 Accumulating Manufactur-
ing Costs
 In a job order cost system, manufacturing costs are
recorded in the period in which they are incurred.
 No effort is made at this point to associate the cost of ma-
terials with specific jobs or orders.
 The costs of raw materials purchased are debited to Raw
Materials Inventory when materials are received.
 Wallace Manufacturing Company, which makes tools and dies,
purchases handles and 800 modules for a total cost of $42,000.
Date Account Titles and Explanation Debit Credit
(1)
Jan. 4 Raw Materials Inventory 42,000
Accounts Payable 42,000
(Purchase of raw materials on account)
 Materials Inventory Card
Raw Materials Inventory is a control account. The sub-
sidiary ledger consists of individual records for each item of
raw materials in the form of
–mechanically or manually prepared accounts (or
cards) or
–computer data files.
The inventory card for Stock No. AA2746 following the pur-
chase is shown below.
Item: Handles Part No: AA2746
Receipts Issues Balance
Date Units Cost Total Units Cost Total Units Cost Total
1/4 2,000 $5 $10,000 2,000 $5 $10,000
 Accumulating Manufactur-
ing Costs
 In a manufacturing company, the cost of factory labor consists of
– gross earnings of factory workers,
– employer payroll taxes on such earnings, and
– fringe benefits incurred by the employer.
 Labor costs are debited to Factory Labor when they are incurred.
 Wallace Manufacturing incurs $32,000 of factory labor costs, of
which $27,000 relates to wages payable and $5,000 relates to payroll
taxes payable in January. The entry is:

Date Account Titles and Explanation Debit Credit

(2)
Jan. 31 Factory Labor 32,000
Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000
(To record factory labor costs)
 Accumulating Manufactur-
ing Costs
 The accumulation of overhead costs may be recognized daily,
as in the case of machinery repairs and the use of indirect mate-
rials and indirect labor.
 Overhead costs may also be recorded periodically through ad-
justing entries, as in the case of property taxes, depreciation,
and insurance.
 A summary entry for overhead in Wallace Manufacturing Company
is:
Date Account Titles and Explanation Debit Credit
(3)
Jan. 31 Manufacturing Overhead 13,80
Utilities Payable 0 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated Depreciation 3,000
Property Taxes Payable 1,400
(To record overhead costs)
 Assigning Manufacturing
Costs to Work in Process
 Assigning manufacturing costs to Work in Process results
in debits to Work in Process Inventory and credits to Raw
Materials Inventory, Factory Labor, and Manufacturing
Overhead.
 Journal entries for the assignment of costs to work in
process are usually made and posted monthly.
 An indispensable accounting record used in assigning costs
to jobs is the job cost sheet.
 Job Cost Sheet
A job cost sheet is a form used to record the costs chargeable to a
specific job and to determine the total and unit cost of the completed
job. Postings to job cost sheets are made daily.

Job Cost Sheet

Job No. _________________________________ Quantity ________________________________
Item ___________________________________ Date Requested __________________________
For ____________________________________ Date Completed __________________________

Direct Direct Manufacturing

Date Materials Labor Overhead

Cost of completed job

Direct materials $
Direct labor
Manufacturing overhead
Total cost $
Unit cost (total dollars ÷ quantity) $
 Job Cost Sheet

 A separate job cost sheet is kept for each job. Job

cost sheets constitute the subsidiary ledger for the
Work in Process Inventory account.
 Each entry to Work in Process Inventory must be
accompanied by a corresponding posting to one or
more job cost sheets.
 Materials Journalizing
and Posting
 Requisitions for direct materials are posted daily to the individual
job cost sheets. Periodically, the requisitions are sorted, totaled, and
journalized.
 If $24,000 of direct materials and $6,000 of indirect materials are
used in Wallace Manufacturing in January, the entry is a shown be-
low.
Date Account Titles and Explanation Debit Credit
(4)
Jan. 31 Work in Process Inventory 24,000
Manufacturing Overhead 6,000
Raw Materials Inventory 30,000
(To assign materials to jobs and overhead)
 Time Ticket
Labor costs are assigned to jobs on the basis of time tickets. The
time ticket should indicate the employee, the hours worked, the ac-
count and job to be charged, and the total labor cost.

Wallace Manufacturing Company

Time Ticket

Date: 1/6/99
Employee John Nash Employee No. 124
Charge to: Work in Process Job No. 101

Time Hourly Total

Start Stop Total Hours Rate Cost
0800 1200 4 10.00 40.00

Approved by Costed by
 Factory Labor Journalizing
and Posting
 Just as with Materials, direct costs are debited to Work in Process
and indirect costs are debited to Manufacturing Overhead.

 If the total factory labor cost incurred of $32,000 consists of $28,000

of direct labor and $4,000 of indirect labor, the entry is as shown
below.

Date Account Titles and Explanation Debit Credit

(5)
Jan. 31 Work in Process Inventory 28,000
Manufacturing Overhead 4,000
Factory Labor 32,000
(To assign labor to jobs and overhead)
 Assigning Manufacturing
Costs to Work in Process

 Manufacturing Overhead costs are assigned to

work in process and to specific jobs on an esti-
mated basis through the use of a predetermined
overhead rate.
 Predetermined
Overhead Rate
 The predetermined overhead rate is established at the
beginning of the year and is based on the relationship be-
tween estimated annual overhead costs and expected an-
nual operating activity, expressed in terms of a common
activity base.
 The activity base may be stated in terms of direct labor costs, direct
labor hours, machine hours, or any other measure that will provide
an equitable basis for applying overhead costs to jobs.
 Predetermined
Overhead Rate
The formula to compute a predetermined overhead
rate is shown below.

Estimated Annual
Overhead Costs ÷ Expected Annual
Operating Activity = Predetermined
Overhead Rate

A predetermined overhead rate is used to assign costs because

overhead costs are not incurred uniformly each month, and not all
actual overhead invoices are received at the end of the month.
Therefore, using a predetermined overhead rate enables a cost to be
determined for the job immediately.
 Using Predetermined Over-
head Rates
Work in Process

Activity Base Predetermined is as-

X Overhead Rate signed to

Job 1 Job 2 Job 3

 Manufacturing Overhead
Journalizing
 At Wallace Manufacturing Company, direct labor cost is the activ-
ity base. Annual overhead costs are expected to be $280,000, and
$350,000 of direct labor costs are anticipated.
 Thus, the overhead rate is 80% ($280,000 ÷ $350,000).
 Overhead applied for January is $22,400 ($28,000 X 80%), and the
application is recorded through the entry shown below.

Date Account Titles and Explanation Debit Credit

(6)
Jan. 31 Work in Process Inventory 22,400
Manufacturing Overhead 22,400
(To assign overhead to jobs)
 Proof of Job Cost Sheets to
Work in Process Inventory
 At the end of each month, the balance in Work in Process Inventory
should equal the sum of the costs shown on the job cost sheets of un-
finished jobs. Assuming that all jobs are unfinished, proof of the
agreement of the control and subsidiary accounts in Wallace Manu-
facturing Company is shown below.

Work in Process Inventory Job Cost Sheets

Jan. 31 24,000 No. 101 $ 39,000
Jan. 31 28,000 102 23,200
Jan. 31 22,400 103 12,200
$ 74,400 $ 74,400
 Assigning Manufacturing
Costs to Finished Goods
 When a job is finished, an entry is made to transfer its to-
tal cost from Work in Process Inventory to Finished Goods
Inventory.
 When a job is completed, the manufacturing costs are
summarized and the lower portion of the applicable job
cost sheet is completed.
 If Job No. 101 is completed on January 31, the job cost
sheet will be as shown to the right.
 Completed Job Cost Sheet
When a job is
completed, the Job Cost Sheet
Job No. _______________101_______________ Quantity _________________1,000__________
manufacturing Item ___________Magnetic Sensors_________ Date Requested ________February 5________
For ____________Tanner Company_________ Date Completed ________January 31________
costs are summa-
rized and the Date
Direct
Materials
Direct
Labor
Manufacturing
Overhead
lower portion of 1/8 $ 1,000
1/10 $ 9,000 $ 7,200
the applicable 1/12 7,000
job cost sheet is 1/26
1/31
4,000
6,000 4,800
completed. $ 12,000 $ 15,000 $ 12,000

 If Job No. 101 Cost of completed job

Direct materials $ 12,000
is completed on Direct labor 15,000
January 31, the Manufacturing overhead 12,000
Total cost $ 39,000
job cost sheet Unit cost ($39,000 ÷ 1,000) $ 39.00
will be as shown
to the right.
 Journalizing Finished
Goods
The entry to transfer the cost of the completed job from
Work in Process Inventory to Finished Goods Inventory for
Wallace Manufacturing Company is:
Date Account Titles and Explanation Debit Credit

(7)

Jan. 31 Finished Goods Inventory 39,000

Work in Process Inventory 39,000

(To record completion of Job No. 101)

 Journalizing
Cost of Goods Sold
 On January 31 Wallace Manufacturing Company sells Job
No. 101 (costing $39,000) for $50,000 on account. The
entries are:
Date Account Titles and Explanation Debit Credit
(8)
Jan. 31 Accounts Receivable 50,000
Sales 50,000
(To record sale of Job No. 101)

31 Cost of Goods Sold 39,000

Finished Goods Inventory 39,000
(To record cost of Job No. 101)
 Job Order Cost System
Flow Of Costs
Flow of Costs

R a w M a te r ia ls In v e n to r y W o r k in P r o c e s s In v e n to r y F in is h e d G o o d s In v e n to ry
(7 ) 3 9 ,0 0 0 (8 ) 3 9 ,0 0 0 8
(1 ) 4 2 ,0 0 0 (4 ) 3 0 ,0 0 0 4 (4 ) 2 4 ,0 0 0 (7 ) 3 9 ,0 0 0 7
B a l. 1 2 ,0 0 0 (5 ) 2 8 ,0 0 0
(6 ) 2 2 ,4 0 0
B a l. 3 5 ,4 0 0

F a c to ry L a b o r C o s t o f G o o d s S o ld
(2 ) 3 2 ,0 0 0 (5 ) 3 2 ,0 0 0 5 (8 ) 3 9 ,0 0 0
Key to Entries:
Accum ulation Assignm ent
1. Purchase raw m aterials 4. R aw m aterials are used
M a n u fa c tu r in g O v e r h e a d 2. Incur factory labor 5. Factory labor is used
(3 ) 1 3 ,8 0 0 (6 ) 2 2 ,4 0 0 6 3. Incur m anufacuring 6. O verhead is applied
overhead 7. C om pleted goods are
(4 ) 6 ,0 0 0 recognized
(5 ) 4 ,0 0 0 8. C ost of goods sold is
B a l. 1 ,4 0 0 recognized
 Job Order Cost System
Flow Of Documents
Flow of Documents
Materials Requi-
sition Slips
The job cost sheet summarizes
the cost of jobs completed and
not completed at the end of the
accounting period. Jobs com-
pleted are transferred to Fin-
ished Goods to await sale.

Cost of Jobs
Jobs Are
Labor Time is Summa- Job Cost
Charged
Tickets rized on a Sheet
Through

Predetermined
Overhead Rate
 Cost of Goods Manufac-
tured
At the end of a period, financial statements are prepared that
present aggregate data on all jobs manufactured and sold.
The Cost of Goods Manufactured Schedule in job order
costing is prepared the same as in Chapter 1 except that
manufacturing overhead applied, rather than actual
overhead costs is added to direct materials and direct la-
bor in determining total manufacturing costs.
 Cost Of Goods Manufac-
tured Schedule
 A condensed Cost of Goods Manufactured Schedule for Wallace
Manufacturing Company is shown below.
 Note that the cost of goods manufactured ($39,000) agrees with
the amount transferred from Work in Process to Finished
Goods.
WALLACE MANUFACTURING COMPANY
Cost of Goods Manufactured Schedule
For the Month Ended January 31, 1999

Work in process inventory, January 1 $ –0–

Direct materials used $ 24,000
Direct labor 28,000
Manufacturing overhead applied 22,400
Total manufacturing costs 74,400
Total cost of work in process 74,400
Less: Work in process inventory, January 31 35,400
Cost of goods manufactured $ 39,000
 Balance Sheet and
Income Statement
 The Income Statement and Balance Sheet in job order cost-
ing are the same as those in Chapter 1.
 As an example, the partial Income Statement for Wallace Man-
ufacturing Company is shown below.

WALLACE MANUFACTURING COMPANY

Income Statement
For the Month Ended January 31, 1999

Sales $ 50,000
Less: Cost of goods sold
Finished goods inventory, January 1 $ –0–
Cost of goods manufactured 39,000
Cost of goods available for sale 39,000
Finished goods inventory, January 31 –0–
Cost of goods sold 39,000
Gross profit $ 11,000
 Under- or Overapplied
Manufacturing Overhead
 When Manufacturing Overhead
has a debit balance, overhead is
Manufacturing Overhead
said to be underapplied. Under-
applied overhead means that the
overhead applied to Work in
Process is less than the overhead
Actual Applied
actually incurred. (costs in- (costs as-
 When Manufacturing Overhead curred) signed)
has a credit balance, overhead is
said to be overapplied. Overap-
plied overhead means that the
overhead applied to Work in
Process is greater than the over-
head actually incurred.
 Under- or Overapplied
Manufacturing Overhead
 The existence of under- or overapplied overhead at the end
of a month (or other interim period) usually does not re-
quire corrective action by management. It is reported on
the interim Balance Sheet as follows:
– underapplied overhead is a prepaid expense (current
asset), and
– overapplied overhead is unearned revenue (current lia-
bility).
 At the end of the year, there is no further opportunity for
offsetting events to occur so the Manufacturing Overhead
balance must be eliminated with an adjusting entry.
 Elimination of Under- or Overapplied
Manufacturing Overhead
 Under- or overapplied overhead is usually considered to be an
adjustment to cost of goods sold. Thus, underapplied over-
head is debited to Cost of Goods Sold, and overapplied over-
head is credited to Cost of Goods Sold.
 Wallace Manufacturing Company has a $2,500 credit balance in
Manufacturing Overhead at December 31. The adjusting entry for
the overapplied overhead is shown below. After this entry is
posted, Manufacturing Overhead will have a zero balance.

Date Account Titles and Explanation Debit Credit

Dec. 31 Manufacturing Overhead 2,500
Cost of Goods Sold 2,500
(To transfer overapplied overhead to
cost of goods sold)
 Example
 ABC uses job-order costing. It applies overhead cost to jobs on the
basis of direct labor-hours. The following transactions took place
during the year:
a) $300,000 of raw materials were purchased on account
b) Raw materials were issued into production: $90,000 direct materials
and $40,000 indirect materials
c) Labor costs incurred: $40,000 direct, $130,000 indirect, sales com-
missions $50,000, administrative salaries $100,000
d) Utility costs for the factory were $60,000
e) Depreciation recorded was $300,000 (70% related to factory; 30%
related to administrative offices)
f) Manufacturing overhead of $715,000 was applied to production. Ac-
tual direct labor-hours incurred were 22,000.
 Example
g) Units costing $300,000 were completed and transferred
into the finished goods inventory.
h) Goods with a cost of $150,000 were sold on account for
$200,000.
i) Closed the under/over-applied overhead for the year.

Present the necessary journal entry to record the

above transactions.