Job-Order Costing System

• Job-Order Costing Systems – a product-costing system in which costs are assigned to batches or job orders of production.

• Finished Product can be individually identified

Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

Many different jobs are worked on during each period. Products are manufactured to order. (customer satisfaction)

Unit costs are computed by job

Costs accumulated by using job cost sheet

Cost records must be maintained for each distinct product or job. (JOB ORDER SHEET)

Each job assigned number

Chapter 10

Types of Organisations Using Job Costing

ProcessCosting

Job-orderCosting

• A cost accounting system where costs are assigned to each job or batch of goods.

• Custom built factory

• Production of movie

• Batch of menus

• Audit engagement

Typical job order cost applications: Special-order printing Building construction

Also used in the service industry Hospitals Law firms

Comparison of Job-Order andProcess Costing

Job-Order Costing Process Costing

1. Wide variety of distinct 1. Homogeneous productsproducts

2. Cost accumulated by job 2. Costs accumulated byprocess or department

3. Unit cost computed by 3. Unit cost computed bydividing total job costs dividing process costs ofby units produced on that the period by the unitsjob produced in the period

BEAT

SOUTH

HIGH

Process or Process or job-order job-order costing?costing?

Process or Process or job-order job-order costing?costing?

Process

Process

Job order

Job order

Job order

Process

Job order

Exxon oil refinery

Coca Cola plant

Custom home builder

Shop for customizing vans

Television repair shop

Campbell soup plant

Advertising agency

Law firm Job order

Job Order Cost System

Two Jobs: Wedding Invitations and Menus

Each job has distinguishing characteristics and related costs.

Job #9501

Black ink $

Typesetting $

225

Invitations $225 Envelopes

$

Vellum stock $

Job #9502

Typesetting

Yellow Stock

Yellow stock

Lamination$50 Copies $

Illustration 2-1

$$

Colored Ink $

Illustration 3-2Illustration 3-2

Job 425 Job 426 Job 427 Total

Beginning balance $58,600 $51,300 $ 0 $109,900

Current costs:

Direct materials 4,800 3,600 23,500 31,900

Direct labor 6,000 9,000 10,000 25,000

Applied overhead 2,400 3,600 4,000 10,000Total $71,800 $67,500 $37,500 $176,800

This information is used to determine the total cost of goods manufactured.

Job-Order CostingJob-Order Costing

Sequence of Events in a Job-Order Costing System

Receive orders from customers

Schedulejobs

Ordermaterials

Begin production

Job Order Cost Flow

THE JOB

Traced directly to each job

Traced directly to each job

Applied to each

job using a

predetermined

rate

• Accumulating the manufacturing costs incurred– Raw materials inventory

– Factory Labor

– Manufacturing Overhead

• Assigning the accumulated costs to the work done

Two Major Steps in Cost Flow

Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as

work is performed.

Charge direct

material and direct labor

costs to each job as

work is performed.

Sequence of Events in a Job-Order Costing System

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Material Inventory RecordEach individual item of raw materials has a

card or record.

The sum of the balances of all these records should equal raw materials in the general ledger.

Item: Handles Part No: AA2746Receipts Issues Balance

Date Units Cost Total Units Cost Total Units Cost Total1/4 2,000 $5 $10,000 2,000 $5 $10,000

Apply overhead to each job using a predeter-mined

rate.

Apply overhead to each job using a predeter-mined

rate.

Sequence of Events in a Job-Order Costing System

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing OverheadManufacturing Overhead

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

Ideally, the allocation base is a cost driver that causes overhead.

Job Order Cost Accounting

Job-Order Cost Accounting

The primary document for tracking the costs

associated with a given job is the job

cost sheet.

Let’s investigate

Job-Order Cost SheetJob-Order Cost Sheet

• A job-cost sheet is a document used to

accumulate the cost for a specific job in a

job-cost system to determine the total and unit cost of the

completed job

• A job-cost sheet is a document used to

accumulate the cost for a specific job in a

job-cost system to determine the total and unit cost of the

completed job

Job Cost Sheet

Direct Materials

Direct Labor

Factory Overhead

July 1 100 lbs. @ $ 0.25 = $ 25

3 75 oz. @ $1.40 = 105July 1 3 hrs. @ $10.00 = $ 30

3 7 hrs @ $10.00 = 70

July 7 10 dlh x $2 = $ 20

Job-Order Cost Accounting

Job-Order Cost Accounting

Let’s see one

A materials requisition form is used to

authorize the use of materials on a job.

Materials Requisition Form

Will E. Delite

A document authorizing the issuance of raw materials from the store to production.

Materials Requisition Form

Will E. Delite

Type, quantity, and total cost of material charged to job A-143.

Cost of material is charged to job A-143.

The materials requisition form also serves as the source document for recording material usage in the accounting records.

Materials Requisition FormA document authorizing the issuance of raw

materials from the store to production.

Job-Order Cost Accounting

Job-Order Cost Accounting

Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee

Let’s see one

Employee Time TicketA document that indicates the employee, the hours

worked, the account and the job to be charged, and the total labor cost.

Employee Time TicketA document that indicates the employee, the hours

worked, the account and the job to be charged, and the total labor cost.

Job-Order Cost Accounting

Let’s summarize the document flow we have

been discussing in a job-order

costing system.

Job-Order CostingDocument Flow Summary

Job-Order CostingDocument Flow Summary

Job Cost Sheets

MaterialsRequisition

Direct materials

Indirect materials

Manufacturing Overhead Account

Materials usedmay be either

direct orindirect.

Materials Ledger CardsMaterials

Ledger CardsMaterials Ledger CardsMaterialsRequisitionThe materials requisition

indicates the cost of direct materialto charge tojobs and the cost of indirect materialindirect material to charge to overhead.

Job-Order CostingDocument Flow Summary

Job Cost Sheets

Employee Time Ticket

Manufacturing Overhead Account

Direct Labor

Indirect Labor

An employee’stime may be eitherdirect or indirect.

Employee time tickets indicate the cost of

direct laborto charge to

jobsand the cost

of indirect laborindirect labor to charge to overhead.

Job-Order CostingDocument Flow Summary

EmployeeTime Ticket

Job Cost Sheets

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

AppliedOverhead

WithPOHR

Manufacturing Overhead Account

Flow of CostsFlow of Costs

Accum ulation Assignm ent1. Purchase raw m aterials 4. Raw m aterials are used2. Incur factory labor 5. Factory labor is used3. Incur m anufacuring 6. O verhead is applied

overhead 7. Com pleted goods arerecognized

8. Cost of goods sold isrecognized

Key to Entries:

Factory Labor (2) 32,000 (5) 32,000

R a w M a t e r ia ls In v e n t o r y( 1 ) 4 2 ,0 0 0 ( 4 ) 3 0 ,0 0 0B a l . 1 2 ,0 0 0

M a n u f a c t u r i n g O v e r h e a d( 3 ) 1 3 , 8 0 0 ( 6 ) 2 2 , 4 0 0( 4 ) 6 , 0 0 0( 5 ) 4 , 0 0 0B a l . 1 , 4 0 0

F in is h e d G o o d s In v e n to r y( 7 ) 3 9 ,0 0 0 ( 8 ) 3 9 ,0 0 0

W o r k i n P r o c e s s I n v e n t o r y( 4 ) 2 4 , 0 0 0 ( 7 ) 3 9 , 0 0 0( 5 ) 2 8 , 0 0 0( 6 ) 2 2 , 4 0 0B a l . 3 5 , 4 0 0

C o s t o f G o o d s S o ld(8 ) 3 9 ,0 0 0

7

5

84

6

Job Order Cost AccountingLet’s examine the

cost flows in a job-order costing

system. We will use T-accounts and start

with materials.

Raw MaterialsMaterial

Purchases

Direct Materials

Mfg. Overhead

Job-Order System Cost FlowsWork in Process(Job Cost Sheet)

Indirect Materials

Actual Applied

Raw materials account

is debited for the cost

of materials purchased

Raw materials account

is credited for the cost

of materials issued to jobs

WIP debited for the cost of materials issued to jobs

Overhead control is debited for the cost of actual overhead

Direct Materials

Indirect Materials

Next let’s add labor costs and

applied manufacturing overhead to the job-order cost

flows.

Job-Order System Cost Flows

Job-Order System Cost Flows

Direct Labor

Mfg. Overhead

Salaries and Wages Payable

Work in Process(Job Cost Sheet)

Direct

Materials

OverheadApplied to

Work inProcess

Overhead Applied

IndirectLabor

Actual Applied

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Wages payable is

credited for the cost

of direct labour WIP is debited for the cost of direct labour

Overhead is credited for applied overhead

WIP is debited for applied overhead

Overhead applied using a plant wide rate

Direct Labor

IndirectLabor

Indirect Materials

Now let’s complete the

goods and sell them.

Job-Order System Cost Flows

Cost ofGoodsMfd.

Finished Goods

Cost ofGoodsSold

Cost ofGoodsMfd.

Cost of Goods Sold

Cost ofGoodsSold

Job-Order System Cost FlowsWork in Process(Job Cost Sheet)

Direct

MaterialsDirect Labor

Overhead Applied

Credit WIP for COGM

Debit finished goods for COGM

Credit finished goods for value of units sold

Debit COGS for value of units sold

Let’s look at summary journal entries for a job-

order costing system. We’ll omit

the numbers so that we can focus

on accounts.

Job-Order Costing – Typical Accounting Entries

Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.

Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are

charged to Manufacturing Overhead and also decrease Raw Materials.

Cost Flows – Material Usage

Cost Flows – Labor The cost of direct labor incurred increases Work in

Process and the cost of indirect labor increases Manufacturing Overhead.

Cost Flows – Actual Overhead In addition to indirect materials and indirect labor, other

manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

Cost Flows – Overhead Applied Work in Process is increased when Manufacturing

Overhead is applied to jobs.

Cost Flows – Period Expenses Nonmanufacturing costs (period expenses) are charged

to expense as they are incurred.

Cost Flows – Cost of Goods Manufactured

As jobs are completed, the cost of goods manufactured is transferred to Finished Goods from Work in Process.

Cost Flows – Sales When finished goods are sold, two entries are required:

(1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods.

JOB COSTING-TREATMENT• MATERIAL

– REQUISTIONED FOR EACH JOB SEPERATELY– INFORMATION FROM MATRL REQUISITION– D.MATL DIRECTLY CHARGED TO JOB– I.MATL ALLOCATED TO VARIOUS JOBS

• LABOUR– CHARGED FOR EACH JOB– INFORMATION FROM JOB TIME TICKET

• OVERHEADS– ESTIMATED FOR VARIOUS COST CENTRES– ALLOCTAED TO VARIOUS JOBS ON SUITABLE BASIS– CAHRGED TO WIP BY ABSORBTION RATE

JOB COSTING-RECORDING• JOB

– JOB No. OR WORK ORDER No.

– JOB COST CARD (COLLECTS ALL COST DATA RELATED TO JOB FROM

• MATERIAL REQUISITION NOTE

• JOB TIME SHEET

• JOB TICKETS

JOB ORDER COST SHEETPRODUCTIONORDERS

COST SHEET IDENTIFIED BY JOB NoSET UP IN A/CG DEPTT

UNIT COST FOR JOB ORDERCOMPLETED

JOB ORDERFINISHED

JOB ORDERNOT FINISHED

PRIME COST+ABSORBD OVHD•COST SHEET THAN MARKED COMPLETE•REMOVED FROM JOB LEDGER•ENTRY MADE IN FINISHED GOODS LEDGER

DONETHROUGH

•TOTAL COST INCURRED ON JOB ORDER BRCOMES WIP•CARRIED FORWARD TO SUBSEQUENT A/CG PERIOD AS OPENING STOCK