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I. LECTURE NOTES
A job-order costing system accumulates manufacturing costs by job. Such a system is
used when separate jobs are identifiable, such as a furniture manufacturer, and is intended
for products that are manufactured within a department or cost center are heterogeneous or
dissimilar, special or custom-made products. This system also works for products
manufactured individually or in distinct lots or batches.
A job order costing system provides a separate record for the accumulated cost of each job
through job order cost sheets. Unit costs in a job order system are calculated by dividing the
total manufacturing cost of the job by the number of units produced in the job.
b. Normal costing. This valuation method accumulates product cost using actual
materials, actual labor, and applied overhead using a predetermined overhead rate is
widely used. While direct materials and direct labor are actual costs, overhead is
estimated. A predetermined, or estimated, overhead rate is used to assign overhead
to the products produced throughout the year.
c. Standard costing. This valuation method accumulates product costs using unit
norms or standards developed through careful evaluation and engineering estimates.
Standard costs are developed for direct material, direct labor, quantities and/or costs.
Overhead is applied to production using a predetermined rate that is considered the
standard. This system allows companies to quickly recognize variances from expected
production costs and to correct problems from excess usage and/or costs.
Costs are accumulated individually by job in a job order product costing system.
a. A job is a single unit or group of like units identifiable as being produced to
distinct customer specifications.
b. Each job is treated as a unique cost object.
c. Direct material, direct labor, and overhead costs are accumulated for each job.
d. The normal costing method of valuation is used since actual direct material and
direct labor costs are fairly easy to identify and are associated with a particular
job.
e. Overhead costs are not usually traceable to specific jobs and must be allocated
to production.
2. The output of a given job can be a single unit or multiple similar or dissimilar units.
a. The total accumulated job cost is averaged over the number of units produced
to determine a per unit cost if all the units within the batch are similar.
b. No per unit cost can be determined if the output consists of dissimilar units for
which individual cost information has not been accumulated.
B. Materials Requisitions
The cost of materials is traced to each job through the use of a materials requisition form.
When materials are issued to production, the materials requisition form identifies the job,
the quantity and type of materials, and the cost of materials. This document is the source
document for assigning materials costs to individual job orders. Warehouse personnel are
released from further responsibility for issued materials, and responsibility is assigned to the
department that issued the requisition. Material costs are released from Raw Materials
Inventory—materials that are direct to the job are sent to Work in Process Inventory, while
indirect materials are assigned to the Manufacturing Overhead account. Therefore, the
journal entry will be as follows:
Work in Process Inventory (for direct materials) XXX
Manufacturing Overhead (for indirect materials) XXX
Raw Materials Inventory XXX
Completed material requisition forms provide the ability to verify the flow of materials from
the warehouse to the department and job that received the materials. They are usually
prenumbered and come in multi-copy sets so that completed copies can be maintained in
the warehouse and the department for each job.
If total actual labor costs differ significantly from the original estimate, the manager
responsible for labor cost control will have to explain the difference. The number of hours
worked on a cost plus contract may also be audited by the buyer as with government
contracts or other buyers. In addition, time sheets provide information on overtime hours.
H. Completion of Production
Job cost sheets for completed jobs are removed from the Work in Process Inventory
subsidiary ledger and are transferred to the Finished Goods Inventory file and serve as a
subsidiary ledger for that account.
Finished Goods Inventory XXX
Work in Process Inventory XXX
To transfer completed goods to FG inventory
Job cost sheets for sold jobs are kept in a company’s permanent files, providing management
with a historical summary about total costs and, if appropriate, the cost per finished unit for
a given job.
The production processes may result in losses of materials or partially completed products
Evaporation, leakage, or oxidation is inherent in the manufacturing process; such reductions
are called shrinkage. Defects are production process errors that cause a loss of units
through rejection at inspection for failure to meet appropriate quality standards or designated
product specifications that can be economically reworked and later sold. Spoilage is
production process errors that cause a loss of units through rejection at inspection for failure
to meet appropriate quality standards or designated product specifications that cannot be
economically reworked. Normal loss is a loss of units that falls within a tolerance level that
is expected during production. Normal losses are part of the cost of the job, while abnormal
losses are written off as a period cost. Abnormal loss is a loss of units in excess of expected
Abnormal spoilage.
The cost of abnormal losses should be written off as a period cost.
Abnormal losses should be separately identified and investigated to prevent future
recurrences.
In the following journal entry, the first debit represents the defective inventory’s disposal
value. The debit to Manufacturing Overhead is for the net cost of normal spoilage. The
debit to Loss from Abnormal Spoilage is the net cost of spoilage that was unnecessary and
unanticipated in setting the predetermined application rate.
Problem 1
The Sophomore MANUFACTURING COMPANY had the following inventories on August 1,
2019.
Finished goods P75,000
Work in process 55,500
Materials 66,000
Job Nos. 1, 2, and 3 were completed during the month. Job Nos. 1 and 3 were sold at 180%
of cost. The balance of the factory overhead control account is P 11,640. The variance is
material and is allocated between cost of goods sold, finished goods, and work in process.
Required:
1. Predetermined factory overhead rate
2. The cost of the January 1 work in process inventory
3. The amount of factory overhead applied to production
4. The cost of goods completed and transferred to finished goods inventory
5. The cost of goods sold (normal)
6. The cost of goods sold (actual)
7. The cost of the finished goods inventory end.
8. The cost of the work in process inventory end.
Multiple Choice
The following information pertains to Alma Co., manufacturing process
2019
March 1 March 31
Inventories
Direct materials P 36,000 P 30,000
Work in process 18,000 12,000
Finished goods 54,000 72,000
Additional information for the month of March:
Direct materials purchased 84,000
Direct labor payroll 60,000
Direct labor rate per hour 7.50
Factory overhead rate per direct labor hour 10.00
4. How much must be the prime cost, conversion cost, and cost of goods manufactured for
the month?
Prime cost Conversion cost Cost of goods mftd
a. P90,000 P60,000 P236,000
b. 150,000 140,000 296,000
c. 144,000 170,000 230,000
d. 150,000 140,000 236,000
6. If Job 503 is completed and transferred, how much is the total cost transferred to Finished
Goods Inventory?
a. P 96,700 c. P 108,540
b. P 99,020 d. P 139,540
Work in process of Alonzo Corporation on July 1, 2019 (per general ledger) is P 22,800.
Per cost sheets:
Job 101 Job 102
Direct materials P6,000 P8,000
Direct labor 3,000 2,500
Marco Corporation has a job order cost system. The following debits (credits) appeared in
the general ledger account work-in-process for the month of September, 2019:
September 1 Balance P 12,000
September 30, DM 40,000
September 30, DL 30,000
September 30, FO 27,000
Sept. 30, to FG (100,000)
Marco applies overhead to production at a predetermined rate of 90% based on the direct
labor cost. Job no. 232, the only job still in process at the end of September, 2019, has been
charged with factory overhead of P2,250.
11. What was the amount of direct materials charged to Job 232 as at end of September,
2019?
a. P2,250 c. P4,250
b. P2,500 d. P9,000
Justine Company budgeted total variable overhead costs at P180,000 for the current period.
In addition, they budgeted costs for factory rent at P215,000, costs for depreciation on office
equipment at P 12,000, costs for office rent at P92,000, and costs for depreciation of factory
equipment at P 38,000. All these costs were based upon estimated machine hours of 80,000.
Actual factory overhead for the period amounted to P387,875 and machine hours used
totaled 74,000 hours.
12. What was the over or underapplied factory overhead for the period?
a. P12,650 overapplied c. P 108,850 overapplied
b. P12,650 underapplied d. P108,850 underapplied
Job No. 41 (consisting of 5,000 units) was started in September, 2018 and it is special in
nature because of its strict specifications. Factory overhead is charged at P 0.80 per unit and
includes a P.05 provision for defective work. The prime costs incurred in September are:
Direct materials, P 9,000 and Direct labor, P 4,800. Upon inspection, 80 units were found
with imperfections and required the following reprocessing costs, Direct materials, P 1,500
and direct labor, P 800.
8. The unit cost of Job No. 41, upon completion, is:
a. P 4.10 c. P 3.98
b. P 4.05 d. P 3.62