JOB ORDER COSTING

METHODS OF PRODUCT COSTING

Before products can be costed, a determination must be made about the cost accumulation
system (job order or process costing) and the valuation method to be used (actual, normal, or
standard costing). This chapter focuses on Job Order Costing, accounting system that
accumulates the costs of a product or service as identified p individual job or customer's order.

COST ACCUMULATION SYSTEMS

A job order costing system is the product costing system used by entities that make relatively
small quantities or distinct batches of identifiable, unique products (services). The word "job" is
synonymous with client, engagement, project, or contract.

A process costing system is the product costing system used by entities that produce large
quantities of homogeneous goods such as breakfast cereal, detergent, and gasoline where one
unit of output cannot be readily identified with specific input costs within a given period.

VALUATION METHODS

Actual Costing. This is a valuation method whereby production inputs are valued at the actual
cost, which is the actual amount paid for direct materials, direct labor and overheat costs in
determining the cost of Work in Process Inventory. All factory overhead incurred (debit to Factory
Overhead Control) would be applied to Work-in-Process (credit Factory Overhead Control or
credit Applied Factory Overhead).

The problem is that the total actual costs of overhead are not known until the end of the period. It
is not practical to wait until the end of the period to cost products, since cost is factor in setting
prices. Furthermore, if monthly overhead costs are used, unit costs could vary widely if actual
costs fluctuate from month to month. Service businesses that have few customers and/or low
volume may use an actual cost system.

Normal Costing. This is a valuation method that uses actual direct material, actual direct labor,
and applied overhead (estimated using predetermined overhead rates) in determining the cost of
Work in Process Inventory. This workbook assumes the use of normal costing. Estimated
overhead costs are divided by estimated production for the year to determine an application rate.
This will smooth out monthly variations in overhead costs and allow a more uniform product cost.
If overhead is applied for a cost pool based on machine hours, the overhead rate would be applied
to the actual machine hours used.

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Standard Costing. This is a valuation method wherein standards (predetermined benchmarks)
are developed for direct material and direct labor quantities and/or costs are overhead is applied
to production using a predetermined rate that is considered standard. In a standard cost system,
standard costs are developed for all inputs per unit of production. Input costs charged to inventory
are based on the number of inputs that should have been used to make a unit of product at the
price that should have been paid for each input unit. For example, if overhead is applied on
machine hours, it would be applied to the number of hours that should have been used to make
that unit, not the actual number of machine hours used.

A standard cost system allows companies to quickly recognize variances from expected
production costs and to correct problems from excess usage and/or costs, a capability not found
in actual cost systems and provided only for overhead in normal cost ns(adapted: CMA/CFM
Review Manual 2010). The difference between the standard costs and actual costs incurred are
isolated in variance accounts and analyzed to determine systems responsibility for the variance.
These standards can be used to plan future activities and to value the various inventory accounts
and Cost of Goods Sold.

OVERVIEW OF JOB ORDER COSTING

Some of the manufacturing companies produce products that have similar features and are
subjected to continuous, unchanging flow throughout the manufacturing process like beverages,
perfumes, and electronic devices, hence process costing system will be employed. However
there are companies that produce heterogeneous, final products whose outputs are in lesser
number, so job order costing system is used. The type of companies that use job order costing
shall include printing press, shipbuilding companies, aircraft manufacturing firms, construction
companies, consulting firms, and engineering firms.

In job order costing, it sees every job order as unique and may require different raw materials or
procedure to carry out a customer based final output. For example, the procedure of processing
200 pages of a standard A4 size notebooks will be different from the A7 size notebooks, as smaller
ones requires more manual labor in binding. This if a customer will order notebooks other than
the standard size offered by the company, a different cost computation will be made for that
unique output. In process costing however the company only offers the standard size notebooks
resulting to a more predictable cost and similar production process.

With this customization allowed in job order costing, the tracing and accumulating of production
costs should be for each job. Each job or customer's order is made according to the customer's
specifications and the quoted price is linked with its estimated cost production. The details for
each job or lot can be traced to a subsidiary record known as Job Order Cost Sheet or simply
called Cost Sheet. This will show a summary of the manufacturing costs incurred for every job or
customer's order particularly the costs of the materials used, direct labor and factory overhead.

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POINTS TO PONDER!

In a job order cost system, costs are accumulated individually by job a

1) A job is a single unit or group of like units identifiable as being produced to distinct
customer specifications. Each job is treated as a unique cost object.

2) Costs of different jobs are maintained in separate subsidiary ledger accounts and are
not added together or commingled in those ledger accounts.

3) Direct material, direct labor, and overhead costs are accumulated for each job.

4) 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.

5) Overhead costs are not usually traceable to specific jobs and must be allocated to
production.

The output of a given job can be a single unit or multiple similar or dissimilar units.

1. The total accumulated cost per job is averaged over the number of units produced to
determine an average unit cost if all the units within the batch are similar.

2. No per unit cost can be determined if the output consists of dissimilar units for which
individual cost information has not been accumulated.

OPERATING WORKFLOW

To understand fully how job order costing works and accumulate costs, you have to identify first
the operating workflow of every manufacturing firm. A company is segregated into four (4) main
stages, the 4 p's - Procurement Production, Storage and Selling.

Procurement is the first stage where all the needed materials, labor force, machineries and other
indirect costs are purchased and determined. The 2nd stage, which is Production, is where the
conversion of raw materials into finished products will take place. These will involve various
departments depending on the process in making the product. The third stage Storage, where
the finished products are stored in the warehouse awaiting delivery to the customer. And finally,
Selling, where the finished products are completely delivered and the company declared sales in
the process.

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Remembering these four (4) basic stages of manufacturing will guide you in understanding the
next topic covering cost accumulation, journal entries and preparation of financial statements
under job order cost system.

ACCOUNTING WORKFLOW

After illustrating the operating workflow of every manufacturing company, we will now consider
the accountant's point of view through the use of T-account analysis. Shown below is Exhibit 2.1
which will correlate the operational workflow to the accounting workflow.

PROCUREMENT PRODUCTION STORAGE SELLING

Raw Materials

IN OUT

Payroll Work in Process Finished Goods Cost of Goods

Sold
IN OUT IN OUT IN OUT IN OUT

Factory Overhead Control

IN OUT

EXHIBIT 2.1 Operating and Accounting Workflow

Under the first stage, Procurement, any purchases of materials and incurrence of labor and
indirect charges within the factory shall be charged to Raw Materials, Factory Payroll and Factory
Overhead Control accounts, respectively.

As these costs of materials, labor and overhead are applied to production for the month, a debit
to Work in Process account shall be made. The cost of the completed job will be recorded as a
debit to Finished Goods and credit to Work in Process account. Upon the sale of the completed
job, two (2) entries will be made. First is the entry to record the sale (either cash sales or credit
sales) at an amount billed by the manufacturer or seller to the customer. Second entry on the date
of sale is to record the cost of the completed job sold involving a debit to Cost of Goods Sold
(CGS) at its cost and credit to Finished Goods account. At the end of an accounting period, the
Cost of Goods Sold (CGS) account will ultimately be transferred or closed to the Income Summary
account.

JOURNAL ENTRIES AND T-ACCOUNTS

Let us use throughout this chapter, what is illustrated in Exhibit 2.1 for Raiborn Envelope
International, a company that produces envelopes in accordance with the client's specifications.

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Raiborn Envelope International processed envelopes in various sizes, colors, designs and
packages. Additional product features such as company logo watermarks, perforation and
security characteristics are also offered. It uses job order costing and provides a 20% markup
based on cost. In November 2019, the company received three (2) customers order and Raiborn
identified each order as Job #104, and Job#105. Job#103 was started in October 2019 but was
not yet completed as of the end of the October. Job #102 was completed in October 2019 but
was not yet sold.

ACCOUNTING FOR MATERIALS

(a) Material Purchased

On November 6, the company received a shipment of purchased materials amounting to
P220,000. The company will record this transaction as:

Raw Materials……….. 220, 000 Exhibit 2.2

Accounts Payable……………….220,000 Material Purchased and Used
Purchase of materials on account

There are some companies which

Procurement Production
separates the recording of direct
materials and supplies on the date of
Raw Materials Work in Process
purchase. However it is acceptable to
use the account Materials in recording (a) 220,000 (b) 190,000 (b) 110,000
the purchase of either direct (raw)
material or indirect materials (or Factory Overhead Control
factory supplies). Such classification
(b) 80,000 (b) 190,000
of materials is needed only at the time Job #105
of requisition and not at the time of P
Job #103
purchase. Exhibit 2.2 shows how the Source Documents P
Job #105
Material Requisitions, sorted by numbers P 45, 000
journal entry for (a) will be reflected in
the workflow.

(b) Material Used

Before the release of materials from the warehouse to the production area, material requisition
form must be filled up by the requesting department. A material requisition form is a source
document that indicates the type and quantities of materials to be used in the production or used
in the performance of service. These are prenumbered document which are produced in multiple
copies to be given out to different departments.

The total cost of materials released to the production area as reflected in the material requisition
form issued for the month was P190,000 of which P80,000 was for the issuance of indirect

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materials. The issuance of direct materials totaling P110,000 is distributed to the three (3) jobs as
follows:Job#103 P45,000; Job#104; P32,800; Job#105 account for the said transaction, all Direct
Materials will be charged directly to Work P32,200. Process account and Indirect Materials will be
charged to the Factory Overhead Control account. The journal entry will be:

WIP Inventory - Job #103………………………... P 45,000

WIP Inventory - Job #104………………………… 32,800
WIP Inventory - Job #105………………………… 32,200
Raw Materials..………………………. P 110, 100
Issuance of direct materials to Job 103, 104 & 105.

Factory Overhead Control……………………… P 80,000

Payroll……………………………….... P 80,000
Issuance of indirect materials

If material is issued to a non-factory requisitioning department or office, then charge it to Marketing

or Administrative Expense account Refer to Exhibit 2.2 for the workflow.

INVENTORY SYSTEM

Periodic System This is a system that adjusts the inventory accounts at the end of a period
(generally a year) using data determined from a physical count of inventory items on hand. (.e.
counting the materials and finished goods left). By subtracting these numbers from total materials
available or total finished goods available for the yea, an estimate of materials used or cost of
goods sold is derived.

Perpetual System Under this system, the inventory accounts are directly adjusted for each
acquisition of materials, material requisitions, and transfer of the cost of an item sold from Finished
Goods Inventory to Cost of Goods Sold as these events actually or provides the most up to date
information and, now that computerized systems are now sophisticated and widely available, is
the one mostly used in practice. A periodic count of inventories is still undertaken. However, the
resulting information is used to determine inventory shrinkage levels and to check on the accuracy
of the accounting system.

INVENTORY COSTING METHODS

Most firms purchase materials or spare parts on an ongoing basis and keeps finished goods
inventory. Usually, these purchases are not made at a uniform price and several factors need to
be considered in the production of finished goods. It becomes essential therefore, to ascertain
the cost of goods sold, as well as the cost of goods on hand and the cost of goods already started
in process but has not yet been completed it must be noted that manufacturing companies
maintains three inventory accounts: Materials Inventory, Work in-Process Inventory, and Finished
Goods Inventory.

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Some firms find it advantageous to keep a record of the cost of individual inventory items. These
situations involve inventory units with a high peso value and relatively few sales. Car
manufacturers and dealerships are good illustrations. When negotiating with a customer over the
selling price of a given car, for example, the cost of that particular car is important information for
the dealer. Thus, these firms are motivated to keep a record of each car's cost. Moreover, a
dealer's inventory consists of perhaps no more than 100 cars, and the dealer makes only a few
sales per day. Such activity levels do not present a significant record-keeping challenge. The
specific identification method maintains accounting records showing the cost of each inventory
item.

For most businesses, however, the number of inventory units and the volume of purchases and
sales are so large that the specific identification method would be very costly to implement. A
manufacturer of canned goods, for example, may sell 1,000 boxes of canned items in one day.
This requires firms to use a cost flow assumption

Consider the following summary of finished goods inventory productions of Abre Lata Company
under Job-order costing:

# of Units x Unit Cost = Total Cost

Beginning Inventory 30 P4 P120

Produced on February 18 10 5 50

Produced on June 8 20 6 120

Produced on October 22 20 8 160

Totals 80 450

Assume that 48 units were sold during the year and 32 units remain on hand at year-end. To
prepare the financial statements, the cost of the ending inventory and the cost of goods sold must
be determined.

Average Cost. The average-cost method calculates the weighted-average cost of an inventory
item on hand during the period and applies this cost to the units sold and to the ending inventory.
The average cost is calculated by dividing the cost of goods available for sale by the number of
units available for sale. The cost of goods available for sale equals the cost of the beginning
finished goods inventory plus the cost of goods manufactured during a period. It reflects the total
cost of goods that were on hand at any time during the period that were available for sale:

Average cost = Cost of goods available for sale

Number of units available for sale
= 450/80
= 5.625

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To calculate the cost of units that have been sold, multiply the average cost by 48 which is the
number of units sold”

Cost of Goods Sold = 48 x P5.625 = P270

To calculate the finished goods inventory balance, simply multiply the average cost by the units
left on hand at the end of the period (or the units unsold).

Finished Goods, End = 32 x P5.625 = P180

The computation as shown above is more commonly known as the simple average approach.
More often than not, companies who adheres to the perpetual inventory system computes the
new weighted average every time a new purchase of materials or production is being made. In
this scenario, the moving average method would prove to be more useful in computing for the
new weighted average cost every time a purchase or production is completed.

To illustrate moving average method, consider the following set of facts: Andres Company uses
the moving-average method to determine the cost of its inventory. During January 2019, Andres
record the following information pertaining to its inventory:

Units Unit Cost Total Cost

Balance on 1/1/2020 40,000 P5 P200,000

Sold on 1/17/2020 35,000

Finished on 1/2/2020 20,000 8 160,000

The moving-average method assumes the company has perpetual records. A new weighted-
average cost is computed after each purchase/finished production and issues are priced at the
latest weighted average cost.

Units Unit Cost Total Cost

Balance 1/1/2020 40,000 P5.00 P200,000

Sold 1/17/2020 (35,000) 5.00 (175,000)

Balance 1/17/2020 5,000 5.00 25,000

Finished 1/28/2020 20,000 8.00 160,000

Balance 1/31/2020 25,000 7.40 185,000

In this example, the next units sold would be priced at P7.40, the new weighted average cost.
The new price of P7.40 is computed by dividing P185,000 by 25,000.

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Once the cost of goods sold and the ending finished goods inventory has been solved, you can
now apply the formula given below either to check or work back on some other missing figures.

Beginning Finished Goods

+Cost of Goods Manufactured
- Ending Finished Goods
=Cost of Goods Sold

First-In, First-Out. Another commonly used inventory method is the First-In, First-Out (FIFO)
method. This method assumes that inventory costs move on a first-in, first-out basis. This implies
that the cost of the beginning inventory and the cost of production made early in the period are
the first to flow out of the firm and comprise the cost of goods sold.

In our illustration (ABRE LATA Co.), the cost of goods sold under the FIFO method is based on
the cost of the 48 units that were acquired first.

# of Units x Unit Cost = Total Cost

Beginning inventory 30 P4 P120

Produced on February 18 10 5 50

Produced on June 8 __8__ 6 _____48

CGS 48 P218

Because the cost of goods sold under the FIFO method is based on the cost of the earliest
production, ending inventory must consist of the costs from the most recent production (those
made closest to the period's end). Based on the inventory and purchase data given in the last
illustration, ending inventory consists of the costs associated with the 32 units produced closest
to the end of the year. This includes the 20 units produced on October 22 and 12 of the units
purchased on June 8. Only 12 of the 20 units produced on June 8 are included because the
ending inventory consists of 32 units.

# of Units x Unit Cost = Total Cost

June 8 12 P6 P72

October 22 20 8 160

Ending Inventory 32 P232

*It must be noted that a more comprehensive unit cost computation for units produced is
discussed in Cost Accounting Part 2 under the Process Costing topic.

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 ACCOUNTING FOR LABOR

(c) Factory Labor Incurred Exhibit 2.3

Labor Incurrence and Distribution
The salaries and wages for the month
amounted to P128,500 which was
Procurement Production
accrued and to be given to factory
employees. The general journal entry
is: Payroll Work in Process

(b) 110,000
(c) 128,500 (d) 128,500
Payroll …………. 128,000 (d) 93,100
Accrued Payroll……...128,500
Payroll for the month
Factory Overhead Control
For every payroll period, all the
liabilities related to payroll transaction (b) 80,000 Job #105
(d) 35,400 P Job #104
will be temporarily credited. Other
P #103
Job
liabilities may include Withholding P 38,500
Source Documents
taxes payable, SSS/GSIS Material Requisitions, sorted by numbers

Contributions Payable, PAG-IBIG

Contributions Payable, Philhealth
Contributions Payable and such other payroll deductions.

(d) Distribution of Factory Labor

There are two commonly used source documents in accounting for labor costs under job order
costing system: a time (or clock) card and labor job ticket. Companies use time cards as the basis
for the computation of payroll and can either be manual, electronic or computerized form.
However at the end of the period, labor costs will be computed based on the number of hours
worked by either direct or indirect factory worker. The time card inserted in a time clock by
employees everytime they arrive, go to and return from lunch, take breaks or leave the work or
office premises. This will mechanically show a record of time spent for work each day by an
employee and provides as the basis or as a reference for computing and recording of payroll. The
labor job tickets are prepared daily by an employee indicating the job he has worked on and the
number of hours worked. The wage rate (obtained from the payroll office) shall be multiplied by
the number of hours worked to compute the total labor cost. The labor cost and hours worked on
various jobs as reflected in the labor job tickets should be equal to the data found in the time card.
At period intervals, time cards are summarized to record the payroll and the labor job tickets are
also summarized to determine the amount to be charged to Work in Process account. To carry
out this task, another document known as labor time tickets or employee time sheets is used.
This separates the direct and indirect labor costs chargeable to a particular job.

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Most companies nowadays are using computerized employee time sheets and even use bar code
in their day to day operations. If the company is using manual recording, the sheets must be noted
and collected by the supervisor at the start and at the end of the period but this must be reviewed
to ensure the correctness of the information reflected therein.

Raiborn Envelope International determines at the end of the month that P35,400 of the total
payroll are indirect labor while the balance were summarized as follows: Job#103 P26,000.The
journal entry to record these P38,500, Job# 104 - 28,600, Job# 105 transaction:

WIP Inventory - Job #103……………………... P 38,500

WIP Inventory - Job #104………………………… 28,600
WIP Inventory - Job #105………………………… 26,000
Payroll …………………………………. P 93, 100
Direct labor costs incurred for Job 103, 104 and 105

Factory Overhead Control……………………… P 35,400

Payroll……………………………….... P 35,400
Indirect labor costs incurred for the month

Factory labor costs should be property segregated into direct labor and indirect labor costs. Direct
labor costs will be charged to Work in Process account while indirect labor costs will be charged
to Factory Overhead Control account, respectively. If there are payroll pertaining to non-factory
or office employees other than those working in the factory, it will be charged and debited to
Marketing or Administrative Expense, Please refer to Exhibit 2.3 for the workflow

ACCOUNTING FOR OVERHEAD

(e) Actual Factory Overhead Incurred

Exhibit 2.4
Aside from the debit to Factory Applied Factory Overhead
Overhead Control account for
Indirect material (b) and indirect labor
Procurement Production
(d) incurred for the month, as
reflected in Exhibit 2.4; other actual
Factory Overhead Control Work in Process
overhead cost may be incurred.
Examples are depreciation of the (b) 80,000 (f) 74,480 (b) 110,000
(d) 35,400 (d) 93,100
factory machine used, rental, utilities, (e) 44,600 (f) 74,480
repairs, security and the like.

There is one source document for computing factory overhead costs in a job order costing system:
a departmental factory overhead cost sheet (otherwise known as departmental expense analysis
sheet) maintained by each department. This is the subsidiary record or the subsidiary ledger
showing the breakdown of the controlling account Factory Overhead Control (FOC).
Reconciliation of the General Ledger and subsidiary ledgers should be done at regular intervals.

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The factory overhead costs may be recorded for the plant or factory in total and then distributed
to production departments for application to various jobs.

Raiborn Envelope International incurred other factory overhead cost summarized as follows:
Factory building and machinery depreciation – P18,400; Utilities – P10,300; Repairs and
Maintenance P8, 200 were paid in cash and other various accounts of P7,700. Journal entry for
this transaction will be:

Factory Overhead Control ------------------------------------------------ 44,600

Accumulated Depreciation -------------------------------------- 18,400
Utilities payable----------------------------------------------------- 10,300
Cash------------------------------------------------------------------- 8,200
Various or Sundry Accounts------------------------------------- 7,700
Actual factory overhead incurred for the month

(f) Applied Factory Overhead

Tracing the actual prime cost to a particular job is easier as reliable document, Material requisition
form and time tickets were used to account for the proper cost however determining the amount
of overhead to a particular job is challenging and more difficult. Some of the overhead are fixed
regardless the amount of production like depreciation and rent. Utilities expense however is
dependent and can vary from every job. There are also overhead expenses which can benefit
other job but not on some jobs. Thus the reported actual cost of factory overhead may not be
reflective of the cost of a specific job being costed. With this limitation, actual costing system is
discouraged in job order costing

To solve this dilemma, the accounting system designed a method of estimating overhead cost
which is more reliable and accurate called the overhead allocation base. All the cost incurred by
all jobs will be allocated in proportion to a certain activity - like direct labor usage, machine usage,
material usage and others. This base will be used by every job to measure its overhead cost and
it is called applied overhead. Under job order costing, the valuation method to be used must be
normal costing actual direct material, actual direct labor and applied factory overhead).

At the end of an accounting period, the estimated applied factory overhead will be compared to
the actual overhead incurred and the difference will be identified as either Overapplied or
Underapplied Overhead. Overapplied overhead is the excess of Applied Overhead over the
Actual Overhead while Underapplied Overhead is the excess of Actual Overhead over the Applied
Overhead. In depth discussion about factory overhead will be taken up in Chapter 5.

In recording the actual overhead incurred for the period, Factory Overhead Control account will
be debited. The amount of overhead applied to production for the period will be recorded by a
debit to Work in process account and credit to Applied Factory Overhead account at estimated
amount of indirect factory costs.

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Raiborn Envelope International determines that all jobs will have an applied factory overhead of
80% of direct labor cost. The Applied Factory Overhead account shall be as follows: Job #103 -
P30,800 (P38,500x80%); Job#104- P22,880 (P28,600x80%); Job#105 -P20,800 (P26,000x80%).
The journal entries will be

WIP Inventory-Job #103…………………………..…………P 30,000

WIP Inventory-Job #104…………………………..………… 22,880
WIP Inventory-Job #105…………………………..………… 20,800
Applied Factory Overhead……………………………. P74,480
Overhead applied to Job 103, 104 and 105.

ACCOUNTING FOR JOB COMPLETED AND SOLD

During the month, Job#103 and Job#104 were completed and transferred to storage area. All the
costs relevant to Job#103 and Job#104 must be traced and be debited to Finished Goods
Inventory and close the Work in Process account as shown below:

(g) Finished Goods Inventory-------------------------------- P238,580

WIP Inventory - Job# 103 --------------------------- P 154,300
WIP Inventory-Job#104------------------------------ 84,280
Job #103 (P40,000+45,000+38,500+30,800);
Job#104 (P32,800+28,600+22,880)

Production Storage Selling

Work In Process Finished Goods Cost of Goods

Sold
(b) 110,000 (g) 198,580 (g) 238,580 (h) 184,300 (h) 184,300
(d) 93,000
(f) 74,480

At the end of the month, Job#102 and Job#103 has been shipped and delivered to its customer
and the company provides a 20% markup on cost. The journal entries on the date of sale will be:

(h) Cost of Goods Sold ----------------------------------------- 184,300

Finished Goods Inventory -------------------------- 114,300
Cost of Job#103 and Job#102 sold

(i) Accounts Receivable----------------------------------------- 221,160

Sales------------------------------------------------------ 221,160
Job#103 sold on account

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FORMS AND DOCUMENTS USED

Material Requisitions

A material requisition form is a source document that indicates the type and quantities of materials
to be placed into production or used in performing a service (see Exhibit 2 That will be used as
the basis for the release or issuance of materials (direct materials) from the warehouse to the
requisitioner or requisitioning department.

Materials that are directly used and Exhibit 2.6

identified with a particular job are charged
to Work in Process Inventory account,
while indirect materials are charged to
Factory Overhead Control (FOC) account
as shown in the following journal entry:
Material Requisition Form
Date:___________________
Job No. _________________
Authorized by:___________
Received by:_____________
Department: _______________
Issued By:__________________
Inspected by:________________

Ite Part Descr Unit of Quantity Quantity Unit Total

Work in Process Inventory XXX m No ip. Measure Required Issued Cost Cost
Factory Overhead Control XXX No

Raw Materials Inventory XXX

Completed material requisition forms will

provide an audit trail to verify the flow of
materials from the warehouse to the
department/s involved indicating also the job where the issued materials are charged. They are
usually prenumbered just like any source documents and issued in multiple con so that the
warehouse clerk and the requisitioning department can file their own copy verification and control
purposes.

Employee Time Sheets

An employee time sheet is a source Exhibit 2.7

document that indicates for each employee Employee Time Sheets
the jobs assigned to him to be worked on
and the time spent on each job. Work Employee Name:__________
Employee No: ____________ For week ending: _____________
assigned at the work station is Department:_____________
accompanied by a tag or bar code
specifying the job number. The time that Ite Part Descr Unit of Quantity Quantity Unit Total
m No ip. Measure Required Issued Cost Cost
the work is started and stopped are No

recorded on the time sheet and is reviewed

by a supervisor for accuracy.
_______________
Large businesses often use time keeping _______________
software instead of manual time sheets. Employee Signature Supervisor’s
Employees just swipe their ID cards and job Signature
cards through an electronic scanner as they change from one job to another. Information about
employee's labor rate is required in transferring employee time information to the job order cost
sheet. Time sheet information is also used for payroll preparation.

The journal entry to record the distribution of factory payroll will be as follows:

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 Work in Process Inventory (for direct labor cost) XXX
Factory Overhead Control (for indirect labor cost) XXX
Salaries and Wages Payable XXX

If total actual labor costs differ significantly from the original estimate, the manager responsible
for labor cost control will have to explain the difference.

Exhibit 2.8 Job Order Cost Sheet

Job Order Cost Sheet
The Job Order Cost Sheet (JOCS) is a
Customer:____________
Starting Date:_________ Job Description: _____________ source document that summarizes the
Completion Date:______ Contract Price: ______________ amount of DM used, DL and OH applied to
each job processed. Posting to the JOCS
Materials Direct Labor Overhead Applied
Date Ref# Amount Date Ref# Amount Date Ref# Amount may be done either on a daily or weekly
basis. They are designed to provide the
needed information by management. Some
may include cost to make and sell as well
Total Materials_________________ as the selling price in order to estimate the
Total Labor____________________ Total Cost of profit identified with each job. Other forms
Job may provide only the basic cost information
Total OH Applied_______________ such as direct materials used, direct labor
__________________ and applied overhead charged to individual
job. These forms may also Vary depending
on whether a firm is departmentalized or not. The file of all job order cost sheets will serve as the
subsidiary ledger for the controlling account Work in Process Inventory in the company's general
ledger. An amount debited in the JOCS would mean that Work in Process account increases or
is debited in the journal entry while an amount credited in the JOCS or shown in parenthesis
would mean an that Work in Process account decreases or is credited in the journal entry.

Direct material information is taken from the material requisition forms, while direct labor
information is taken from employee's time sheets or his labor time tickets. Overhead is applied to
production using a predetermined overhead rate.

FINANCIAL STATEMENT PREPARATION

At the end of the accounting period, the financial reports prepared for a manufacturing company
are those typical reports required for a certain company the statement of cost of goods
manufactured, the income statement and the statement of financial position.

We will be using the T-accounts of Raiborn Envelope International to produce the financial
statements, however additional information will be needed to fully illustrate these reports.
Beginning balances of Raiborn Company shows Raw Materials P50,000; Work in process -
P40,000 and Finished Goods Inventory - P30,000. These are the updated T-accounts with
beginning balances.

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 PROCUREMENT PRODUCTION STORAGE SELLING

Materials

Beg 50, 000 (b) 190,000

(a) 220,000
End 80,000

Payroll Work in Process Finished Goods Cost of Goods

Sold
(c) 128,500 (c) 128,500 Beg 40,000 (g) 238,580 Beg 30,000 (h) 184,300 (h) 184,300
(b) 110,000 (g) 238,580
(d) 93,100 End 84,280
(f) 74,480
Manufacturing Overhead End 79,000

(b) 80,000 (f) 74,480

(d) 35,400
(e) 44,600

Raiborn Envelope International

Statement of Cost of Goods Manufactured
For the month ended November 30, 2020

Direct Materials
Raw Materials Inventory, Nov 1 P 50,000
Materials Purchases 220,000
Raw Materials to be Used P 70,000
Less: Raw Materials, Nov 30 (80,000)
Total Raw Materials Used P 190,000
Less: Indirect Materials Used (80,000)
Direct Material Used P 110,000 *
Direct Labor 93,100 **
Applied Manufacturing Overhead 74,480 ***
Total Manufacturing Cost P 277,580
Add: Work in Process, Nov 1 40,000
Total Goods Work in Process P 317,580
Less: Work in Process, Nov 30 (79,000)
Cost of Goods Manufactured P 238,580 ****

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 Raiborn Envelope International
Income Statement
For the month ended November 30, 2020

Sales P221,160
Less Cost of Sales:
Finished Goods Inventory, Nov 1 P 30,000
Add: Cost of Goods Manufactured 238,580
Total Goods Available for Sale 268,580
Less: Finished Goods Inventory, Nov 30 (84,280) (184,300)
Gross Profit 36,860
Less: Operating Expenses (12,000)
Net Income before Tax P10,860

Job Order Costing in Service Industries

Service firms and nonprofit organizations also engaged in production. However, the difference
between manufacturing and service industries is that service is consumed as it is produced
whereas manufactured products can be stored in the form of inventory.

Like the accumulation of costs in manufacturing companies, the service industries also define
product costs as the combination of three (3) elements; Direct material, Direct Labor and Factory
Overhead. Imagine a service industry like the Janitorial Services, the direct materials used will be
the various chemicals and cleaning supplies, however the costs of materials are not that
significant compared to manufacturing companies. The large portion of cost for service industries
are the direct service hours imputed in every job. Because the bulk of the product costs rely
heavily on direct labor, the computation of the applied overhead will also be based on direct labor
hours or direct labor costs.

Job Order Costing and Technology

The trend in job order costing is to automate the data collection and data entry functions.
Automating the recordkeeping functions relieves production employees of that burden.

In many companies, intranets are being created to manage the information pertaining to jobs. An
intranet is a mechanism for sharing information and delivering data from corporate databases to
the local area network (LAN) desktops. Intranets use Web technology and are restricted networks
that can enhance communication and distribute information.

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TERMINOLOGIES

Actual Cost System. A valuation method that uses actual cost for direct materials, direct labor
and factory overhead.

Applied Factory Overhead. The amount of estimated overhead that has been assigned to Work
in Process Inventory as a result of productive activity.

Employee time sheet: A source document that indicates the jobs on which each employee
worked and the direct labor time consumed.

Job: A single unit or group of units identifiable as being produced to distinct customer
specifications.

Job order cost sheet: A source document that provides virtually all the financial information
about a particular job; the set of all job order cost sheets for uncompleted jobs composes the
Work in Process Inventory subsidiary ledger.

Job order costing system: A system of product costing used by companies that make relatively
small quantities of distinct batches of identifiable, tailor-made products that conform to
specifications designated by the purchaser; the focus of recordkeeping is individual jobs.

Material requisition form: A source document that indicates the types and quarter material to
be placed into production or used in performing a service; it causes materials and its cost to be
released from the Raw Material Inventory warehouse and sent to Work in Process Inventory.

Normal Cost System: A valuation method that uses actual cost of direct material direct and labor
in conjunction with a predetermined overhead rate or rates in determining the cost of work in
process.

Overhead Allocation Base: a measure of activity or volume such as labor hours, machine hours
or volume of production to apportion overhead to products and services

Process costing systems: Systems used by companies that make large quantities of
homogeneous goods such as breakfast cereal, candy bars, detergent, gasoline, and bricks; given
the mass manufacturing process, one unit of output cannot be readily identified with specific input
costs within a given period - making the use of either a weighted average or FIFO cost flow
assumption necessary; it accumulates costs by cost component in each production department
and assigns costs to units using equivalent units of production.

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In RETROSPECT
These are the basic journal entries in Job-Order Costing:

 Materials are charged to production:

Work in Process Inventory – Job #-------------------------------------------- xxx
Work in Process Inventory – Job #-------------------------------------------- xxx
Factory Overhead Control (indirect material) ----------------------------- xxx
Raw Material Inventory----------------------------------------------- xxx
Issued direct and indirect materials to Job #

 Labor is charged to production:

Work in Process Inventory – Job #---------------------------------------------- xxx
Work in Process Inventory – Job #---------------------------------------------- xxx
Factory Overhead Control (indirect labor) ----------------------------------- xxx
Salaries and Wages Payable------------------------------------------- xxx
Direct and indirect labor costs charged to Job #

 Actual overhead costs are recorded as incurred:

Factory Overhead Control -------------------------------------------------------- xxx
Accumulated Depreciation -------------------------------------------- xxx
Prepaid Insurance--------------------------------------------------------- xxx
Utilities Payable----------------------------------------------------------- xxx
Cash-------------------------------------------------------------------------- xxx
Various or Sundry Accounts-------------------------------------------- xxx
Overhead applies to production in September

 Overhead is charged (or applies to production:

Work in Process Inventory – Job #---------------------------------------------- xxx
Work in Process Inventory – Job #---------------------------------------------- xxx
Applies Factory Overhead or FOC------------------------------------ xxx
Overhead applied to production in September

 Job is completed and is transferred from Finishing Department to Finished Goods:

Finished Goods Inventory – Job # ---------------------------------------------- xxx
Work in Process Inventory – Job #------------------------------------ xxx
To transfer completed Job # to FG Inventory

 Job is delivered and billed to the customer:

Accounts Receivable --------------------------------------------------------------- xxx
Sales------------------------------------------------------------------------- xxx
Sale of Job # on account

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Cost of goods Sold – Job #-------------------------------------------------------- xxx
Finished Goods Inventory – Job # ----------------------------------- xxx
Cost of Job # sold to Customer A

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