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JOB ORDER COSTING

Cost Accounting
 Learning Objectives
• How do job order and process costing systems, as well as their
related valuation methods, differ?
• What are the distinguishing characteristics of a job order costing
system?
• What are the primary documents supporting a job order costing
system and what purposes are served by each of them?
• How are costs accumulated in a job order costing system?
• How does information from a job order costing support management
decision making?
• How are losses treated in a job order costing system?
Product
Costing

Cost Accounting
Methods of – Cost Accumulation System defines
• Cost object
product • Method of assigning costs to production

costing:
– Valuation Method specifies
• How product costs will be
measured

Cost Accounting
 Methods of Product Costing 5

COST ACCUMULATION
SYSTEMS

Cost Accounting
 Cost Accumulation Systems:
Job Order or Process Costing
Job Order Process
 Small quantities of  Large quantities
heterogeneous products
or services  Homogeneous goods
 Batches of identifiable,  Tracks costs by batch
tailor-made products of goods by
 User-specific services department
 Tracks costs by job

Cost Accounting
 Cost Accumulation Systems:
Job Order or Process Costing
Job Order Process
Small quantities
  Large quantities
 Batches of identifiable,
 Homogeneous goods
tailor-made products
 Tracks costs by batch
e.g.  User-specific services
of goods by
• Cobbler makingcosts
 Tracks custom by
shoes
joband e.g.
boots; • department
Manufacturing companies
• Publishing company making breakfast cereals,
• Accounting firm candy bars, detergent,
• Architectural firm gasoline and bricks
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• Research firm
Cost Accounting
Job Order Costing
 A job is a single unit or group of units
identifiable as being produced to distinct
customer specifications

Job is synonymous with client or customer,

engagement, project, product or contract

Cost Accounting
 Methods of Product Costing 9

VALUATION METHODS

Cost Accounting
 Six Possibilities
V COST ACCUMULATION
A SYSTEM
L M
U E Job Order Process
A T  Actual  Actual
T H  Normal  Normal
I O  Standard  Standard
O D
N 10

Cost Accounting
Valuation Actual Costs System Normal Costs
System
Standard Costs
System

Methods • Use the actual

costs of direct
materials, direct
• Combines actual
direct material
and direct labor
• Unit norms or
standards are
labor, and costs with develop for
overhead to predetermined direct material
determine Work overhead rates. and direct
In Process (WIP) labor
Inventory costs. quantities
and/or costs.
• Overhead is
applied to
production
using a
predetermined
rate that is
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considered the
standard
Cost Accounting
 Valuation Methods
• Actual • Standard
– Actual direct material
– Standard direct material
– Actual direct labor
– Standard direct labor
– Actual overhead
– Standard overhead
• Normal
– Actual direct material
– Actual direct labor
– Predetermined overhead The
Difference
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Cost Accounting
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Cost Accounting
 Standards Cost System
 Standards are used to plan for future activities and cost incurrence and to value
inventories.
 Both actual and standard costs are recorded in the accounting records to
provide an essential element of cost control – norms against which actual
operating costs can be compared.
 A standard cost system allows companies to quickly recognize deviations or
variances from expected production costs and to correct problems resulting
from excess usage and/or costs.

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Cost Accounting
 15

Cost Accounting
 Cost Accumulation Systems 16

JOB ORDER COSTING

SYSTEM

Cost Accounting
Job Order  Each job is a cost object
Costs are accumulated for each job.
Costing


 A Job is a single unit or group of units that is

System
identifiable as being produced to distinct customer
specifications. Each job is treated as a unique cost
entity or cost object.
 A job can consist of one or more units of output
 Because each job is distinctive, costs of the
products cannot logically be averaged – a unique
cost must determined for each job.
 There is a subsidiary ledger for each job and are
not added together in the ledger. 17

Cost Accounting
 Illustration
 Crown Fence Company is a firm that specializes in a custom ornamental metal
products.
 During February, the company completed three small contracts; each job
required a different quantity and type of material, labor input, conversion
operations.
Job 2 Job 3
Job 1 Interior railing Window guards
Ornamental fence

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Cost Accounting
 Illustration
 Crown uses normal costing valuation.
 Actual direct material and direct labor costs are fairly easy to identify and
associate with particular jobs.
 However, overhead costs are usually not traceable to specific jobs and must be
applied to production using a predetermined OH rate multiplied by some
actual cost driver.
 e.g. Utility costs are related to all jobs. Actually determining which jobs created
the need for a given amount of water, heat or electricity would be impossible.

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Cost Accounting
 Job Order Costing System
WIP Subsidiary Ledgers
Job 1 Job 2 Job 3 WIP Control
ACTUAL DM XX XX XX
= Job 1 100
Job 2 200
ACTUAL DL XX XX XX Job 3 500
APPLIED OVERHEAD
XX XX XX Total 800
----- ----- -----
100 200 500

Job 1 + Job 2 + Job 3 = WIP Control 20

Cost Accounting
Job Order Cost-Plus Contract Competitive bidding
technique
Costing • Allows producers to
cover all direct
• The company must
accurately estimate
System: costs and some
indirect costs and
the costs of making
the unique products

Pricing
to generate an associated with
acceptable profit each contract;
margin. otherwise, the
company can incur
significant losses
when actual costs
exceed those that
were estimated
during the bidding
process. 21

Cost Accounting
 Job Order Costing System 22

DETAILS AND
DOCUMENTS

Cost Accounting
Three stages Contracted for
but not yet
of production started

Each production stages are

supported by various documents In process
providing information about the job
and supporting the journal entries
related to the job.

Completed
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Cost Accounting
 Job Order • All financial information about a job

Cost Sheet – Direct material (from material requisitions)

– Direct labor (from time sheets or labor
tickets)
– Applied overhead
– Budgeted cost information (if such
information is used to estimate the job’s
selling price or to support a bid price)

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Cost Accounting
 Job Order • The set of job order cost sheets for all
incomplete jobs composes the WIP
Cost Sheet inventory subsidiary ledger.
• The total costs contained on the job
order cost sheets for all incomplete jobs
should reconcile to the WIP Inventory
control account balance in the general
ledger.
• When job is complete, use job order cost
sheet to analyze actual costs compared
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with budgeted costs
Cost Accounting
 Job Order Costing System
WIP Subsidiary Ledgers
Job 1 Job 2 Job 3 WIP Control
ACTUAL DM XX XX XX
= Job 1 100
Job 2 200
ACTUAL DL XX XX XX Job 3 500
APPLIED OVERHEAD
XX XX XX Total 800
----- ----- -----
100 200 500

Job order cost Job order cost Job order cost

sheet 1 sheet 2 sheet 3 26

Cost Accounting
 Job Order Cost Sheet
Customer ____________ Job No. 315
Starting Date _________ Job Description ____________
Completion Date ______ Contract Price _____________

Materials Direct Labor Overhead Applied

Date Ref# Amount Date Ref # Amount Date Ref# Amount

Total Materials _________

Total Labor _________ Total Cost of Job
Total OH Applied _________ ======== 27

Cost Accounting
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Cost Accounting
 Production Cycle

Direct materials
associated with the
job is issued to
production

Material Job order cost

requisition form sheet
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Cost Accounting
 Material • It is prepared so material can be
released from the warehouse and sent to
Requisition the production area.
Form • It indicates the types and quantities of
material to be issued to production or
used to perform a service job.
• Tracks who is responsible for materials
• Verifies flow of materials from warehouse
to department to job
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Cost Accounting
 Materials Requisition Form

Date ___________________ No. 341 1st copy for

Warehouse
Job No. _________________ Department _______________
Authorized by ___________ Issued by _________________
Received by _____________ Inspected by _______________ 2nd copy for
Production
Item Part Unit of Quantity Quantity Unit Total
No. No. Descrip. Measure Required Issued Cost Cost
3rd copy for
the job

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Cost Accounting
 Material Requisition Form
Particulars Dr Cr
Work in Process Inventory (direct material) Xx
Manufacturing Overhead - Control (indirect material) xx
Raw Material Inventory xx
To record direct and indirect materials issued per requisition

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Cost Accounting
 Production Cycle

Direct materials
associated with the Labor is applied to
job is issued to the job
production

Material Employee time Job order cost

requisition form sheet sheet
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Cost Accounting
 Employee  Indicates the jobs on which each
employee worked; and
Time Sheet  Time worked on each job

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Cost Accounting
Employee Time Sheet
Employee Name _______________
Employee No. _______________ For week ending
Department _______________
_______

Start Stop Total

Type of Work Job No. Time Time Day Hours

Employee Signature Supervisor’s Signature 35

Cost Accounting
 Material Requisition Form
Particulars Dr Cr
Work in Process Inventory (direct labor) Xx
Manufacturing Overhead - Control (indirect labor) xx
Salaries and Wages Payable xx
To record direct and indirect labor wages

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Cost Accounting
 Production Cycle

Direct materials
associated with the Labor is applied to Overhead is applied
job is issued to the job to the job
production

Material Employee time Job order cost

requisition form sheet sheet
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Cost Accounting
 Manufacturing Overhead
Overhead Account
Actual Overhead Applied Overhead

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Cost Accounting
 Manufacturing Overhead
Actual overhead incurred during the
production is debited to Manufacturing
Overhead Account
Overhead Control account.
Actual Overhead Applied Overhead

Particulars Dr Cr
Manufacturing overhead control Xx
Accumulated depreciation
Cash Xx
Utilities payable Xx
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Various accounts Xx
To record actual overheadCost
exclusive
Accounting
of indirect materials and indirect labor
 Manufacturing Overhead
Overhead Account Under normal costing, overhead is applied
to jobs with one or more annualized
predetermined OH rates and credited to
Actual Overhead Applied Overhead manufacturing overhead.

Particulars Dr Cr
Work in process inventory Xx
Manufacturing overhead control Xx
To apply overhead using predetermined rates Xx

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Cost Accounting
 Sale
Particulars Dr Cr
Accounts receivable Xx
Sale Xx
To the sale of goods on account Xx Matches revenues and
expenses on the income
statement

Particulars Dr Cr
Cost of goods sold Xx
Finished goods inventory Xx
To the cost of goods sold Xx
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Cost Accounting
 Accounting • Closing the under-applied or over-

for cost of applied overhead to cost of goods

sold
goods sold
Particulars Dr Cr
Cost of goods sold Xx
Manufacturing overhead control Xx
To close the under-applied overhead to cost of goods sold

Particulars Dr Cr
Manufacturing overhead control Xx
Cost of goods sold Xx
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To close the over-applied overhead to cost of goods sold

Cost Accounting
Job Order Costing • Automate data collection and data
and Technology entry
• Accounting software includes job
costing modules
• Share information using intranet
– Intranet: Restricted network for
sharing information and delivering
data from corporate databases to
local-area network (LAN) desktops
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Cost Accounting
Journal Entries

W & Sal Pay Materials WIP-Job 1 FG

Accts Pay Overhead WIP-Job 2 CGS

WIP consists of job cost sheets

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Cost Accounting
Purchase Materials on Account (a)

W & Sal Pay Materials WIP-Job 1 FG

a

Accts Pay Overhead WIP-Job 2 CGS

a

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Cost Accounting
Use Materials Requisition to Request
Materials for Jobs (b)
W & Sal Pay Materials WIP-Job 1 FG
a b b

Accts Pay Overhead WIP-Job 2 CGS

a b b

Direct materials to WIP

Indirect materials to Overhead 46

Cost Accounting
Apply Overhead (d)

W & Sal Pay Materials WIP-Job 1 FG

c a b b
c
d
Accts Pay Overhead WIP-Job 2 CGS
a b d b
c c
d
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Cost Accounting
Complete Job 1 (e)

W & Sal Pay Materials WIP-Job 1 FG

c a b b e e
c
d
Accts Pay Overhead WIP-Job 2 CGS
a b d b
c c
d
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Cost Accounting
Sell Job (f, g)

W & Sal Pay Materials WIP-Job 1 FG

c a b b e e f
c
d
Accts Pay Overhead WIP-Job 2 CGS
a b d b f
c c
d
Accts Rec Sales
g g
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Cost Accounting
 Job Order • Actual cost
• Normal cost
Costing Using • Standard cost
Standard – Predetermined norms (or
Cost System standards) for materials, labor, and
overhead
– Compare actual costs to standard
costs— difference is a variance

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Cost Accounting
Management Use • Estimate future job costs
of Job Order • Establish realistic bids and selling prices
Costing Systems • Develop budgets and standards
• Compare actual costs to estimated costs
• Furnish performance evaluation
information based on profitability of
jobs

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Cost Accounting
 Product and • Production processes may result
Material in losses of direct material or
partially completed products.
Losses in Job
Order Costing

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Cost Accounting
 Product and Shrinkage

Material Inherent in the manufacturing

process
Losses in Job Modifying the production process to
Order Costing reduce or eliminate shrinkage may
be difficult, impossible or simply
not cost beneficial
– Evaporation
– Leakage
– Oxidation
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Cost Accounting
 Product and Production errors
Material Cause a loss of units through
rejection at inspection for failure
Losses in Job to meet appropriate quality
Order Costing standards or designated product
specifications
– Defects can be economically
reworked
– Spoilage cannot be economically
reworked
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Cost Accounting
 Normal vs. Abnormal Loss
• Normal Loss—the loss falls within • Abnormal Loss—exceeds the
the tolerance level expected during tolerance level that is expected
production during production
– Anticipated on all jobs – Abnormal spoilage
• Include cost when calculating • Period cost—includes cost of
predetermined overhead application abnormal loss less any disposal
rate value
• Include cost less the estimated
disposal value
– Specific to a job
• Applied to the specific job
• Include cost less the estimated
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disposal value

Cost Accounting
References: • Raiborn & Kinney (2013), Cost Accounting
Principles 9th edition, Cengage Learning

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Cost Accounting