Job Order Costing: Prepared and Lectured by MR - Sin Rajak, MBA 1

Chapter II
Job Order Costing
Prepared and Lectured by Mr.Sin Rajak, MBA 1

Job Order Costing
Cost Accounting Job Order Reporting Job

System Cost Flow Cost Data
 Job Order Cost  Accumulating Cost  Cost of Goods

System  Assigning Cost to WIP Manufactured
 Process Cost System  Assigning Cost to Schedule
Finished Goods  Income Statement
 Assigning Cost to CGS Presentation
 Summary of Job Order  Under-or
Cost Flows Overapplied
 Job Order Costing for Manufacturing
Services Companies Overhead
 Advantage and
Disadvantage
I. Cost Accounting System
 Cost Accounting involves the measuring, recording
and reporting the product costs.
 Cost Accounting System consists of manufacturing

cost accounts that are fully integrated into the
general ledger of a company.
 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.
 There are two basics types of cost accounting systems
 A job order cost system, and
 A process cost system.

1. 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.

2. Process Cost System
 Process cost system is used when a series of
connected manufacturing processes or departments
produce a large volume of uniform or relatively
homogeneous products. Production is continuous.
 Process costing accounts for and accumulates

product-related costs for a period of time, as
opposed to assigning costs to specific products or
jobs.
 Cost a

I. Cost Accounting System
 Cost accounting systems differ widely from

company 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
presentation.

II. Job Order Cost Flow
 The flow of costs (direct materials, direct labor, and

manufacturing overhead) in job order cost
accounting parallels the physical flow of the material
as they are converted into finished goods.
 As job 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.

Finished Goods
Manufacturing Cost Work in Process Inventory
Raw Materials
Assigned to Completed
Factory Labors
Manufacturing
Overhead
Cost of Goods Sold
Sold

 There are two major steps in the flow of costs:
 Accumulating the manufacturing costs

incurred
 Assigning the accumulated costs to the work

done.
 Manufacturing costs incurred are accumulated in

entries by debits to Raw Materials Inventory, Factory
Labor, and Manufacturing Overhead
 The remaining entries pertain to the assignment of

manufacturing costs incurred.
Accumulation Assignment
1. Purchase raw materials 4. Raw materials are used
2. Incur factory labor 5. Factory labor is used
3. Incur manufacturing overhead 6. Overhead is applied
7. Completed goods are

recognized
8. Cost of goods sold is
recognized

1. Accumulating Manufacturing Costs
 Raw Material Costs
Example: Assume that Wallace purchases 2,000 lithium batteries

(Stock No. AA2746) at $5 per unit ($10,000) and 800 electronic
modules (Stock No. AA2850) at $40 per unit ($32,000) for a total
cost of $42,000 ($10,000 1 $32,000). The entry to record this
purchase on January 4 is:
Raw Materials Inventory $42,000
Jan 4 Account Payable $42,000
Purchase of raw materials on

account

 Factory Labor Costs
Example: Assume that Wallace incurs $32,000 of factory labor costs.

Of that amount, $27,000 relates to wages payable and $5,000 relates
to payroll taxes payable in February. The entry to record factory labor
for the month is:
Factory Labor $32,000
Factory Wages Payable $27,000

Jan 31
Employer Payroll Taxes Payable 5,000
To record factory labor costs

 Manufacturing Overhead Costs
 A company has many types of overhead costs. If these

overhead costs, such as property taxes, depreciation,
insurance, and repairs, relate to overhead costs of a
nonmanufacturing facility.
 If the costs relate to the manufacturing process, then they

are accumulated in Manufacturing Overhead, to ensure
their treatment as product costs.
 Using assumed data, the summary entry for manufacturing

overhead in Wallace Company is:

Manufacturing Overhead $13,800
Utilities Payable 4,800
Prepaid Insurance 2,000
Jan 31 Account Payable (for repairs) 2,600
Accumulated Depreciation 3,000
Property taxes payable 1,400
To record overhead costs

2. Assigning manufacturing Cost to Work in Process
 Assigning manufacturing costs to work in process results in
the following entries.
1. Debits made to Work in Process Inventory.
2. Credits made to Raw Materials Inventory, Factory

Labor, and Manufacturing Overhead.
 Journal entries for 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.
a. 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. Posting to job cost sheets are
made daily.

a. Job Cost Sheet
Job Cost Sheet
Jon No…………………………………………….. Quantity………………………………………….
Item………………………………………………... Date Requested………………………………
For………………………………………………….. Date Completed………………………………
Direct Direct Manufacturing

Date
Material Labor Overhead
Cost of completed job

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

a. 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 sheet.
 In short, raw materials costs are assigned to jobs

when the materials are issued by the storeroom.

b. Materials Requisition Slip
 The authorization for issuing raw materials is made on
prenumbered materials requisition slip signed by an
authorized employees such as a department supervisor.
 The requisition should indicate the quantity and type of

materials (direct or indirect) withdrawn and the account to
be charged.
 The requisition is prepared in duplicate.
 A copy is retained in the storeroom as evidence of the

materials released.
 The original is sent to accounting, where the cost per

unit and total cost of the materials used are determined.
b. Materials Requisition Slip
Wallance Manufacturing Company

Materials Requisition Slip
Deliver to: Assembly Department Req. No R247

Charge to: Work in Process – Job No. 101 Date 01/06/16
Quantity Description Stock No. Cost per Unit Total
200 Handles AA2746 $5.00 $1,000
Requested by: Received by:
Approved by Costed by:

c. 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.
 For example, if Wallace uses $24,000 of direct materials and

$6,000 of indirect materials in January, the entry is:
Work in Process Inventory $24,000
Manufacturing Overhead 6,000

Jan 31
Raw Materials Inventory 30,000
To assign materials to jobs and

overhead Prepared and Lectured by Mr.Sin Rajak, MBA 21
c. Materials Journalizing and Posting
 This entry reduces Raw Materials Inventory by $30,000,
increases Work in Process Inventory by $24,000, and increases
Manufacturing Overhead by $6,000, as shown below.
Work in Process Inventory

Raw Materials
$24,000
$42,000 $30,000 Manufacturing Overhead
$13,800
$6,000

d. Factory Labor Journalizing and Posting
 Labor costs are assigned to jobs on the basis of time tickets.

The time ticket should indicate the employee.
 The hours worked, the account and job to be charged, and

the total labor cost.

Wallace Manufacturing Company

Time Ticket
Date: 1/6/16
Employee John Nash Employee No : 124
Charge to Work in Process Job No : 101
Time Hourly Total

Rate Cost
Start Stop Total Hours
08:00 12:00 4 10.00 40.00
Approved by Bol Kader Costed by

m. Cher

 Just as with Materials, direct costs are debited to Work in
Process and indirect costs are debited to Manufacturing
Overhead.
 For example, if the $32,000 total factory labor cost consists

of $28,000 of direct labor and $4,000 of indirect labor, the
entry is:
Manufacturing Overhead 4,000

Jan 31
Factory Labor 32,000
To assign labor to jobs and overhead

 This entry reduces Raw Materials Inventory by $30,000,
increases Work in Process Inventory by $24,000, and increases
Manufacturing Overhead by $6,000, as shown below.
Work in Process Inventory

Factory Labor
$24,000
$28,000
$32,000 $32,000
Manufacturing Overhead
$13,800
$6,000
$4,000
e. Manufacturing Overhead Cost Journalizing and Posting
 Manufacturing Overhead Costs are assigned to work in

process and to specific jobs on an estimated basis through
the use of a predetermined overhead rate.
 The predetermined overhead rate is established at the

beginning of the year and is based on the relationship
between estimated annual overhead costs and expected
annual operating 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.

 The formula to compute a predetermined overhead rate is

shown.
Estimate Annual
Overhead Costs ÷ Expected Annual
Operating Acivities = 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. Prepared and Lectured by Mr.Sin Rajak, MBA 28
 Using Predetermined Overhead Rates

Work in Process
is
Predetermined
Activity Base assigned
Overhead Rate to
Job 1 Job 2 Job 3

Example: Wallace uses direct labor cost as the activity base.

Assuming that the company expects annual overhead
costs to be $280,000 and direct labor costs for the year to
be $350,000,
the overhead rate is 80%, computed as follows.
$280,000 4 $350,000 5 80%
 Overhead applied for January is $22,400 ($280,000 × 80%),

and the application is recorded through the entry show
below.

Jan 31 Manufacturing Overhead 22,400
To assign overhead to jobs
Manufacturing Overhead Work in Process Inventory
$13,800 $22,400 $24,000
$6,000 $28,000
$4,000 $22,400

 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 unfinished jobs.
 Assuming that all jobs are unfinished, proofs in

Wallance manufacturing Company is shown below
Work in Process Inventory Job Cost Sheets
$24,000 No. 101 $39,000

$28,000 102 23,200
103 12,200
$22,400
$74,400 $74,400

f. Completed Job Cost Sheet
Job Cost Sheet
Job No. 101 Quantity 1,000

Item Magnetic Sensors Date Requested February 5
For Tanner Company Date Completed January 31
Direct Direct Manufacturing

Date
Material Labor Overhead
1/8 $1,000
1/10 $9,000 $7,200
1/12 7,000
1/26 4,000
1/31 6,000 4,800
$12,000 $15,00 $12,000
Cost of completed job
Direct materials $12,000
Direct labor 15,000
Manufacturing overhead 12,000
Total cost $39,000
Unit cost ($39,000÷1,000) Prepared and Lectured by Mr.Sin Rajak, MBA $39.00 33
3. Journalizing Finished Goods
 The entry the cost of the completed job from Work in
Process Inventory to Finished Goods Inventory for
Wallance Manufacturing Company is:
Finished Goods Inventory $39,000
Jan 31 Work in Process Inventory 39,000
(To record completion of Job No.101)
Work in Process Inventory Finished Goods Inventory
$24,000 $39,000 $39,000

$28,000
$22,400
4. Assigning Manufacturing Cost to Cost of Goods Sold
 Recognition of Cost of Goods Sold is made when
each sale occurs.
 On January 31 Wallace Manufacturing Company

sells Job No.101 (costing $39,000) for $50,000 on
account. The entries are:
Accounts Receivable $50,000

Jan 31 Sales $50,000
(To record completion of Job No.101)
Cost of Goods Sold $39,000

Jan 31
Finished Goods Inventory $39,000
(To record cost of job No.101
5. Cost of Goods Manufactured
 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 labor in determining total
manufacturing costs.

a. Cost of Goods Manufactured 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.

Cost of Goods Manufactured Schedule

Cost of Goods Manufactured Schedule
For the Month Ended January 31, 2014
Work in Process Inventory, Jan 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, Jan 31 35,400
Cost of Goods Manufactured $39,000

6. Income Statement and Balance Sheet
 The income statement and balance sheet in job
order costing are the same as those in chapter 1.
 An example, the partial income statement Company

is shown below.

Income Statement
For the Month Ended January 31, 2014
Sales $50,000
Less: Cost of Goods Sold
Finished Goods Inventory Jan 1 $0
Cost of goods manufactured 39,000
Cost of goods available for sale 39,000
Finished goods inventory, Jan 31 0
Cost of goods sold 39,000
Gross Profit $11,000
7. Flow of Documents
Source Documents
The job cost sheet
Materials summarizes the
Requisition Slips cost of jobs
completed or not
completed at the
Labor Time Job Cost end of the
Ticket Sheet accounting period.
Jobs completed
Predetermined are transferred to
Overhead Rate finished goods to
await sales.

8. Under-or Overapplied Manufacturing Overhead
 When Manufacturing Overhead has a debit
balance, overhead is said to be underapplied.
 Underapplied overhead means that the overhead

assigned to work in process is less than the
overhead incurred.
 Conversely, when manufacturing overhead has a

credit balance, overhead is overapplied.
 Overapplied overhead means that the overhead

assigned to work in process is greater than the
overhead incurred.
Manufacturing Overhead
 If actual is greater than
Actual Applied applied,manufacturing
(Cost incurred) (Cost assigned) overhead is
underapplied.
 If actual is less than

applied, manufacturing
overhead is overapplied.

 `The existence of under-or overapplied overhead at
the end of a month (or other interim period)
usually does not require corrective action by
management .
 It is reported on interim Balance Sheet as follows:
 Underapplied overhead is prepaid expense

(current assets), and
 Overapplied overhead is unearned revenue

(current liability)

 `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 adjustment entry.

9. Elimination of Under-or Overapplied Manufacturing
Overhead
 Under-or overapplied is usually considered to be

an adjustment to cost of goods sold.
 Thus, undeapplied overhead is debited to Cost of

Goods Sold, and overapplied overhead is credited
to Cost of Goods Sold.

9. Elimination of Under-or Overapplied Manufacturing
Overhead
 Wallace Manufacturing Company has a $2,500
credit balance in Manufacturing Overhead at
December 31.
 The adjustment entry for the overapplied overhead

is shown below
Manufacturing Overhead $2,500
Dec 31 Cost of Goods Sold $2,500

(To transfer overapplied overhead to
cost of goods sold)

THE END
Financial Institution Management. Instructed by Mr. Sin Rajak, MBA 48

Job Order Costing: Prepared and Lectured by MR - Sin Rajak, MBA 1

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Chapter II

Job Order Costing

Prepared and Lectured by Mr.Sin Rajak, MBA 1

Cost Accounting Job Order Reporting Job

 Job Order Cost  Accumulating Cost  Cost of Goods

 Cost Accounting System consists of manufacturing

 An important feature of a cost accounting system is

 There are two basics types of cost accounting systems

 A job order cost system, and

 A process cost system.

 Under a job order cost system, costs are assigned

 An important feature of job order costing is that

 The objective of job order costing is to calculate the

Prepared and Lectured by Mr.Sin Rajak, MBA 4

 Process costing accounts for and accumulates

Prepared and Lectured by Mr.Sin Rajak, MBA 5

 Cost accounting systems differ widely from

 The objective of both systems is to provide unit cost

Prepared and Lectured by Mr.Sin Rajak, MBA 6

 The flow of costs (direct materials, direct labor, and

 As job are worked on, manufacturing costs are

 When a job is completed, the cost of the job is

 When the goods are sold, their cost is transferred to

Prepared and Lectured by Mr.Sin Rajak, MBA 7

Cost of Goods Sold

Prepared and Lectured by Mr.Sin Rajak, MBA 8

 There are two major steps in the flow of costs:

 Accumulating the manufacturing costs

 Assigning the accumulated costs to the work

 Manufacturing costs incurred are accumulated in

 The remaining entries pertain to the assignment of

2. Incur factory labor 5. Factory labor is used

3. Incur manufacturing overhead 6. Overhead is applied

7. Completed goods are

Prepared and Lectured by Mr.Sin Rajak, MBA 10

 Raw Material Costs

Example: Assume that Wallace purchases 2,000 lithium batteries

Raw Materials Inventory $42,000

Jan 4 Account Payable $42,000

Purchase of raw materials on

Prepared and Lectured by Mr.Sin Rajak, MBA 11

 Factory Labor Costs

Example: Assume that Wallace incurs $32,000 of factory labor costs.

Factory Wages Payable $27,000

To record factory labor costs

Prepared and Lectured by Mr.Sin Rajak, MBA 12

 Manufacturing Overhead Costs

 A company has many types of overhead costs. If these

 If the costs relate to the manufacturing process, then they

 Using assumed data, the summary entry for manufacturing

Prepared and Lectured by Mr.Sin Rajak, MBA 13

Manufacturing Overhead $13,800

Utilities Payable 4,800

Prepaid Insurance 2,000

Jan 31 Account Payable (for repairs) 2,600

Accumulated Depreciation 3,000

Property taxes payable 1,400

To record overhead costs

Prepared and Lectured by Mr.Sin Rajak, MBA 14

1. Debits made to Work in Process Inventory.

2. Credits made to Raw Materials Inventory, Factory

 Journal entries for assignment of costs to work in process