MANAGERIAL ACCOUNTING MANUAL

Module 2

Job Order Costing

LEARNING OBJECTIVES

1. Describe cost systems and the flow of costs in a job order system.
2. Use a job cost sheet to assign costs to work in process.
3. Demonstrate how to determine and use the predetermined overhead rate.
4. Prepare entries for manufacturing and service jobs completed and sold.
5. Distinguish between under and overapplied manufacturing overhead.

LO1.
Describe cost 2.1 Cost Accounting Systems
systems and
the flow of Cost accounting involves measuring, recording, and reporting product and
costs in a job service costs. Companies determine both the total cost and the unit cost of each
order system. product. The accuracy of the product cost information is critical to the success of
the company. Companies use this information to determine which products to
produce, what prices to charge, and how many units to produce. Accurate product
cost information is also vital for effective evaluation of employee performance.

A cost accounting system consists of accounts for the various manufacturing

and service costs. These accounts 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. Such a system provides immediate, up-to-date information on
the cost of a product.

There are two basic types of cost accounting systems: (1) a process cost system
and (2) a job order cost system. Although cost accounting systems differ widely
from company to company, most involve one of these two traditional product costing
systems.

2.1.1 Process Cost System

A company uses a process cost system when it manufactures a large volume of
similar products. Production is continuous.

Process costing accumulates product-related costs for a period of time (such as

a week or a month) instead of assigning costs to specific products or job orders. In
process costing, companies assign the costs to departments or processes for the
specified period of time.

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Illustration 2.1 shows examples of the use of a process cost system.

2.1.2 Job Order Cost System

Under a job order cost system, the company assigns costs to each job
or to each batch of goods.

An important feature of job order costing is that each job or batch has
its own distinguishing characteristics. For example, each house is custom
built, each consulting engagement by a CPA fi rm is unique, and each printing
job is different.

The objective is to compute the cost per job. At each point in

manufacturing a product or performing a service, the company can identify
the job and its associated costs. A job order cost system measures costs for
each job, rather than for set time periods.

Illustration 2.2 shows the recording of costs in a job order cost system
for Disney as it produced two different films at the same time: an animated
film and an action thriller.

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2.1.3 Job Order Cost Flow

We first address the flow of costs for a manufacturer (service company costs
are addressed in a later section). The flow of costs (direct materials, direct labor,
and manufacturing overhead) in job order cost accounting parallels the physical
flow of the materials as they are converted into finished goods and then sold.

As shown in Illustration 2.3, companies first accumulate manufacturing costs in

the form of raw materials, factory labor, or manufacturing overhead. They then
assign manufacturing costs to the Work in Process Inventory account. When a
job is completed, the company transfers the cost of the job to Finished Goods
Inventory. Later when the goods are sold, the company transfers their cost to
Cost of Goods Sold.

2.1.4 Accumulating Manufacturing Costs

a. Raw Materials Costs

When Wallace receives the raw materials (both direct and indirect) it
has purchased from a supplier, it debits the cost of the materials to Raw
Materials Inventory.

To illustrate, 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 + $32,000). The entry to record this purchase on January 4 is:

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(1)

Jan 4 Raw Materials Inventory 42,000

Accounts Payable 42, 000
(Purchase of raw materials on
account )

b. Factory Labor Costs

Costs related to manufacturing employees are accumulated in Factory
Labor to ensure their treatment as product costs. Factory labor consists of
three costs: (1) wages payable related to factory workers, (2) employer
payroll taxes on these wages, and (3) fringe benefits (such as sick pay,
pensions, and vacation pay) incurred by the employer.

To illustrate, 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 (both
direct and indirect) for the month is:

(2)

Jan 31 Factory Labor 32,000

Factory Wages Payable 5,000
Employer Payroll Taxes Payable 27,000
(To record factory labor
costs)

c. 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, such as an office building, then
these costs are expensed as period costs (e.g., Property Tax Expense,
Depreciation Expense, Insurance Expense, and Maintenance and Repairs
Expense). If the costs relate to the manufacturing process, then they are
accumulated in Manufacturing Overhead to ensure their treatment as product
costs.

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Using assumed data, the summary entry for manufacturing overhead

(other than indirect materials and indirect labor) in Wallace Company is:

(3)

Jan 31 Manufacturing Overhead 13,800

Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated
Depreciation 3,000
Property Taxes
Payable 1,400
(To record overhead costs)

EXAMPLE NO. 1

1. During the current month, Ringling Company incurs the following manufacturing
costs:

a. Raw material purchases of $4,200 on account.

Solutions:

b. Factory labor of $18,000. Of that amount, $15,000 relates to wages payable and
$3,000 relates to payroll taxes payable.

Solutions:

c. Factory utilities of $2,200 are payable, prepaid factory insurance of $1,800 has
expired, and depreciation on the factory building is $3,500.

Prepare journal entries for each type of manufacturing cost

Solutions:

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LO2. Use a 2. 2 Assigning Manufacturing Costs

job cost
sheet to Assigning manufacturing costs to work in process results in the following
assign entries.
costs to
work in 1. Debits made to Work in Process Inventory.
process.
2. Credits made to Raw Materials Inventory, Factory Labor, and
Manufacturing Overhead.

An essential accounting record in assigning costs to jobs is a job cost

sheet, as shown in Illustration 2.4. A job cost sheet is a form used to
record the costs chargeable to a specific job and to determine the total
and unit costs of the completed job

2.3 Raw Materials Costs

Companies assign raw materials costs to jobs when their materials
storeroom issues the materials in response to requests. Requests for issuing
raw materials are made by production department personnel on a prenumbered
materials requisition slip. The materials issued may be used directly on a job,
or they may be considered indirect materials.

Illustration 2.5 shows, the requisition should indicate the quantity and
type of materials withdrawn and the account to be charged

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The company journalizes the requisitions. For example, if Wallace

uses $24,000 of direct materials and $6,000 of indirect materials in January,
the entry on January 31 is:

(4)

Jan 31 Work in Process Inventory 24,000

Manufacturing Overhead 6,000
Raw Materials Inventory 30,000
(To assign materials to jobs and
overhead)

This entry reduces Raw Materials Inventory by $30,000, increases

Work in Process Inventory by $24,000 as the direct costs are assigned to jobs,
and increases Manufacturing Overhead by $6,000, as the following shows.

2.4 Factory Labor Costs

Companies assign factory labor costs to jobs on the basis of time
tickets prepared when the work is performed. The time ticket indicates the

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

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:

(5)

Jan 31 Work in Process Inventory 28,000

Manufacturing Overhead 4,000
Factory Labor 32,000
(To assign labor to jobs and
overhead)

As a result of this entry, Factory Labor is reduced by $32,000 so it

has a zero balance, and labor costs are assigned to the appropriate
manufacturing accounts. The entry increases Work in Process Inventory by
$28,000 and increases Manufacturing Overhead by $4,000, as shown below.

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Example No.2

1. Danielle Company is working on two job orders. The job cost sheets show
the following:

Direct materials—Job 120 $6,000; Job 121 $3,600

Direct labor—Job 120 $4,000; Job 121 $2,000

Manufacturing overhead—Job 120 $5,000; Job 121 $2,500

Prepare the three summary entries to record the assignment of costs

to Work in Process from the data on the job cost sheets.

Solution:

Direct Materials
Work in Process Inventory (6,000+3,600) 9,600
Raw Materials Inventory 9,600
(To assign materials to jobs)

Direct Labor
Work in Process Inventory (4,000 + 2,000) 6,000
Factory Labor 6,000
(To assign labor to jobs)

Manufacturing Overhead
Work in Process Inventory (5,000 + 2,500) 7,500
Manufacturing Overhead 7,500
(To assign overhead to jobs)

LO3.
Demonstr Predetermined Overhead Rates
ate how to
determine The predetermined overhead rate is based on the relationship
and use between estimated annual overhead costs and estimated annual operating
the activity, expressed in terms of a common activity base. The formula for a
predetermi predetermined overhead rate is shown:
ned
overhead
rate.

Example: Wallace Company uses direct labor cost as the activity base.
Assuming that the company estimates annual overhead costs to be $280,000

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and direct labor costs for the year to be $350,000, the overhead rate is 80%,
computed as shown:

Wallace Company applies manufacturing overhead to work in process

after it assigns direct labor costs. It also applies manufacturing overhead to
specific jobs at that time. For January, Wallace applied overhead of $22,400
in response to its assignment of $28,000 of direct labor costs (direct labor
cost of $28,000 × 80%). The following entry records this application.

(6)

Jan 31 Work in Process Inventory 22,400

Manufacturing Overhead 22,400
(To assign overhead to job)

This entry reduces the balance in Manufacturing Overhead and

increases Work in Process Inventory by $22,400, as shown below.

The overhead that Wallace applies to each job will be 80% of the direct
labor cost of the job for the month. Illustration 2.12 shows the Work in
Process Inventory account and the job cost sheets after posting. Note that
the debit of $22,400 to Work in Process Inventory equals the sum of the
overhead applied to jobs: Job No. 101 $12,000 1 Job No. 102 $7,200 1 Job
No. 103 $3,200.

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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. Illustration 2.13 presents proof of the agreement of the control and
subsidiary accounts in Wallace. (It assumes that all jobs are still in process.)

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EXAMPLE NO.3:

Stanley Company produces specialized safety devices. For the year,

manufacturing overhead costs are estimated to be $160,000. Estimated
machine usage is 40,000 hours. The company assigns overhead based on
machine hours. Job No. 302 used 2,000 machine hours.

Compute the predetermined overhead rate, determine the amount of

overhead to apply to Job No. 302, and prepare the entry to apply overhead
to Job No. 302 on March 31.

Solution
Predetermined overhead rate = $160,000 ÷ 40,000 hours = $4.00 per
machine hour
Amount of overhead applied to Job No. 302 = 2,000 hours × $4.00 = $8,000
The entry to record the application of overhead to Job No. 302 on March 31
is:

Work in Process Inventory 8,000

Manufacturing Overhead 8,000
(To assign overhead to jobs)

LO4.
Prepare 2.5 Entries for Jobs Completed and Sold
entries for
manufactu
ring and
Assigning Costs to Finished Goods
service
When a job is completed, Wallace Company summarizes the costs and
jobs
completed completes the lower portion of the applicable job cost sheet. For example, if
and sold. we assume that Wallace completes Job No. 101, a batch of electronic sensors,
on January 31, the job cost sheet appears as shown in Illustration 2.14.

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When a job is finished, Wallace makes an entry to transfer its total

cost to finished goods inventory. The entry is as follows.

(7)

Jan 31 Finished Goods Inventory 39,000

Work in Process Inventory 39,000
(To record completion of Job No. 101)

This entry increases Finished Goods Inventory and reduces Work in

Process Inventory by $39,000, as shown in the T-accounts below.

2.6 Assigning Costs to Cost of Goods Sold

Companies recognize cost of goods sold when each sale occurs. To
illustrate the entries a company makes when it sells a completed job, assume

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that on January 31 Wallace Company sells on account Job No. 101. The job
cost $39,000, and it sold for $50,000. The entries to record the sale and
recognize cost of goods sold are:

(8)

Jan 31 Accounts Receivable 50,000

Sales Revenue 50,000
(To record sale of Job No. 101)

Jan
31 Cost of Goods Sold 39,000
Finished Goods Inventory 39,000
(To record cost of Job No. 101)

This entry increases Cost of Goods Sold and reduces Finished Goods
Inventory by $39,000, as shown in the T-accounts below.

2.7 Summary of Job Order Cost Flows

Illustration 2.15 shows a completed flowchart for a job order cost accounting
system. All postings are keyed to entries 1–8 in the example presented in the
previous pages for Wallace Company.

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EXAMPLE NO. 4:

During the current month, Onyx Corporation completed Job 109 and
Job 112. Job 109 cost $19,000 and Job 112 cost $27,000. Job 112 was sold
on account for $42,000. Journalize the entries for the completion of the two
jobs and the sale of Job 112.

Finished Goods Inventory 46,000

Work in Process Inventory 46,000
(To record completion of Job No. 109
costing 19,000 and Job 112 costing 27,000)

Accounts Receivable 42,000

Sales Revenue 42,000
(To record sale of Job No. 112)

Cost of Goods Sold 27,000

Finished Goods Inventory 27,000
(To record cost of goods sold for Job No. 112)

LO5.
Distinguish 2.8 Under- or Overapplied Manufacturing Overhead
between
under- and When Manufacturing Overhead has a debit balance, overhead is said
overapplie to be underapplied. Underapplied overhead means that the overhead applied
d to work in process is less than the overhead incurred. Conversely, when
manufactur manufacturing overhead has a credit balance, overhead is overapplied.
ing Overapplied overhead means that the overhead applied to work in process is
overhead. greater than the overhead incurred

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Illustration 2.18 shows these concepts.

Year-End Balance

At the end of the year, all manufacturing overhead transactions are

complete. There is no further opportunity for offsetting events to occur. At
this point, Wallace Company eliminates any balance in Manufacturing
Overhead by an adjusting entry. It considers under- or overapplied overhead
to be an adjustment to cost of goods sold. Thus, Wallace debits underapplied
overhead to Cost of Goods Sold. It credits overapplied overhead to Cost of
Goods Sold.

To illustrate, as noted earlier in the chapter and shown below, after

overhead of $22,400, Wallace has a $1,400 debit balance in Manufacturing
Overhead at December 31. This occurred because the amount of overhead
applied was less than the amount incurred during the period.

The adjusting entry for the underapplied overhead is:

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EXAMPLE:

For Karr Company, the predetermined overhead rate is 140% of direct

labor cost. During the month, Karr incurred $90,000 of factory labor costs,
of which $80,000 is direct labor and $10,000 is indirect labor. Actual
overhead incurred (including indirect labor) was $119,000.

Compute the amount of manufacturing overhead applied during the

month. Determine the amount of under- or overapplied manufacturing
overhead.

SOLUTION:

Manufacturing overhead applied = (140% × $80,000) = $112,000

Underapplied manufacturing overhead = ($119,000 − $112,000) = $7,000

Cost of Goods Sold $7,000

Manufacturing Overhead $7,000
(To transfer underapplied overhead cost)

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Name: _______________________________ Score: _____________

Section/Course Code: _________________ Date: ______________

Exercise No. 2.1

1. A job order cost sheet for Michaels Company is shown below.

Instructions:
a. Answer the following questions.
1. What was the balance in Work in Process Inventory on January 1 if this
was the only unfinished job?
2. If manufacturing overhead is applied on the basis of direct labor cost, what
over-head rate was used in each year?

b. Prepare summary entries at January 31 to record the current year’s transactions

pertaining to Job No. 92

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Name: _______________________________ Score: _____________

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Exercise No. 2.2

1. Cardella Company applies overhead on the basis of direct labor costs. The
company estimates annual overhead costs will be $760,000 and annual direct labor
costs will be $950,000. During February, Cardella works on two jobs: A16 and B17.
Summary data concerning these jobs are as follows.

Manufacturing Costs Incurred

Purchased $54,000 of raw materials on account.
Factory labor $76,000, plus $4,000 employer payroll taxes.
Manufacturing overhead incurred exclusive of indirect materials and indirect
labor $59,800

Assignment of Costs
Direct materials: Job A16 $27,000, Job B17 $21,000
Indirect materials: $3,000
Direct labor: Job A16 $52,000, Job B17 $26,000
Indirect labor: $2,000

The company completed Job A16 and sold it on account for $150,000. Job
B17 was only partially completed.

Instructions:
a. Compute the predetermined overhead rate.
b. Journalize the February transactions in the sequence followed in the lessons.
c. What was the amount of under- or overapplied manufacturing overhead?

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Name: _______________________________ Score: _____________

Section/Course Code: _________________ Date: ______________

Exercise No. 2.3

1. Kwik Kopy Company applies operating overhead to photocopying jobs on the

basis of machine hours used. Overhead costs are estimated to total $290,000 for
the year, and machine usage is estimated at 125,000 hours. For the year, $295,000
of overhead costs are incurred and 130,000 hours are used.

Instructions

a. Compute the service overhead rate for the year.

b. What is the amount of under- or overapplied overhead at December 31?

c. Assuming the under- or overapplied overhead for the year is not

allocated to inventory accounts, prepare the adjusting entry to assign the
amount to cost of jobs finished.

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