ً ‫ صفحة الباحث العلوي هجانا‬Alaa.aliasrei@gmail.

com ‫@ عالء هحسن شحن‬Aliasrei ‫تلكرام‬

CHAPTER 17
Costing Systems: Job Order Costing

PLANNING MATRIX
Enhancing
Knowledge, Skills, and
Learning Objective Building Your Basic Knowledge and Skills Critical Thinking
1. Explain why unit cost is SE 1 C1
important in the C2
management process. C5
2. Distinguish between the SE 2, 3 E 1, 2, 3 C2
two basic types of product
costing systems, and
identify the information
each provides.
3. Explain cost flow in a SE 4, 5, 6 E 4, 5, 6, 7 P 1, 2, 3, 6, C3
manufacturer’s job order 7, 8
costing system,.
4. Prepare a job order cost SE 7, 8, E 8, 9, 10, P 3, 4, 5, 8, C4
card, and compute a job 9, 10 11, 12, 13, 9, 10 C5
order’s product or service 14, 15 C6
unit cost
MEMORANDA:
SE: Short Exercises
E: Exercises
P: Problems (Each problem has a User Insight question.)
All questions are in the text with related Learning Objectives (Stop, Think, and Apply).

SUGGESTED INSTRUCTIONAL STRATEGY

Output Skills Developed:
Technical

Related Learning Objectives:

2, 3, 4

Instructional Strategy
Learning activity: Demonstration
Learning environment: Active, in-class

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
226 Chapter 17: Costing Systems: Job Order and Process Costing

Learning tool: E 2, P 2, or C 6

Steps to Implement
1. Gather materials for the demonstration: direct materials (flour, sugar, butter, etc., or cookie mix in
a box), work in process (bowl, cups, spoons, batter), and finished goods (cookies).
2. Prepare an in-class assignment that requires students to perform one or more of the following
tasks:
a. Students are to write down their observations about the relationship between the flow of
costs and the production flow.
b. They are to explain (1) what a job order costing system is, when it would be appropriate to
use it for costing cookies, and what the work in process elements would be (e.g., batches
varying by customer request), and (2) what a process costing system is, when it would be
appropriate to use it for costing cookies, and what the work in process elements would be
(e.g., mixing department, baking department).
c. They are to calculate the direct materials cost per cookie and to discuss the labor and
overhead costs that should be charged to each cookie and how those costs would be
determined and allocated.
3. Distribute the assignment to the class. Discuss it briefly, and then perform the demonstration.
Allow students about ten minutes to prepare their answers.
4. Ask students to discuss their answers. Use the chalkboard, overhead projector, or flip charts to
convey the points made in the discussion.
5. If time permits, ask students to identify services they have performed for which a “product” cost
could be calculated. Examples include lawn mowing services, babysitting services, volunteering
at nonprofit organizations, catering parties, and helping senior citizens run errands. All are labor-
intensive services and have some overhead costs. Discuss the importance of costing services and
how the cost of services differs from the cost of products. Point out how the accounting system
would differ in accumulating service costs and product costs.

Assessment
Technical skills: Give a brief quiz at the end of the period to test recall, comprehension, and
application. Ask a related question on the next examination.

RESOURCE MATERIALS AND OUTLINES

OBJECTIVE 1: Explain why unit cost is important in the management process.
Summary Statement
During the planning stage of the management process, information about costs helps managers develop
budgets, establish prices, set sales goals, plan production volume, estimate product or service unit costs,
and determine human resource needs. During the year, managers use cost information to make
decisions about controlling costs, managing the company’s volume of activity, ensuring quality, and
negotiating prices. When evaluating performance, managers analyze actual and targeted cost
information to evaluate performance and adjust planning and decision-making strategies. Managers use
unit costs to determine inventory balances and the cost of goods or services sold for the financial
statements. They also prepare internal reports that compare actual unit costs and targeted costs; these
reports enable them to determine whether cost goals for products or services are being achieved.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 17: Costing Systems: Job Order and Process Costing 227

Lecture Outline
I. In the planning stage, managers use cost information to
A. Develop budgets.
B. Establish prices.
C. Set sales goals.
D. Plan production volume.
E. Estimate product or service unit costs.
F. Determine human resource needs.
II. During the year, managers use cost information to
A. Make decisions about controlling costs.
B. Manage the company’s volume of activity.
C. Ensure the quality of products or services.
D. Negotiate prices.
III. When evaluating performance, managers use cost information to
A. Evaluate actual and planned performance.
B. Adjust planning and decision-making strategies.
IV. When communicating in reports, managers use cost information to
A. Determine inventory balances and the cost of goods or services sold for the financial
statements.
B. Prepare internal reports that compare actual unit costs and targeted costs.

Teaching Strategy
Use Case 1 to illustrate the role information about costs plays in the management process and in the
formulation of a business plan.

OBJECTIVE 2: Distinguish between the two basic types of product costing systems, and
identify the information each provides.
Summary Statement
A product costing system is a set of procedures used to account for an organization’s product costs and
to provide timely and accurate unit cost information for pricing, cost planning and control, inventory
valuation, and financial statement preparation. The two basic types of product costing systems are the
job order costing system and the process costing system.
Organizations that make custom, unique, or special-order products typically use a job order costing
system. Such a system traces the costs of direct materials, direct labor, and overhead to a specific batch
of products or a specific job order (i.e., a customer order for a specific number of specially designed,
made-to-order products). A job order cost card is the document on which all costs incurred in the
production of a particular job order are recorded.
Companies that produce large amounts of similar products or liquid products or that have long,
continuous production runs of identical products typically use a process costing system. Makers of
paint, soft drinks, candy, bricks, and paper would use such a system. A process costing system first
traces the costs of direct materials, direct labor, and overhead to processes, departments, or work cells
and then assigns an average cost per unit to the products manufactured by those processes, departments,
or work cells.
In reality, few production processes are a perfect match for either a job order costing system or a
process costing system. The typical product costing system therefore combines parts of job order
costing and process costing to create a hybrid system designed specifically for an organization’s
production process.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
228 Chapter 17: Costing Systems: Job Order and Process Costing

New Concepts and Terminology

product costing system; job order costing system; job order; job order cost card; process costing
system; operations costing system

Related Text Illustrations

Table 1: Characteristics of Job Order Costing and Process Costing Systems
Focus on Business Practice: Why Does Toyota Use a Hybrid Product Costing System?

Lecture Outline
I. To track product costs throughout the management process, an organization may use a job order
costing system, a process costing system, or a hybrid version of the two.
II. The type of product costing system an organization uses depends on the nature of its production
process.
III. Organizations whose units of output are quite different—that is, they make custom, unique, or
special-order products—typically use job order costing.
A. A job order costing system traces the costs of direct materials, direct labor, and overhead to
a specific batch of products or a specific job order.
1. A job order is a customer order for a specific number of specially designed, made-to-
order products.
2. A job order cost card is the document on which all costs incurred in the production of a
particular job order are recorded.
IV. Organizations that produce large amounts of similar products or liquids or that have a continuous
flow of identical products typically use process costing.
A. Examples of products whose production flow makes them suitable for process costing
include bricks, beverages, paint, and paper.
B. A process costing system first traces the costs of direct materials, direct labor, and overhead
to processes, departments, or work cells and then assigns an average cost per unit to the
products produced by those processes, departments, or work cells.

Teaching Strategy
Short Exercise 2 is useful in distinguishing between the types of products that are appropriate for job
order costing and those that are appropriate for process costing. Exercises 1 and 2 also reinforce the
material covered in this learning objective.

OBJECTIVE 3: Explain the cost flow in a manufacturer’s job order costing system.
Summary Statement
In a manufacturer’s job order costing system, the costs of materials are first debited to the Materials
Inventory account and are recorded in the corresponding accounts in the Materials Inventory account’s
subsidiary ledger. Labor costs are first accumulated in the Factory Payroll account. The various
overhead costs (including indirect labor costs and indirect materials) are first debited to the Overhead
account.
As products are manufactured, the costs of direct materials and direct labor are transferred to the Work
in Process Inventory account. Overhead costs are applied at a predetermined overhead rate by a debit to
the Work in Process Inventory account and a credit to the Overhead account. All the costs of jobs in
process but not yet complete are recorded in a subsidiary ledger of job order cost cards that supports the
Work in Process Inventory account.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 17: Costing Systems: Job Order and Process Costing 229

When products and jobs are completed, the costs assigned to them are transferred to the Finished Goods
Inventory account and are recorded in that account’s subsidiary ledger. When the products are sold and
shipped, their costs are transferred to the Cost of Goods Sold account. Any balance in the Overhead
account at the end of the period is closed to Cost of Goods Sold.

Related Text Illustration

Exhibit 1: The Job Order Costing System—Augusta Custom Golf Carts, Inc.

Lecture Outline
I. Cost flows in a manufacturer’s job order costing system are recorded as follows:
A. The costs of materials are first charged to the Materials Inventory account and are recorded
in the corresponding accounts in the Materials Inventory account’s subsidiary ledger.
B. Labor costs are first accumulated in the Factory Payroll account.
C. The various overhead costs (including indirect labor costs and indirect materials) are first
charged to the Overhead account.
1. As products are manufactured, the costs of direct materials and direct labor are
transferred to the Work in Process Inventory account and are recorded in a subsidiary
ledger of job order cost cards that supports the Work in Process Inventory account.
2. Overhead costs applied at a predetermined overhead rate are charged to the Work in
Process Inventory account and are recorded in that account’s subsidiary ledger. These
charges are used to reduce the balance in the Overhead account.
D. When products and jobs are completed, the costs assigned to them are transferred to the
Finished Goods Inventory account and are recorded in that account’s subsidiary ledger.
E. When the products are sold and shipped, their costs are transferred to the Cost of Goods
Sold account.
F. Any balance in the Overhead account at the end of the period is closed to Cost of Goods
Sold.

Teaching Strategy
Use Exhibit 1 to illustrate the flow of costs through a job order costing system. Use Problem 2 to
reinforce this concept.

OBJECTIVE 4: Prepare a job order cost card, and compute a job order’s product or
service unit cost.
Summary Statement
In a job order costing system, all costs of direct materials, direct labor, and overhead for a particular job
are accumulated on a job order cost card. Because all these costs are accumulated in one Work in
Process Inventory account, a subsidiary ledger made up of job order cost cards is needed to trace the
costs of specific jobs.
The first step in computing product unit cost in a job order costing system is to total the manufacturing
costs recorded on a job order cost card. This amount is then divided by the number of units produced
for the job to obtain the unit cost. The product unit cost is entered on the job order cost card and will be
used for inventory valuation.
Service organizations use job order cost cards to record the costs of labor, materials and supplies, and
overhead incurred in performing a service. They use information on the total cost of a service to
determine pricing in cost-plus contracts.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
230 Chapter 17: Costing Systems: Job Order and Process Costing

New Concepts and Terminology

cost-plus contracts

Related Text Illustration

Figure 1: Job Order Cost Card for a Manufacturing Company
Figure 2: Job Order Cost Card for a Service Organization

Lecture Outline
I. In a job order costing system, all the costs of a particular job’s direct materials, direct labor, and
overhead are accumulated on a job order cost card.
A. Because all manufacturing costs are accumulated in one Work in Process Inventory account,
a subsidiary ledger made up of job order cost cards is needed to trace the costs of specific
jobs.
II. Product unit cost in a job order costing system is calculated as follows:
B. Total all manufacturing costs recorded on a particular job order cost card.
C. Divide total manufacturing costs by the number of units produced for that job.
III. Service organizations use job order cost cards to record the costs of labor, materials and supplies,
and overhead incurred in performing a particular job and to determine selling prices in cost-plus
contracts.

Teaching Strategy
In discussing a job order cost card, refer students to Figures 1 and 2. Use Short Exercise 8 to show how
a manufacturer uses a job order cost card to compute product unit cost. Use Exercise 12 to show how a
service organization uses a job order cost card to track costs and compute revenues and profits.

REVIEW QUIZ

True-False
1. T F A job order costing system is typically used in production settings that are
characterized by a continuous flow of similar or identical products.
2. T F In manufacturing companies, managers use unit cost information to develop budgets,
establish product prices, and determine human resource needs.
2. T F Predetermined overhead rates are not used with a job order costing system.
3. T F Service organizations can use job order costing to trace costs to the services they
render.
5. T F When a manufacturer receives a sales order, the purchasing process begins with a
request for specific quantities of direct or indirect materials that are needed for the
order but not currently available in the storeroom.
6. T F When a manufactured item is sold during the period, the cost is transferred from the
Work in Process Inventory to the Finished Goods Inventory.
4. T F Both job order and process costing systems supply information that managers can use
to evaluate an organization’s operating performance.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 17: Costing Systems: Job Order and Process Costing 231

Multiple Choice
5. Which of the following organizations would use a job order costing system?
a. Custom-furniture manufacturer
b. Oil refinery
c. Cereal manufacturer
d. Paint manufacturer
e. None of the above

6. RBW Company’s job order costing system shows the following information:
Job # Balance, January 1 January’s Production Costs
100 $5,800
101 2,400 $3,600
102 4,900
Jobs 100 and 102 were sold to customers in January. Job 101 was completed in January. What
was RBW Company’s cost of goods sold for January?
a. $4,900
b. $5,800
c. $8,500
d. $10,700
e. None of the above

7. Based on the information given in question 11, the amount in RBW Company’s Work in Process
Inventory on January 31 would be
a. $0.
b. $3,600.
c. $4,900.
d. $6,000.
e. none of the above.

13. The Work in Process Inventory account decreases as products are completed when a company
uses
a. job order costing only.
b. both job order and process costing.
c. neither job order nor process costing.
d. process costing only.
e. none of the above.

14. In a job order costing system, the basic document used to accumulate the cost of each order is the
a. purchase request.
b. job order cost card.
c. time card.
d. process cost report.
e. none of the above.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
232 Chapter 17: Costing Systems: Job Order and Process Costing

15. A new advertising agency serves a wide variety of clients, including large manufacturing
companies, small restaurants, service businesses, and shopping malls. The accounting system best
suited to the advertising agency is
a. job order costing.
b. process costing.
c. average costing.
d. relevant costing.
e. none of the above.

16. Command Performances, Inc., specializes in planning special events. Which of following items of
cost information is not likely to be available in the company’s product costing system?
a. Cost of paper and envelopes
b. Food costs for an event
c. Labor costs for an event
d. President’s salary
e. All of the above

ANSWERS TO REVIEW QUIZ

True-False Multiple Choice
1. F 5. d
2. F 6. a
2. F 7. a
3. T 8. d
5. T 9. a
6. F 13. b
4. T 14. b
15. a
16. d

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.