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2 Job Order Costing

Learning Objectives
Describe cost systems and the flow of costs in a job order
2.1
system.

2.2 Use a job cost sheet to assign costs to work in process.

Demonstrate how to determine and use the predetermined

2.3
overhead rate.

Prepare entries for manufacturing and service jobs completed

2.4
and sold.

Distinguish between under- and overapplied manufacturing

2.5
overhead.
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 LEARNING Describe cost systems and the flow of
OBJECTIVE
2.1
costs in a job order system.

Cost Accounting involves

Measuring,
Recording, and
Reporting product costs.

 Accounts are fully integrated into the general ledger.

 Perpetual inventory system provides immediate, up-to-date
information on the cost of a product.
 Two basic types: (1) a process order cost system and (2)
a job order cost system.

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 Process Cost System

 Used when a large volume of similar products are

manufactured – (cereal, refining of petroleum,
production of chocolate).
 Costs are accumulated for a time period – (week or
month).
 Costs are assigned to departments or processes for a
specified period of time.

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 Process Cost System

Illustration 2-1
Process cost system

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 Job Order Cost System

 Costs are assigned to each job or batch.

 Important feature: Each job or batch has its own
distinguishing characteristics.
 Objective is to compute the cost per job.
 Measures costs for each job completed – not for set time
periods.

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 Job Order Cost System

Illustration 2-2 shows the recording of costs in a job order cost

system for Disney as it produced two different films.

Illustration 2-2
2-7 Job order cost system for Disney LO 1
2-8 LO 1
 Job Order Cost Flow

The flow of costs parallels the physical flow of the

materials as they are converted into finished goods
 Manufacturing costs are assigned to the Work in
Process (WIP) Inventory account.

 Cost of completed jobs is transferred to the Finished

Goods Inventory account.

 When units are sold, the cost is transferred to the Cost

of Goods Sold account.

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 Job Order Cost Flow

Illustration 2-3
Flow of costs in job
order costing
Basic overview of the flow of costs in a manufacturing
setting for production of a fire truck.

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 Accumulating Manufacturing Costs

Raw Material Costs

Illustration: Zhang Ltd. 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:

Jan. 4 Raw Materials Inventory 42,000

Accounts Payable 42,000

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 Accumulating Manufacturing Costs

Factory Labor Costs

Consists of three costs:
1. Gross earnings of factory workers,

2. Employer payroll taxes on these earnings, and

3. Fringe benefits (such as sick pay, pensions, and vacation

pay) incurred by the employer.

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 Accumulating Manufacturing Costs

Factory Labor Costs

Illustration: Zhang 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:

Jan. 31 Factory Labor 32,000

Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000

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 Accumulating Manufacturing Costs

Manufacturing Overhead Costs

 Many types of overhead costs
► For example, property taxes, depreciation, insurance,
and repairs related to the manufacturing process.
 Costs unrelated to manufacturing process are expensed.
 Costs related to manufacturing process are accumulated
in Manufacturing Overhead account.
► Manufacturing overhead subsequently assigned to
work in process.

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 Accumulating Manufacturing Costs

Manufacturing Overhead Costs

Illustration: Using assumed data, the summary entry for
manufacturing overhead in Zhang Ltd. is:

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

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 2.1 Accumulating Manufacturing Costs

During the current month, Li Group incurs the following

manufacturing costs:

(a) Raw material purchases of NT$126,000 on account.

(b) Factory labor of NT$540,000. Of that amount, NT$450,000
relates to wages payable and NT$90,000 relates to payroll
taxes payable.
(c) Factory utilities of NT$66,000 are payable, prepaid factory
insurance of NT$54,000 has expired, and depreciation on the
factory building is NT$105,000.
Prepare journal entries for each type of manufacturing cost.

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 2.1 Accumulating Manufacturing Costs

Prepare journal entries for each type of manufacturing cost.

(a) Raw material purchases of NT$126,200 on account.

Raw Materials Inventory 126,000

Accounts Payable 126,000

(b) Factory labor of NT$540,000. Of that amount, NT$450,000

relates to wages payable and NT$90,000 relates to payroll
taxes payable.
Factory Labor 540,000
Factory Wages Payable 450,000
Employer Payroll Taxes Payable 90,000

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 2.1 Accumulating Manufacturing Costs

Prepare journal entries for each type of manufacturing cost.

(c) Factory utilities of NT$66,000 are payable, prepaid factory

insurance of NT$54,000 has expired, and depreciation on the
factory building is NT$105,000.

Manufacturing Overhead 225,000

Utilities Payable 66,000
Prepaid Insurance 54,000
Accumulated Depreciation 105,000

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 LEARNING Use a job cost sheet to assign costs to work
OBJECTIVE
2.2
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
► Manufacturing Overhead

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 LEARNING Use a job cost sheet to assign costs to work
OBJECTIVE
2.2
in process.

Job Cost Sheet

 Used to record costs chargeable to specific jobs.
 Constitutes the subsidiary ledger for the work in process
account.
 Each entry to Work in Process
Inventory must be accompanied
by a corresponding posting to
one or more job cost sheets.

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 Illustration 2-4
Job cost sheet

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 Raw Material Costs

 Assigned to a job when materials are issued in

response to requests.
 Materials requisition slip
► Written authorization for issuing raw materials.
► May be directly issued to use on a job - direct
materials (charged to Work in Process Inventory).
► May be considered indirect materials – charged to
Manufacturing Overhead.

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 Illustration 2-5
Materials requisition slip

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 Raw Material Costs

Illustration: Zhang uses £24,000 of direct materials and £6,000 of

indirect materials in January, the entry is:

Jan. 31 Work in Process Inventory 24,000

Manufacturing Overhead 6,000
Raw Materials Inventory 30,000

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 Raw Material Costs Illustration 2-6
Job cost sheets–posting
of direct materials

Illustration 15-6
The sum of the direct
materials columns of
the job cost sheets
should equal the
direct materials
debited to Work in
Process Inventory
account.

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2-26 LO 2
 Factory Labor Costs

 Assigned to jobs on the basis of time tickets.

 Time tickets are prepared when the work is performed.
 Time tickets indicate:
► Employee
► Hours worked
► Account and job charged
► Total labor cost

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 Factory Labor Costs

Illustration 2-7
Time ticket

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 Factory Labor Costs

Illustration: The time tickets are later sent to the payroll

department, which applies the employee’s hourly wage rate and
computes the total labor cost. If the £32,000 total factory labor
cost consists of £28,000 of direct labor and £4,000 of indirect
labor, the entry is:

Jan. 31 Work in Process Inventory 28,000

Manufacturing Overhead 4,000
Factory Labor 32,000

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 Factory Labor Costs

Jan. 31 Work in Process Inventory 28,000

Manufacturing Overhead 4,000
Factory Labor 32,000

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 Factory Labor Costs

The sum of the

direct labor
columns of the job
cost sheets should
equal the direct
labor debited to
Work in Process
Inventory.

Illustration 2-8
Job cost sheets–
direct labor

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 2.2 Work in Process

Liu Precision is working on two job orders. The job cost sheets show
the following:

Direct materials—Job 120 HK$60,000; Job 121 HK$36,000

Direct labor—Job 120 HK$40,000; Job 121 HK$20,000
Manufacturing overhead—Job 120 HK$50,000; Job 121 HK$25,000

Prepare the three summary entries to record the assignment of costs

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

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 2.2 Work in Process

Liu Precision is working on two job orders. The job cost sheets show
the following:

Direct materials—Job 120 HK$60,000; Job 121 HK$36,000

Direct labor—Job 120 HK$40,000; Job 121 HK$20,000
Manufacturing overhead—Job 120 HK$50,000; Job 121 HK$25,000

Prepare the three summary entries to record the assignment of

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

Work in Process Inventory (HK$60,000 + HK$36,000) 96,000

Raw Materials Inventory 96,000

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 2.2 Work in Process

Liu Precision is working on two job orders. The job cost sheets show
the following:

Direct materials—Job 120 HK$60,000; Job 121 HK$36,000

Direct labor—Job 120 HK$40,000; Job 121 HK$20,000
Manufacturing overhead—Job 120 HK$50,000; Job 121 HK$25,000

Prepare the three summary entries to record the assignment of costs

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

Work in Process Inventory(HK$40,000 + HK$20,000) 60,000

Factory Labor 60,000

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 2.2 Work in Process

Liu Precision is working on two job orders. The job cost sheets show
the following:

Direct materials—Job 120 HK$60,000; Job 121 HK$36,000

Direct labor—Job 120 HK$40,000; Job 121 HK$20,000
Manufacturing overhead—Job 120 HK$50,000; Job 121 HK$25,000

Prepare the three summary entries to record the assignment of costs

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

Work in Process Inventory (HK$50,000 + HK$25,000) 75,000

Manufacturing Overhead 75,000

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 LEARNING Demonstrate how to determine and use the
2.3
OBJECTIVE predetermined overhead rate.

Manufacturing Overhead Costs

 Relates to production operations as a whole.

 Cannot be assigned to specific jobs based on actual

costs incurred.

 Companies assign to work in process and to specific jobs

on an estimated basis through the use of a …

Predetermined Overhead Rate

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 Predetermined Overhead Rate

 Based on the relationship between estimated annual

overhead costs and expected annual operating activity.
 Expressed in terms of an activity base such as:
► Direct labor costs
► Direct labor hours
► Machine hours
► Any other measure that will provide an equitable
basis for applying overhead costs to jobs.

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 Predetermined Overhead Rate

 Established at the beginning of the year.

 Small companies often use a single, company-wide
predetermined rate.
 Large companies often use a different rate for each
department and each department may have a different
activity base.
 Formula for computing the predetermined rate
overhead rate is: Illustration 2-9

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 Predetermined Overhead Rate

Manufacturing overhead costs are assigned to Work in

Process during the period to get timely information about the
cost of a completed job.

Illustration 2-10
Using predetermined
overhead rates

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 Predetermined Overhead Rate

Illustration: Zhang Ltd. 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,
compute the overhead rate.

This means that for every pound of direct labor, Zhang will
80 pence of manufacturing overhead to a job.
assign _________

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 Predetermined Overhead Rate

Illustration: Zhang Ltd. manufacturing overhead to work in

process when it assigns direct labor costs. Calculate the amount of
applied overhead assuming direct labor costs were £28,000.
£28,000 x 80% = £22,400
The following entry records this application.

Jan. 31 Work in Process Inventory 22,400

Manufacturing Overhead 22,400

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 Predetermined Overhead Rate

The sum of the

manufacturing
overhead columns
of the job cost
sheets should
equal the
manufacturing
overhead debited
(i.e., applied) to
Work in Process
Inventory.

Illustration 2-12
Job cost sheets–
manufacturing
overhead applied
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 Predetermined Overhead Rate

At the End of Each Month:

The balance in the Work in Process Inventory should equal
the sum of the costs shown on the job cost sheets of unfinished
jobs.

Illustration 2-13
Proof of job cost sheets to
work in process inventory

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 2.3 Predetermined Overhead Rate

  safety devices. For the year,

Ozturk A.Ş. produces specialized
manufacturing overhead costs are expected to be 160,000.
Expected 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.

Solution

₺160,000 ÷ 40,000 hours = ₺4.00 per machine hour

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 2.3 Predetermined Overhead Rate

Ozturk A.Ş. produces specialized safety devices. For the year,

manufacturing overhead costs are expected to be ₺160,000.
Expected machine usage is 40,000 hours. The company
assigns overhead based on machine hours. Job No. 302 used
2,000 machine hours. Determine the amount of overhead to
allocate to Job No. 302.

Solution

2,000 hours x ₺4.00 = ₺8,000

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 2.3 Predetermined Overhead Rate

Ozturk A.Ş. produces specialized safety devices. For the year,

manufacturing overhead costs are expected to be ₺160,000.
Expected machine usage is 40,000 hours. The company
assigns overhead based on machine hours. Job No. 302 used
2,000 machine hours. Prepare the entry to assign overhead
to Job No. 302 on March 31.

Solution

Work in Process Inventory 8,000

Manufacturing Overhead 8,000

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 LEARNING Prepare entries for manufacturing and
2.4
OBJECTIVE service jobs completed and sold.

Assigning Costs to Finished Goods

When a job is
completed,
Zhang Ltd.
summarizes the
costs and
completes the
lower portion of
the applicable
job cost sheet.

Illustration 2-14
Completed job
cost sheet
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 Assigning Costs to Finished Goods

Illustration: When a job is completed, Zhang makes an

entry to transfer its total cost to finished goods inventory.

Jan. 31 Finished Goods Inventory 39,000

Work in Process Inventory 39,000

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 Assigning Costs to Finished Goods

Illustration: On January 31 Zhang sells on account Job 101.

The job cost £39,000, and it sold for £50,000. Entries to record
the sale and recognize cost of goods sold are:

Jan. 31 Accounts Receivable 50,000

Sales revenue 50,000
Cost of Goods Sold 39,000
Finished Goods Inventory 39,000

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 Summary of Job Order Cost Flows

Illustration 2-15
Flow of costs in a job
order cost system

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 Summary of Job Order Cost Flows
Illustration 2-16
Flow of documents in a
job order cost system

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 Job Order Costing for Service Companies

While service companies do not have inventory, the

techniques of job order costing are still quite useful in many
service-industry environments.

Consider, for example, the U.S. companies of Mayo Clinic

(healthcare), PricewaterhouseCoopers (accounting), and
Goldman Sachs (investment banking).

These companies need to keep track of the cost of jobs

performed for specific customers to evaluate the profitability
of medical treatments, audits, or investment banking
engagements.

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2-53 LO 4
 Job Order Costing

Advantages
 More precise in assignment of costs to projects than
process costing.
 Provides more useful information for determining the
profitability of particular projects and for estimating costs
when preparing bids on future jobs.

Disadvantage
 Requires a significant amount of data entry.

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 2.4 Completion and Sale of Jobs

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

Finished Goods Inventory 46,000,000

Work in Process Inventory 46,000,000
Accounts Receivable 42,000,000
Sales Revenue 42,000,000
Cost of Goods Sold 27,000,000
Finished Goods Inventory 27,000,000

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 LEARNING Distinguish between under- and overapplied
2.5
OBJECTIVE manufacturing overhead.

Illustration 2-17
Cost of goods
manufactured
schedule

 Shows manufacturing overhead applied rather than actual

overhead costs.
 Applied overhead is added to direct materials and direct labor to
determine total manufacturing costs
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 Cost of Goods Manufactured

Partial Income Statement

Illustration 2-18

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 Under- or Overapplied Overhead

 A debit balance in manufacturing overhead means

that overhead is underapplied.
 A credit balance in manufacturing overhead means
that overhead is overapplied.
Illustration 2-19
Under- and overapplied
overhead

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 Under- or Overapplied Overhead

Any Year-End Balance in manufacturing overhead is

eliminated by adjusting cost of goods sold.
 Underapplied overhead is debited to COGS
 Overapplied overhead is credited to COGS

Illustration: Zhang has a £2,500 credit balance in Manufacturing

Overhead at December 31. The adjusting entry for the over-applied
overhead is:

Dec. 31 Manufacturing Overhead 2,500

Cost of Good Sold 2,500
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 2.5 Applied Manufacturing Overhead

For Botha Electronics, the predetermined overhead rate is 140% of

direct labor cost. During the month, Botha incurred R900,000 of
factory labor costs, of which R800,000 is direct labor and R100,000
is indirect labor. Actual overhead incurred was R1,190,000.
Compute the amount of manufacturing overhead applied during the
month. Determine the amount of under- or overapplied
manufacturing overhead.
Manufacturing overhead
(140% x R800,000) = R1,120,000
applied
Underapplied
(R1,190,000 – R1,120,000) = R70,000
manufacturing overhead

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