JOB ORDER

COSTING
DR. GABRIELLE MAE A. BERNAS, CPA, REB
Relationship of Cost Accumulation, Cost
Measurement and Cost Assignment
Relationship of Cost Accumulation, Cost
Measurement and Cost Assignment
Cost accumulation refers to the recognition and recording of costs.
Cost measurement refers to classifying the costs; it consists of determining the
amounts of direct materials, direct labor, and overhead used in production.
◦ An actual cost system uses actual costs for direct materials, direct labor, and overhead to
determine unit cost. The main problem with using actual costs for calculation of unit cost is
with manufacturing overhead. Many overhead costs are not incurred uniformly throughout
the year.
◦ A cost system that measures overhead costs on a predetermined basis and uses actual costs
for direct materials and direct labor is called a normal costing system.

Once costs have been accumulated and measured, they are assigned to units of
product manufactured or units of service delivered. Unit costs are essential for
valuing inventory, determining income, and making a number of important
decisions.
Building-Block Concepts of Costing
Systems
1) Cost object—anything for which a measurement of costs is desired—for
example, a product, such as an iMac computer, or a service, such as the cost of
repairing an iMac computer
2) Direct costs of a cost object—costs related to a particular cost object that can
be traced to that cost object in an economically feasible (cost-effective) way—
for example the cost of purchasing the main computer board or the cost of
parts used to make an iMac computer
3) Indirect costs of a cost object—costs related to a particular cost object that
cannot be traced to that cost object in an economically feasible (cost-effective)
way—for example, the costs of supervisors who oversee multiple products, one
of which is the iMac, or the rent paid for the repair facility that repairs many
different Apple computer products besides the iMac. Indirect costs are
allocated to the cost object using a cost allocation method.
Job Order Costing System
 Firms operating in job-order industries produce a wide
variety of products or jobs that are usually quite distinct from
each other
 Customized or built-to-order products fit into this category,
as do services that vary from customer to customer
 Examples of job-order processes include printing,
construction, furniture making, automobile repair, and
beautician services.
Job Order Costing System Used
Job-order Cost
Sheet
 The document that
identifies each job and
accumulates its
manufacturing costs
 The cost accounting
department creates
such a cost sheet upon
receipt of a production
order.
Material
Requisition
Form
 The cost of direct
materials is assigned to a
job
 Using this form, the
cost accounting
department can enter
the total cost of direct
materials directly onto
the job-order cost sheet.
Job Time
Tickets
 Direct labor also must
be associated with each
particular job.
 When an employee
works on a particular
job, she fills out a time
ticket that identifies her
name, wage rate, hours
worked, and job number.
Overhead Application
 Jobs are assigned overhead costs with the predetermined overhead rate.
 Typically, direct labor hours is the measure used to calculate overhead.
For example, assume a firm has estimated overhead costs for the coming year of
P900,000 and expected activity is 90,000 direct labor hours. The predetermined
overhead rate is P900,000/90,000 direct labor hours = 10 per direct labor hour.
What if overhead is assigned to jobs based on something other than direct labor
hours? Then the other driver must be accounted for as well. That is, the actual
amount used of the other driver (for example, machine hours) must be collected
and posted to the job cost sheets. Employees must create a source document
that will track the machine hours used by each job. A machine time ticket could
easily accommodate this need.
Overhead Application
Flow of Costs in Job Order Costing
Job Order Costing System Illustration
All Signs Company, recently formed by Bob Fredericks, produces a
wide variety of customized signs. Bob leased a small building and
bought the necessary production equipment. For the first month of
operation (January), Bob has finalized two orders: one for 20 street
signs for a new housing development and a second for 10 laser-
carved wooden signs for a golf course. Both orders must be delivered
by January 31 and will be sold for manufacturing cost plus 50
percent. Bob expects to average two orders per month for the first
year of operation.
Bob created two job-order cost sheets and assigned a number to each
job. Job 101 is the street signs, and Job 102 is the golf course signs.
Accounting for Direct Materials
Since the company is beginning its business, it has no beginning inventories. To
produce the 30 signs in January and retain a supply of direct materials on hand at
the beginning of February, Bob purchases, on account, $2,500 of direct materials.
This purchase is recorded as follows:

Materials Inventory 2,500

Accounts Payable 2,500
Accounting for Direct Materials
From January 2 to January 19, the production supervisor used three requisition
forms to remove $1,000 of direct materials from the storeroom. From January 20
to January 31, two additional requisition forms for $500 of direct materials were
used. The first three forms revealed that the direct materials were used for Job
101; the last two requisitions were for Job 102. Thus, for January, the cost sheet
for Job 101 would have a total of $1,000 in direct materials posted, and the cost
sheet for Job 102 would have a total of $500 in direct materials posted. In
addition, the following entry would be made:

Work-in-Process Inventory 1,500

Materials Inventory 1,500
Accounting for Direct Materials
Accounting for Direct Labor Cost
Since two jobs were in progress during January, time tickets filled out by direct
laborers must be sorted by each job. Once the sorting is completed, the hours
worked, and the wage rate of each employee are used to assign the direct labor
cost to each job. For Job 101, the time tickets showed 60 hours at an average
wage rate of $10 per hour, for a total direct labor cost of $600. For Job 102, the
total was $250, based on 25 hours at an average hourly wage of $10. In addition
to the postings to each job’s cost sheet, the following summary entry would be
made:

Work-in-Process Inventory 850

Wages Payable 850
Accounting for Direct Labor Cost
Accounting for Overhead
Assume that Bob has estimated overhead costs for the year at $9,600.
Additionally, since he expects business to increase throughout the year as he
becomes established, he estimates 2,400 total direct labor hours. Accordingly, the
predetermined overhead rate is as follows:
Overhead rate $9,600/2,400 = $4 per direct labor hour

Overhead costs flow into Work-in-Process Inventory via the predetermined rate.
Since direct labor hours are used to assign overhead into production, the time
tickets serve as the source documents for assigning overhead to individual jobs
and to the controlling work-in-process inventory account.
Accounting for Overhead
For Job 101, with a total of 60 hours worked, the amount of overhead cost posted
is $240 ($4 × 60). For Job 102, the overhead cost is $100 ($4 × 25). A summary
entry reflects a total of $340 (i.e., all overhead applied to jobs worked on during
January) in applied overhead.

Work-in-Process Inventory 340

Overhead Control 340
Accounting for Overhead
Accounting for Actual Overhead Costs
All Signs Company incurred the following indirect costs for January:
Lease payment $200
Utilities 50
Equipment depreciation 100
Indirect labor 65
Total overhead costs $415

Overhead Control 415

Lease Payable 200
Utilities Payable 50
Accumulated Depreciation—Equipment 100
Wages Payable 65
Accounting for Actual Overhead Costs
Thus, the amount of the debit side of Overhead Control gives the total
actual overhead costs at a given point in time. Since actual overhead
costs are on the debit side of this account and applied overhead costs
are on the credit side, the balance in Overhead Control is the
overhead variance at a given point in time. For All Signs Company at
the end of January, the actual overhead of $415 and applied overhead
of $340 produce underapplied overhead variance of $75 ($415 –
$340).
Accounting for Actual Overhead Costs
Accounting for Finished Goods
Inventory
Job 101 was completed in January with the completed job order cost sheet shown
in Exhibit 5-10. Since Job 101 is completed, the total manufacturing costs of
$1,840 must be transferred from the work-in-process inventory account to the
finished goods inventory account. This transfer is described by the following
entry:
Finished Goods Inventory 1,840
Work-in-Process Inventory 1,840
Completed
Job-Order
Cost Sheet
Statement of
Cost of Goods
Manufactured
Accounting for Cost of Goods Sold
In a job-order firm, units can be produced for a particular customer or they can
be produced with the expectation of selling the units as market conditions
warrant. When the job is shipped to the customer, the cost of the finished job
becomes the cost of the goods sold. When Job 101 is shipped, the following
entries would be made.

Cost of Goods Sold 1,840

Finished Goods Inventory 1,840

Accounts Receivable 2,760

Sales Revenue 2,760
Accounting for Cost of Goods Sold
Cost of goods sold before adjustment for an overhead variance is called normal
cost of goods sold. After adjustment for the period’s overhead variance takes
place, the result is called the adjusted cost of goods sold.

Cost of Goods Sold 75

Overhead Control 75
Statement of
Cost of Goods
Sold
Accounting for Nonmanufacturing Costs
All Signs Company had the following additional transactions in January:
Research and development $ 50
Advertising circulars 75
Sales commission 125
Office salaries 500
Depreciation, office equipment 50

Research and Development Expense 50

Selling Expense 200
Administrative Expense 550
Cash 50
Accounts Payable 75
Wages Payable 625
Accumulated Depreciation—Office Equipment 50
Income
Statement
Review Problem
ABC Company uses a normal job-order costing system. It processes most jobs through two
departments. Selected budgeted and actual data for the past year follow.
Data for one of several jobs completed during the year also follow.
Department A Department B
Budgeted overhead P100,000 P500,000
Actual overhead P110,000 P520,000
Expected activity (direct labor hours) 50,000 10,000
Expected machine hours 10,000 50,000
ABC Company uses a plantwide,
Job 10
Direct materials P20,000 predetermined overhead rate to
Direct labor cost: assign overhead (OH) to jobs.
Department A (5,000 hrs. @ P6 per hr.) P30,000 Direct labor hours (DLH) is used
Department B (1,000 hrs. @ P6 per hr.) P 6,000 to compute the predetermined
Machine hours used:
Department A 100 overhead rate. ABC prices its
Department B 1,200 jobs at cost plus 30 percent.
Units produced 10,000
Review Problem
Required:
1. Compute the predetermined overhead rate.
2. Using the predetermined rate, compute the per-unit manufacturing cost for Job 10.
3. Assume that Job 10 was completed in May and sold in September. Prepare journal
entries for the completion and sale of Job 10.
4. Recalculate the unit manufacturing cost for Job 10 using departmental overhead
rates. Use direct labor hours for department A and machine hours for department
B. Does this approach provide a more accurate unit cost? Explain.
5. Assume that Job 10 was completed in May and sold in September. Using your
work from Requirement 4, prepare journal entries for the completion and sale of
Job 10.
Solution
1. Predetermined overhead rate P600,000/60,000 = P10 per DLH. Add the
budgeted overhead for the two departments and divide by the total expected
direct labor hours (DLH = 50,000 + 10,000).

2. Direct materials P 20,000

Direct labor 36,000
Overhead (P10 × 6,000 DLH) 60,000
Total manufacturing costs P116,000
Unit cost (P116,000/10,000) P 11.60
Solution
3. Finished Goods 116,000
Work in Process 116,000

Cost of Goods Sold 116,000

Finished Goods 116,000

Accounts Receivable 150,800

Sales* 150,800

*Sales = $116,000 + (0.3)($116,000) = $150,800.

Solution
4. Predetermined rate for department A: P100,000/50,000 = P2 per DLH.
Predetermined rate for department B: P500,000/50,000 = P10 per machine hour.

Direct materials P20,000 Overhead assignment using

Direct labor 36,000 departmental rates is more accurate
Overhead: because there is a higher correlation
with the overhead assigned and the
Department A:P2 × 5,000 10,000 overhead consumed. Notice that Job
Department B: P10 × 1,200 12,000 10 spends most of its time in
Total manufacturing costs P78,000 department A, the least overhead
intensive of the two departments.
Unit cost (P78,000/10,000) P 7.80 Departmental rates reflect this
differential time and consumption
better than plantwide rates do.
Solution
5. Finished Goods 78,000
Work in Process 78,000

Cost of Goods Sold 78,000

Finished Goods 78,000

Accounts Receivable 101,400

Sales 101,400

*Sales = P78,000 + (0.3)(P78,000) = P101,400