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Job Order Costing

Student Version

11-22-2

1

Describe cost accounting systems used by manufacturing businesses.

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Cost Accounting System Overview

A job order cost system provides product costs for each quantity of product that is manufactured. Each quantity of product that is manufactured is termed a job. Manufacturers that use a job order cost system are sometimes called job shops.

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A process cost system provides product costs for each manufacturing department or process. Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process.

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Cost Accounting System Overview

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2

Describe and illustrate a job order cost accounting system.

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Materials Information and Cost Flows

To Materials Requisitions

a.

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Exhibit 3

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From Materials Ledger Account

Job Cost Sheets

Materials Requisitions

b.

b.

b.

b.

2Materials Information and Cost Flows (continued)Exhibit 3

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The journal entry to record the supplier’s invoice related to Receiving Report 196 is as follows:

InvoiceReceiving

Report No. 196

750 units of No. 8 Maple

Wood

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A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month. For the requisition of direct materials, the following entry is made:

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On December 26, 2010, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. × $15). A total of 500 hours was spent by all employees who worked on Job 72 during December, for a total cost of $7,500.

A Closer Look at Job 72

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December Job 72 (500 hours) for a total cost

of $7,500

to Job Cost Sheet

Labor Information and Cost Flows (a closer look)

2

(continued)

Exhibit 4

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The same procedure is followed for Job 71.

from Time

Sheets

Labor Information and Cost Flows (continued)

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Exhibit 4

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A total of 500 hours was spent by employees on Job 72 during December for a total cost of $7,500. A summary of the time tickets is used as the basis for the following journal entry:

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Factory Overhead Cost

Factory overhead includes all manufacturing costs except direct materials and direct labor. Factory overhead costs are derived from a variety of sources including the following:1. Indirect materials2. Indirect labor3. Factory power4. Factory depreciation

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The factory overhead of $4,600 incurred in December for Legend Guitars would be recorded as follows:

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To provide current job costs, factory overhead may be allocated or applied to production using a predetermined factory overhead rate.

Predetermined Factory Overhead Rate

Predetermined Factory Overhead Rate

Estimated TotalFactory Overhead Costs

Estimated Activity Base=

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Management estimates factory overhead costs to be $50,000 and the activity base to be 10,000 direct labor hours. The predetermined overhead rate is calculated in Slide 18.

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Estimated Total Factory Overhead Costs Estimated Activity Base

Predetermined Factory

Overhead Rate=

$50,000

10,000 direct labor hours

Predetermined Factory

Overhead Rate=

= $5 per direct labor hour

Predetermined Factory

Overhead Rate

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The textbook shows two jobs that were worked on in December. When overhead is applied to both jobs, the entry is for $4,250 ($1,750 + $2,500).

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Overapplied and Underapplied Factory Overhead

Underapplied balance

Overapplied balance

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Disposal of Factory Overhead Balance

An ending debit balance (underapplied overhead) in the factory overhead account is disposed of by the following entry:

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Disposal of Factory Overhead Balance

An ending credit balance (overapplied overhead) in the factory overhead account is disposed of by the following entry:

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Work in Process

During the period, Work in Process is increased (debited) for the following:1. Direct material cost2. Direct labor cost

3. Applied factory overhead cost

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At the end of the accounting period (December 31) the total costs for Job 71 are determined and the following entry is made:

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Sales and Cost of Goods Sold

During December, Legend Guitars sold 40 Jazz Series guitars for $850, generating total sales of $34,000 ($850 × 40 guitars).

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The cost of the guitars sold was $500 per guitar or a total cost of $20,000 ($500 × 40 guitars).

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• Selling expenses are incurred in marketing the product and delivering the sold product to the customer.

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• Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions.

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During December, Legend Guitars recorded the following selling and administrative expenses:

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Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000

Materials Factory Overhead Work in Process

a. Materials purchased during December

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

Credit Accounts Payable for $10,500

(a) 10,500

(a) 10,500

Flow of Manufacturing Costs for Legend Guitars

2

Exhibit 8

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Materials Factory Overhead Work in ProcessDec. 1 6,500 Dec. 1 200 Dec. 1 3,000

b. Materials requisitioned to jobs

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(b) 13,000

20 Units of Jazz Series Guitars, Job 71Dec. 1 3,000

60 Units of American Series Guitars, Job 72

Job Cost Sheets

(b) Direct materials 2,000

(b) Direct materials 11,000

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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Materials Factory Overhead Work in Process

c. Factory labor used in productions of jobs

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000 (c) 11,000

Credit Wages Payable, $11,000

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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Materials Factory Overhead Work in Process

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000 (c) 11,000

20 Units of Jazz Series Guitars, Job 71Dec. 1 3,000(b) Direct materials 2,000

60 Units of American Series Guitars, Job 72(b) Direct materials 11,000

Job Cost Sheets

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(c) Direct labor 3,500

(c) Direct labor 7,500

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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Materials Factory Overhead Work in Process

d. Factory overhead incurred in production

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(d) 500

(c) 11,000 (d) 500

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(d) 200

(d) 300

Indirect materials used, $500

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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Materials Factory Overhead Work in Process

d. Factory overhead incurred in production

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(d) 500

(c) 11,000 (d) 500 (d) 900

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(d) 200

(d) 300

Utility bill, $900

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

credit Utilities Payable, $900

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Materials Factory Overhead Work in Process

d. Factory overhead incurred in production

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(d) 500

(c) 11,000 (d) 500 (d) 900

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(d) 200

(d) 300

(d) 1,200

Depreciation on factory machinery, $1,200

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

credit Accumulated Deprecation, $1,200

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Materials Factory Overhead Work in Process

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(d) 500

(c) 11,000 (d) 500 (d) 900

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(d) 200

(d) 300

(d) 1,200

Indirect labor, $2,000

(d) 2,000

d. Factory overhead incurred in production

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

credit Wages Payable, $2,000

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e. Factory overhead is applied to jobs according to the predetermined overhead rate

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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Materials Factory Overhead Work in Process

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(d) 500

(c) 11,000 (d) 500 (d) 900

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(d) 200

(d) 300

(d) 1,200 (d) 2,000

(e) 4,250

(e) 4,250

20 Units of Jazz Series Guitars, Job 71Dec. 1 3,000(b) Direct materials 2,000(c) Direct labor 3,500

60 Units of American Series Guitars, Job 72(b) Direct materials 11,000(c) Direct labor 7,500

Job Cost Sheets

(e) Factory overhead 1,750

(e) Factory overhead 2,500

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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f. Closed underapplied factory overhead to cost of goods sold

Materials Factory Overhead Work in Process

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(d) 500

(c) 11,000 (d) 500 (d) 900

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(d) 200

(d) 300

(d) 1,200 (d) 2,000

(e) 4,250

(e) 4,250

(f) 150

debit Cost of Goods Sold, $150

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

11-402-40

g. Job 71 completed in December

Materials Factory Overhead Work in Process

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(d) 500

(c) 11,000 (d) 500 (d) 900

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(d) 200

(d) 300

(d) 1,200 (d) 2,000

(e) 4,250

(e) 4,250

(f) 150

(g) 10,250

20 Units of Jazz Series Guitars, Job 71Dec. 1 3,000(b) Direct materials 2,000(c) Direct labor 3,500(d) Factory overhead 1,750

10,250

Job Cost Sheets

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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Materials Factory Overhead Work in Process

Materials LedgerNo. 8 Wood—Maple

Glue

Sandpaper

Dec. 1 6,000

Dec. 1 200

Dec. 1 300

(a) 10,500(b) 13,000

(a) 10,500 (b) 13,000

(d) 500

(c) 11,000 (d) 500 (d) 900

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000(b) 13,000

(d) 200

(d) 300

(d) 1,200 (d) 2,000

(e) 4,250

(e) 4,250

(f) 150

(g) 10,250

Dec. 1 20,000 (g) 10,250

Finished Goods

Dec. 1 20,000 (g) 10,250

Finished Goods Ledger

Jazz Series Guitars

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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Work in Process (b) 13,000 (c) 11,000

Dec. 1 3,000

(e) 4,250

(g) 10,250

Dec. 1 20,000 (g) 10,250

Finished Goods

Dec. 1 20,000 (g) 10,250

Finished Goods LedgerJazz Series Guitars

(f) 150

Cost of Goods Sold

h. Sold 40 units of Jazz Series guitars on account

Accounts Receivable XXX Sales XXX

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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Work in Process (b) 13,000 (c) 11,000

Dec. 1 3,000

(e) 4,250

(g) 10,250

Dec. 1 20,000 (g) 10,250

Finished Goods

Dec. 1 20,000 (g) 10,250

Finished Goods LedgerJazz Series Guitars

(i) 20,000(f) 150

Cost of Goods Sold

i. Cost of 40 units of Jazz Series guitars sold

(i) 20,000

(i) 20,000

2Flow of Manufacturing Costs for Legend Guitars (continued)

Exhibit 8

(continued)

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3

Describe the use of job order cost information for decision making.

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Job Order Costing for Decision Making

A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs.

3

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4

Describe the flow of costs for a service business that uses a job order cost accounting system.

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Job Order Cost Systems for Professional Service Businesses

Since the “product” of a service business is service, management’s focus is on direct labor and overhead costs. A job cost sheet is used to accumulate the costs for each client’s job. When the job is completed and the client billed, the costs are transferred to a Cost of Services account.

4

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