Chapter 5: Job Order Costing System
Characteristics of production process
- In general, a firm’s cost management system mirrors the production process. A cost
management system modeled after the production process allows managers to better
monitor the economic performance of the firm.
Manufacturing vs. Service Firm
Manufacturing
- Involves combining direct materials, direct labor and overhead.
Service
- Characterized by its intangible nature.
- Intangibility- non physical nature of service
- Inseparability- production and consumption are inseparable for service
- Heterogeneity- refers to greater chances of variation
- Perishability- service cannot be inventoried and must be consumed immediately
Cost Systems
- Job order costing system –Firms produces unique products in small batches
- Process costing system –Firms produces identical units of the same products.
- Operation costing –Combination of both process costing and job order costing.
Setting up the cost accounting system
- Cost accumulation –Recognition and recording of Cost
- Cost measurement –Determining the amounts of direct materials, direct labor, and
overhead used in production.
- Cost Assignment –The association of production costs with the units produced.
Choosing Activity level
- Expected level of activity –The production level the firm expects to attain for the
coming year
- Normal level of activity –Is the average activity usage that a firm experiences in the
long term.
- Predetermined overhead rates –Those corresponding to the theoretical and practical
- levels. Solution: Overhead Rate=
- Theoretical activity level –Is the absolute maximum production activity of a
manufacturing firm.
- Practical activity level –Is the maximum output that can be realized if everything
operates perfectly.
Job Order Costing System
- Produce a wide variety of products or jobs that are usually distinct from each other.
Costs are accumulated by Job.
- Job order Cost sheet –A document that identifies each job and accumulates its
manufacturing costs.
- Work in process inventory file – The collection of all job cost sheets.
- Materials Requisition Form –Cost of direct materials is assigned to a job by the use of
a source document.
- Time tickets –Document used to assign direct labor.
Job Order Costing: specific cost flow description
- Accounting for Direct materials
Raw Materials Inventory xx
Accounts Payable/ Cash xx
- Accounting for Direct labor cost
Work in Process Inventory xx
Materials Inventory xx
- Accounting for Overhead
(Applied) Work in Process Inventory xx
Overhead Control xx
- (Actual) Overhead Control xx
Various accounts xx
- Accounting for Finished Goods Inventory
Finished Goods Inventory xx
Work in Process Inventory xx
- Accounting of Cost of Goods Sold
Cost of Goods Sold xx
Finished goods inventory xx
Accounts Receivable/ Cash xx
Sales xx
- Accounting for Overhead Adjustment
(Under Applied) Cost of Goods Sold xx
Overhead Control xx
(Over Applied) Overhead Control xx
Cost of Goods Sold xx
Statement of Cost of Goods Manufactured
Direct Materials:
Beginning Direct Materials xx
Add: Purchase of Direct Material xx
Less: Ending Direct materials (xx)
Total; Direct Materials Used XX
Direct Labor: XX
Manufacturing Overhead:
Lease xx
utilities xx
depreciation xx
indirect labor xx
Total Overhead xx
Less: Underapplied (xx)
Overhead Applied XX
Current manufacturing Cost XX
Add: Beginning WIP XX
Less: Ending WIP XX
COSTOF GOODS MANUFACTURED XXXX
Statement of Cost of Goods Sold
Beginning Finished Goods Inventory xx
Cost of Goods Manufactured xx
Goods available for sale xx
Less: Ending finished goods inventory (xx)
Cost of Goods Sold xx
Add: Under applied overhead xx
Adjusted Cost of Goods Sold XX
