CHAPTER 3

DETERMINING MANUFACTURING COSTS USING JOB ORDER COSTING SYSTEM

OBJECTIVES
After studying this chapter, you will be able to:
 Differentiate between job order and process costing systems.
 Account for materials in job order costing system.
 Account for labor in job order costing system.
 Account for manufacturing overhead costs in job order costing.
Introduction
In this chapter, we will see how production costs are determined based on job order costing system.
It is known that the primary objective of cost accounting is to determine the cost of an organization’s
products or services. Just as a variety of methods (FIFO, LIFO, and specific identification) exist to
determine inventory valuation and cost of goods sold for a retailer, different methods are available to
value inventory and calculate product cost in a manufacturing or service environment. The method
chosen depends on the nature of the product or service and the company’s conversion process.
Generally, before products can be costed, a determination must be made about:
1. The product costing system
2. The valuation method to be used
There are two basic systems of costing a product:
1. Job Order Costing System
Job order costing is costing method applied to determine the costs of specific job generally
manufactured according to customer’s specification. Job order costing system provides for
separate records of the cost of each particular quantity of product manufactured.
Therefore, under this method, costs are collected and accumulated for each job, work order or
project separately.
Each job will be separately identified with a job number, so that it becomes essential to analyze
the cost of each job.
Different jobs can vary considerably in terms of materials, labor and overhead costs; so job-
costing system accumulates costs separately for each job preparing a job card.
This type of costing system is applied by furniture manufacturers, construction companies
(house builders), publishing companies, accounting firms, research firms, etc.

2. Process Costing System

Process costing system is used by entities that produce large quantities of homogenous
goods/products.
This costing system is used in those industries where manufacturing is done continuously
through different processing cycle stages. In this way the finished product of one process
usually becomes a raw material for the subsequent process.
This method of costing is suitable for textile industries, chemical industries, paper
manufactures, cement factorier, etc…
Advantages of Job Order Costing System
Job order costing system has the following advantages
1. The cost of material, labor and overhead for every job is readily available and management is able
to control the efficiency of operations.
2. It is simple as the recording of direct materials, direct labor, and overhead is done for each job.
3. Spoilage and defective works can be easily identified with specific jobs so that responsibility can
be fixed.
4. It provides basis for comparison between job costs or through periods.

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 Disadvantages of Job Costing System
Job order costing system has the following limitations:
1. Job costing is very expensive as more clerical work is involved in identifying each element of cost
with specific jobs.
2. With the increase in clerical processes, chances of errors are enhanced.
3. In case of inflation, comparison of cost of a job for one period with that of another becomes
meaningless.
Characteristics of Job Costing System
The major objective of job order costing is to find out the profit or loss on each job. When distinct
products are produced, there is a need that costs be identified with specific orders. Some of the
common features of this method of costing are given below:
a) The distinction between direct and indirect costs is more important in job order costing than in
process costing.
b) Orders are issued, and costs are kept for each lot of products manufactured.
c) Direct costs are charged to the work in process account and are entered in job sheets.
d) This method is used for estimating the amount of applied indirect costs, also known as applied
manufacturing expenses in respect of each order. Such amounts are entered in cost sheets and
charged to the work in process account.
e) This method is relatively more labor intensive. That means majority of the expenses are related to
labor or payroll.
Some Common Terms in Job Costing System
1. Production order
The central point of job order costing system is the production order. Once an order has been accepted
and the time has come to start manufacturing, the production control department will make the
production order. It serves as authorization to manufacture or to execute the order and control its
physical progress.
Each production order bears a serial number and several copies are prepared. These copies are then
passed on to the concerned departments. However, there is no standard format for the production order
and its details differ according to the nature of production.

FORMAT OF PRODUCTION ORDER

ABC Company
Production order --------------------------- Job number----------
Name of the customer ------------------- Date -----------
Date of starting manufacturing ---------
Date of completion of manufacturing------
Special instruction --------------------
Quantity Description Machine to be used Tools required

Bills of materials No--------

Production authorization (signature) -----------------------

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2. Job Cost sheet (Job Cost card)
Production order is the starting point for the cost accountant to prepare a job cost sheet. It is also
termed as job cost card. It is the basic record or document in a job order costing system. It is a cost
sheet on which the cost accountant records the costs incurred as the job passes through the factory.
The job cost card, at time of completion of a product, shows the total cost of the completed jobs. The
job cost sheet can differ in form, content and arrangement in each business. But the common items to
be included are stated in the following format.
FORMAT OF JOB COST SHEET

ABC Company
Customer name -------------- Date------------
Product description --------- Job order no------
Quantity ------------------- Date started -------
Selling price ------------- Date complted -------
Total cost ----------------
Department 1 Department 2 Department 3
Materials
Date
Requisition No
Amount
Labor
Date
Job time card No
Amount
Over head
Rate /basis
Amount
Cost summary
Depatment1 Department 2 Department3
Material
Labor
Overhead ________________________________________________________
Total

3. Work in progress account (work in process account)

When job costing is used, the work in progress account serves as a control account for a job cost card.
As jobs are finished and passed from the factory floor to the finished goods warehouse for dispatch,
the job cost cards are totaled and removed from their collection as work in progress. The
corresponding entry is made in the cost ledger by crediting the work in progress account and debiting
finished goods account.

4. Job ticket
In job costing it is an advantage to use job tickets. Because their use provides information about the
progress of the job as it passes from one operation to the next. The production department upon
receiving the job ticket will be able to check actual production against the plan and take action to
investigate delays in production.

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5. Profit/loss on job
This is determined by comparing the total cost incurred with the selling price obtained for each job.
That means, each job’s required resources will be separately indicated in the job cost sheet by that
specific job number. The sum of costs indicated in the job cost sheet reflects total cost of completing
the job. Finally, this cost will be compared with the selling price to arrive at profit or loss on the job.

Recording Costs in Job Order Costing System

Illustration-1
Addis manufacturing company follows job order costing and has the following information and
transactions related to the month of March 2010.
1. The beginning inventory of direct materials consists of:
Material X……………………………… Br. 7,000
Material Y……………………………… Br. 6,500
Material Z………………………………. Br. 9,000
Total 22,500
2. Purchase of direct materials on account consists of:
Material X…………………………….... Br. 25,000
Material Y……………………………… Br. 30,000
Material Z………………………………. Br. 50,000
Total 105,000
3. Issuance of direct material consists of:
Material X………………………………. Br. 22,000
Material Y………………………………. Br. 28,000
Material Z………………………………. Br. 45,000
Total 95,000
The materials are charged as follows:
Job 10 25,000
Job 11 30,000
Job 12 40,000
Total 95,000
4. The beginning work in process inventory consists of:
Job 10 15,000
Job 11 18,000
Job 12 16,000
Total 49,000

5. The beginning finished goods inventory consists of:

Job 10 360 units @ 50 Br each 18,000
Job 11 100 units @125 Br each 12,500
Job 12 150 units @120 Br each 18,000
Total 48,500
6. The direct labor cost for the month was 80,000 Birr of which 30% is charged to job 10, 30% to Job
11, and 40% to Job 12.
7. Manufacturing overheads is applied to the production at 75% of direct labor cost.
8. All the jobs are completed.
9. Job 10 was for 1,500 units, job 11 was for 600 units and job 12 was for 700 units.
10. Sales for the month were as follows:
 1,200 units of Job 10 at Br. 60 each
 560 units of Job 11 at Br.170 each
 650 units of Job 12 at Br. 150 each
Note that, the company uses FIFO method to account for all inventories.

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Required
A. Prepare all the necessary journal entries for the above transactions.
B. Prepare the job cost sheet for each job.
C. Compute unit costs for each job
D. Compute the direct material, work in process, and finished goods at March 31, 2010.

SOLUTION FOR ILLUSTRATION-1

A. preparing the journal entry
1. Material X 25,000
Material Y 30,000
Material Z 50,000
Accounts payable 105,000
v To record the cost of materials purchased

2. Work in process (Job 10) 25,000

Work in process (Job 11) 30,000
Work in process (Job 12) 40,000
Material X 22,000
Material Y 28,000
Material Z 45,000
To record the cost of materials used by each job
3. Work in process (Job 10) 24,000
Work in process (Job 11) 24,000
Work in process (Job 12) 32,000
Factory payroll clearing 80,000
To record the cost of labor incurred for each job.
4. Work in process (Job 10) 18,000
Work in process (Job 11) 18,000
Work in process (Job 12) 24,000
Manufacturing overhead applied 60,000
To record the cost manufacturing overhead cost applied to each job.

5. Work in process (Job 10) = 15,000+25,000+24,000+18,000

= 82,000 Br
Work in process (Job 11) =18,000+30,000+24,000+18,000
= 90,000 Br
Work in process (Job 12) =16,000+40,000+32,000+24,000
= 112,000 Br
Finished goods (Job 10) 82,000
Finished goods (Job 11) 90,000
Finished goods (Job 12) 112,000
Work in process (Job 10) 82,000
Work in process (Job 11) 90,000
Work in process (Job 12) 112,000
To record the cost of goods completed and transferred to the finished goods warehouse.
Unit cost = Total cost
Total quantity
Unit cost of Job 10 = 82,000 Br = 54.667 Br/unit
1,500 units
Unit cost of Job 11 = 90,000 Br = 150 Br/unit
600 units
Unit cost of Job 12 = 112,000 Br = 160 Br/unit
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 700 units
6. A. Cash (Accounts Receivable) 72,000
Sales 72,000
Cost of goods sold 63,920
Finished goods(Job 10) 63,920
Finished goods sold (Job 10) = (360*50) + (840*54.667)
= 63,920 Br
B. Cash (Accounts Receivable) 95,200
Sales 95,200
Cost of goods sold 81,500
Finished goods job 11 81,500
Finished goods sold (Job 11) = (100*125) + (460*150)
=81,500 Br
C. Cash (Accounts Receivable) 97,500
Sales 97,500
Cost of goods sold 98,000
Finished goods job 12 98,000
Finished goods sold (job12) = (150*120) + (500*160)
=98,000 Br
To record the cost of jobs sold to the customers

B. preparing the job cost sheet

Job 10 Job 11 Job 12
Beginning work in process 15,000 18,000 16,000
Direct material 25,000 30,000 40,000
Direct labor 24,000 24,000 32,000
Manufacturing overhead 18,000 18,000 24,000
Total 82,000 Br 90,000 Br 112,000 Br

C. Computing ending inventories

Ending Material =Beginning Materials + Purchases of Materials - Materials Used
Ending material X=7,000 + 25,000 - 22,000
= 10,000 Br
Ending material Y=6,500 + 30,000 - 28,000
= 8,500 Br
Ending material Z=9,000 + 50,000 – 45,000
= 14,000 Br
 There are no Ending Work in Process Inventories because all of the jobs started are completed
currently. Therefore, there is no job which could be referred to as work still in process.
Finished goods ending (Job 10) = (1,500-840)*54.667
= 36,080 Br
Finished goods ending (Job 11) = (600-460)*150
= 21,000 Br
Finished goods ending (Job 12) = (700-500)*160
= 32,000 Br
Illustration-2
3F company uses a job order costing system, the factory overhead rate estimated for the year 2002 is
birr 6 per direct labor hour. The inventory account has the following balance on January
Materials 8,000
Work in process (Job b 410) 7,500
Finished goods (Job 409) 7,800
During January the following events have occurred
1. Material purchased on account 170,000
2. Materials and supplies were issued as follows:
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 Job (411) 5,000
Job (412) 6,400
Job (413) 7,500
Supplies 2,000
3. The January direct labor cost were
Job (410) 200 hours @7 Br/hour
Job (411) 450 hours @7 Br/hour
Job (412) 400 hours @7 Br/hour
Job (413) 150 hours @ 7 Br/hour
4. Factory indirect labor for January was 3,600 birr
5. Other over head cost incurred during January
Utilities 3,500 Br
Depreciation 1,500 Br
Repairs and maintenance 1,000 Br
6. Job 410, 411,412 were completed and transferred to finished goods.
7. Job 409 and 410 were sold on account for 150% of the cost.

Required
1. Prepare the journal entries for the above transaction
2. Determine the ending inventory
3. Calculate the MOH over or under applied
SOLUTION FOR ILLUSTRATION-2
Journal entry
1. Materials 170,000
Vouchers payable 170,000
To record purchase of materials

2. Work in process (411) 5,000

Work in process (412) 6,400
Work in process (413) 7,500
MOH Control 2,000
Material 20,900
To record the cost of materials issued to the production process.
3. Work in process (410) (200hrs*7Br) 1,400
Work in process (411) (450hrs*7Br) 3,150
Work in process (412) (400hrs*7Br) 2,800
Work in process (413) (150hrs*7Br) 1,050

Factory payroll clearing 8,400

To record the cost of labor incurred in the production process
4-MOH control 3,600
Factory payroll clearing 3,600
To record the cost of indirect labor identified
5- MOH Control 6,000
Utilities payable 3,500
Accumulated depreciation 1,500
Repair and maintenance payable 1,000
To record other manufacturing overhead costs
6. Work in process (410) 1,200
Work in process (411) 2,700
Work in process (412) 2,400
Work in process (413) 900
MOH control applied 7,200

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 To record the manufacturing overhead cost applied to the production process
7. Finished goods (410) 10,100
Work in process (410) 10,100
Finished goods (411) 10,850
Work in process (411) 10,850
Finished goods (412) 11,600
Work in process (412) 11,600
To record the cost of finished goods completed and transferred to warehouse.
8. Job (409)
Cost of goods sold 7,800
Finished goods 7,800
Sales = 7,800 x150%
= 11,700 Br

Accounts receivable 11,700

Sales 11,700
Job (410)
Cost of goods sold 10,100
Finished goods 10,100
Sales= 10,100 x150%
= 15,150 Br

Account receivable 15,150

Sales 15,150
To record the cost of goods sold and sales
2. Ending inventory
Ending inventory of Material = 7,000+170,000- 20,900
= 156,100 Br
Ending work in process = 7,500+1,050
= 8,550 Br
3. Determining over or under applied over head
MOH Control 11,600
MOH applied 7,200
MOH under applied 4,400
MOH applied 7,200
Under applied MOH 4,400
MOH control 11,600