JOB ORDER COSTING

JOB ORDER COST SYSTEM- a system for allocating costs to groups of unique
products. It is applicable to the production of customer-specified products such as
the manufacture of special machines. Each job becomes a cost center for which
costs are accumulated.

Job order costing is used by companies where goods are produced in distinct
batches, and there are significant differences among the batches. Examples of firms
that use job order costing are aircraft manufacturers, printers, furniture
manufacturers, and custom machining firms.
The cost accounting procedures are such designed to assign costs to each job.
Then the costs assigned to each job are averaged over the units of production in
the job to obtain average cost per unit. For example, supposes that Lenlen Print
worked on two printing jobs during October, and the following costs were incurred.

Job 101 Job 102

Direct materials P200 P360
Direct labor 500 400
Factory overhead 300 240
Total cost P1,000 P1,000
If Job 101 is for 50 campaign posters, then the cost per poster is P20 (P1,000 divided
by 50 posters), and if Job 102 is for 100 invitations, then the cost per invitation is P10
(P1,000 divided by 100 invitations).

Procedures similar to those used in job order costing are also used in many service
industry firms, although these firms have no work in process or finished goods
inventories.
Major source documents for job order costing
1. Job-cost sheet
a. These records accumulate product costs of specific units or small batches of
units for both product costing and control purposes.
b. The file of job-cost records for uncompleted jobs serves as a perpetual book
inventory and the subsidiary ledger for Work in Process Control.

2. Materials stock card

a. These records are the perpetual book inventory of costs and quantities of
materials on hand.
b. The file of materials stock cards for unused materials is the subsidiary ledger
for Materials Control.
3. Finished goods stock card
a. These records are the perpetual book inventory of costs and quantities of completed
goods held for sale.
b. The file of finished stock records for unsold goods is the subsidiary ledger of
Finished Goods Control.

4. Factory department overhead cost record

a. These records accumulate detailed manufacturing costs by department.
b. The file of these records for the accounting period is the subsidiary ledger for
Factory Department Overhead Control.

5. Materials requisition, time ticket, and clock card

a. As the source documents for charging costs to jobs and departments.
b. To aid in fixing responsibility for control and usage of labor and materials.
 ACCOUNTS PECULIAR TO JOB ORDER COST SYSTEM

MATERIALS
1. Inventory at the beginning 1. Cost of direct materials issued to
production
2. Invoice price of materials purchased 2. Cost of indirect materials issued to
factory
3. Freight-in (using direct charging) 3. Cost of materials returned to
suppliers
4. Cost of excess materials returned
from factory

WORK IN PROCESS
1. Inventory at the beginning 1. Cost of goods completed and
transferred to finished goods
2. Direct materials issued to production 2. Cost of excess materials returned
to storeroom
3. Direct labor charged to production
4. Factory OH applied to production
 FINISHED GOODS
1. Inventory at the beginning 1. Cost of goods sold
2. Cost of goods completed
3. Cost of goods returned by customers

FINISHED GOODS
1. Inventory at the beginning 1. Cost of goods sold
2. Cost of goods completed
3. Cost of goods returned by customers
 FACTORY OVERHEAD CONTROL
1. Cost of indirect materials and 1. Total debit footing at the end of
supplies used the accounting period when
closing the account
2. Cost of indirect labor
3. Cost of other indirect expenses
FACTORY OVERHEAD APPLIED
1. Total credit footing at the end of the 1. Cost of overhead allocated to
accounting period when closing the production
account
COST OF GOODS SOLD
1. Cost of goods sold (normal) 1. Adjustment for over-applied
factory overhead
2. Adjustment for underapplied factory
overhead
ACCOUNTING FOR MATERIALS

A stock card and a materials requisition are used in accounting for materials.
a. A stock card indicates the quantities and cost of each type of material
received, issued to a job, and remaining inventory. Thus, a perpetual record of
materials is maintained on stock cards.
b. A materials requisition directs the stores clerk to issue certain materials to a
production or service center.
1. Materials requisitions show the types, quantities, and costs of materials ordered
from the store room.
2. Materials requisitions provide the information for entries to Work in process
Inventory account and on job order cost sheets for direct materials.
ACCOUNTING FOR LABOR

Entries for direct labor come from data summarized from work or labor time
tickets.
a. The employee number, job number and other important information are
entered on the word ticket.
b. At the end of the day, work tickets are accumulated and are the basis for the
direct labor charge to the job order cost sheet.
c. When an employee is assigned to indicate labor tasks such as maintenance, a
work ticket is completed showing the type of tasks so that at the end of the day,
the total indirect labor costs can be debited to the Manufacturing overhead
account.
ACCOUNTING FOR FACTORY OVERHEAD
A manufacturing overhead cost sheet summarizes the manufacturing overhead
costs incurred. Manufacturing overhead is accumulated on a manufacturing
overhead cost sheet and applied by means of a predetermined rate.

a. Predetermined overhead rates are calculated by dividing estimated total

overhead costs for a period by an expected level of activity such as direct labor
hours or machine hours.
b. Predetermined overhead rates are usually set at the beginning of the year for
which they will be used and are reviewed at the end of the year.
Sum of the total costs charged to each incomplete job, which includes
direct material, direct labor and overhead applied, must always agree with
the balance in the Work in Process Inventory account.

Manufacturing Overhead account is credited with the estimated overhead

using the predetermined overhead rates. Actual manufacturing overhead is
debited to this account.
a. A debit balance means if actual overhead exceeds applied overhead
and the overhead is underapplied or underabsorbed.
b. A credit balance remains if applied overhead exceeds actual overhead
and the overhead is overapplied or overabsorbed.
DISPOSITION OR UNDERAPPLIED OR OVERAPPLIED OVERHEAD
The balance in the Manufacturing Overhead account which represents overapplied or
underapplied must be closed out at year-end.
a. At the end of the month or quarter, the balance may be carried forward if it is expected
to be offset or reduced in the remainder of the year; then at year-end the balance
remaining could be allocated to Work in Process Inventory, Finished Goods Inventory, and
Cost of Goods Sold based on:
1. Factory overhead applied to the Work in Process Inventory, Finished Goods Inventory, and
Cost of Goods Sold.

1. Ending balances of the Work in Process Inventory, Finished Goods Inventory, and Cost of
Goods Sold.

a. If the amount of the balance is small, the practical alternative is to dispose of the
underapplied or overapplied overhead through Cost of Goods Sold.
Accounting for Spoiled Goods
Spoiled goods are partially or fully completed units that are defective in some ways.
Spoiled goods are not correctable either because it is not possible to correct them or
because it is not economical to correct them.

Spoilage caused by the customer. If spoilage occurs because of actions taken by the
customer, then the loss on the spoiled units are charged to the job.

Spoilage caused by an internal failure. If spoilage occurs because of an internal failure,

such an error by the employee or defective materials/machinery, the unrecovered cost of
the spoiled goods should be charged to factory overhead control.
Accounting for defective units

Defective units are units with imperfections that can be corrected by

reprocessing the units. The problem is the additional costs incurred.

Rework caused by the customer. If the rework is caused by the customer, the
additional costs incurred to reprocessed the units are charged to the job and will
cause an increase in the unit cost.

Rework caused by an internal failure. If the rework is caused by an internal

failure, the cost should be charged to Factory Overhead Control.
Accounting for scrap
Scrap includes (1) the fillings or trimmings remaining after processing materials,
(2) defective materials that cannot be used or returned to vendors, and (3) broken
parts resulting from employee or machine failure.

If the scrap is directly traceable to a specific job, the amount realized from the sale
of the scrap can be credited to the Work in Process account thereby reducing the
material cost of the job. The entry is
Cash/ Accounts Receivable xxx
Work in Process xxx

If the scrap is traceable to indirect materials, the amount realized from the
sale of the scrap can be credited to Factory Overhead Control. The entry is
Cash/ Accounts Receivable xxx
Factory Overhead Control xxx

If scrap results from defective materials or broken parts, it should be

considered as an internal failure which management should try to reduce
or eliminate.
COST ACCOUNTING
PROBLEMS AND
EXERCISES
PROBLEM 1 The Blanchett Company manufactures fishing rods. Last year, direct
materials costing $516,000 were put into production. Direct labor of $430,000 was
incurred and overhead equaled $645,000. The company had operating income for the
year of $58,000 and manufactured and sold 86,000 fishing rods at a sales price of $21
per unit. Assume that there were no beginning or ending inventory balances in the work
in process and finished goods inventory accounts.
Required:
a. Compute the per-unit product cost
b. Compute the per-unit prime cost
c. Compute the per-unit conversion cost
d. Compute the gross margin for the year
e. Compute the selling and administrative expenses for the year
f. Assume production amounted to 86,000 fishing rods and 80,000
were sold. Compute cost of goods sold.
g. Assume production amounted to 86,000 fishing rods and 80,000
were sold. Compute the balance in ending finished goods
inventory.
 PROBLEM 2. The Butchart Company manufactures microwave ovens. Last year,
the per-unit product cost was $56, the per-unit prime cost was $34, and the per-
unit conversion cost was $42. Cost of goods sold for the year was $560,000 and
the sale price per unit was $100. In addition, direct labor costs of $200,000 and
selling and administrative expenses of $240,000 were incurred.
Required

A. Calculate how many units were sold last year

B. Compute the cost of direct materials used
C. Compute the cost of overhead
D. Compute the gross margin for the year
E. Calculate operating income
 PROBLEM 3. Picture It Inc. manufactures customized wooden frames. The
direct materials needed to construct the frames are wood, glass and cardboard.
Picture It has 22 employees who work a 40 hour work week and are each paid
$17 per hour. The company produced and sold 900 frames in the month of
September.
During the month of September the following purchases were made to produce
the 900 frames:
Wood- 4000 ft. at $1.20/ft.
Glass- 400 pieces at $5.60/piece
Cardboard- 500 pieces at $.50/piece

Required
1. Calculate the total product cost for the month. Assume that all employees
worked four full weeks in September and that the company incurred $55,000 in
overhead costs.
2. Calculate the per unit cost.
3. Calculate the gross margin for the month of September assuming that the
company sells each frame for $250.
MULTIPLE CHOICE
1. Which of the following is one of the components of cost accounting?
a.It involves measuring product costs.
b.It involves the determination of company profits.
c. It requires GAAP to be applied.
d.It requires cost minimizing principles.

2. A major purpose of cost accounting is to

a.classify all costs as operating or nonoperating.
b.measure, record, and report period costs.
c. provide information to stockholders for investment decisions.
d.measure, record, and report product costs.
3.The two basic types of cost accounting systems are
a.job order and job accumulation systems.
b.job order and process cost systems.
c. process cost and batch systems.
d.job order and batch systems.

4. In a job order cost accounting system, the Raw Materials Inventory account
is
a.an expense.
b.a control account.
c. not used.
d.a period cost.
5. When a job is completed and all costs have been accumulated on a job cost
sheet, the journal entry that should be made is
a.Finished Goods Inventory
Direct Materials
Direct Labor
Manufacturing Overhead
b.Work In Process Inventory
Direct Materials
Direct Labor
Manufacturing Overhead
c. Raw Materials Inventory
Work In Process Inventory
d.Finished Goods Inventory
Work In Process Inventory
6. If the entry to assign factory labor showed only a debit to Work In
Process Inventory, then all labor costs were
a.direct labor.
b.indirect labor.
c. overtime related.
d.regular hours.

7. The principal accounting record used in assigning costs to jobs is

a.a job cost sheet.
b.the cost of goods manufactured schedule.
c. the Manufacturing Overhead control account.
d.the stores ledger cards.
8. The two major steps in the flow of costs are
a.allocating and assigning.
b.acquiring and accumulating.
c. accumulating and assigning.
d.accumulating and amortizing.

9. A process cost system would most likely be used by a company that

makes
a.motion pictures.
b.repairs to automobiles.
c. breakfast cereal.
d.college graduation announcements.
10. Which of the following would be accounted for using a job order cost
system?
a.The production of personal computers.
b.The production of automobiles.
c. The refining of petroleum.
d.The construction of a new campus building.

11. The cost of the partially completed goods at the end of the period
would be
a. ending work in process inventory.
b. cost of goods sold.
c. beginning finished goods inventory.
d. beginning work in process inventory.
12. Product costs are expensed
a. when the product is finished.
b. when the product unit cost is calculated.
c. when the product is sold.
d. all of these are correct.

13. Product costs are expensed

a. when the product is finished.
b. when the product unit cost is calculated.
c. when the product is sold.
d. all of these are correct.
14. Labor cost flows reflect
a. direct labor cost.
b. indirect labor cost.
c. administration cost.
d. both indirect and direct labor cost.

15. During the month of January, Enterprise Inc. had total manufacturing
costs of $110,000. They
incurred $40,000 of direct labor cost and $30,000 of overhead cost
during the month. If the
materials inventory on January 1 was $3,000 less that the materials
inventory on January 31, what
was the cost of materials purchased during the month?
a. $37,000
b. $43,000
c. $40,000
d. none of these
Figure 2-2.
Lonborg Co. had the following beginning and ending inventory balances for the year
ended December 31, 2021:
January 1, December 31,
2021 2021
Materials $10,000 $ 8,000
Work in Process $18,000 $17,000
Finished Goods $21,000 $16,500

In addition, direct labor costs of $30,000 were incurred, overhead equaled $42,000,
materials purchased were $27,000 and selling and administrative costs were $22,000.
Lonborg Co. sold 25,000 units of product during the year at a sales price of $5.00 per
unit.
16. Refer to Figure 2-2. What was the amount of cost of goods manufactured
for the year?
a. $101,000
b. $124,000
c. $100,000
d. $102,000

17. Refer to Figure 2-2. What was the amount of cost of goods sold for the
year?
a. $102,000
b. $97,500
c. $106,500
d. $128,500
Work-in-Process for Lee's Carpentry was $64,000 for January. Direct labor and direct
materials together for the month were $39,000. Direct labor was twice as much as
direct materials. The overhead rate is 70% of direct labor. No jobs were finished
during the month. What was beginning Work-in-Process?
a. $6,800
b. $25,000
c. $4,250
d. $15,250
e. $0

Wright's Construction builds custom houses for individual buyers. On June 1, it had
one job started with a beginning Work-in-Process of $56,000. During June the job was
finished and sold. Direct labor for the job in June was $75,000 and direct materials
used were $57,000. Overhead is computed at a rate of 65% of direct labor. There is a
markup of 35% on all sales. What was the selling price of the house?
a. $319,612.50
b. $236,750
c. $82,862.5
d. $272,600
e. 262,087.5
20. Wright Corporation had the following information available for December of the
current year:

Work in Process, December 1 $20,000

Materials placed into production, December 27,500
Direct labor, December 37,500

Plantwide overhead rate is 150% of direct labor costs. Job cost sheets had the
following balances:
Job Z1 $32,500 Job Z3 35,000
Job Z2 55,000 Job Z4 18,750

Jobs Z3 and Z4 were not completed at the end of December. What is the balance in
work-in process for Wright at the end of December?
a. $85,000
b. $87,500
c. $56,250
d. $53,750
Figure 5-8

John's Water Slides makes custom water slides for hotels. On September 1, there
were three jobs in process, Jobs 812, 813, and 814. Two more jobs were started
during September, Jobs 815 and 816. By September 30, Jobs 812, 814, and 816
were finished. The following data has been collected:

Job 812 Job 813 Job 814 Job 815 Job 816
9/1 Balance $615 $830 $ 945 --- ---
Direct materials 750 235 1,280 $200 $915
Direct labor 420 115 560 320 875

Overhead is applied at the rate of 120% of direct labor cost. Jobs are sold at cost
plus 60%. Selling and administrative expenses for September totaled $2,950. By
September 30, Jobs 812 were 816 are sold, but the customer who ordered Job 814
decided he did not want the slide so it is still in the warehouse.
21. Refer to Figure 5-8. Calculate the ending balance in Work-in-Process as of
Sept 30.
a. $2,222
b. $1,700
c. $1,961
d. $3,555.20
22. Refer to Figure 5-8. What is the ending balance of Finished Goods if the
beginning balance was $0?
a. $3,457
b. $5,531.20
c. $8,206.40
d. $13,737.60
23. Refer to Figure 5-8. What is the selling price of Job 816?
a. $4,544
b. $2,840
c. $2,864
d. $3,408
24. Refer to Figure 5-8. What is the cost of goods sold for September?
a. $5,129
b. $8,206.40
c. $5,720
d. $3,575
e. $8,586
25. Refer to Figure 5-8. What is John's operating income for the
month of September?
a. $127.40
b. $8,206.40
c. $3,077.40
d. $0
Questions 26 and 27 are based on the following information. The estimated unit
cost for a company using absorption (full) costing and planning to produce and
sell at a level of 12,000 units per month are as follows:
Estimated
Cost Item Unit Cost
Direct materials $32
Direct labor 20
Variable manufacturing overhead 15
Fixed manufacturing overhead 6
Variable seIling 3
Fixed selling 4
26. Estimated conversion costs per unit are: -
a. $ 35.
b. $ 41.
c. $ 44.
d. $ 48.
e. $ 67.

27. Estimated prime costs per unit are:

a. $ 73.
b. $ 32.
c. $ 67.
d. $ 52.
Questions 28 through 31 are based on the following information. Alex Company had the
following inventories at the beginning and end of January.
January 1 January 31
Finished goods $ 125,000 $ 117,000
Work in process 235,000 134,000
Direct materials 251,000 124,000
The following additional manufacturing data were available for the month of January.
Direct materials purchased $ 189,000
Purchases returns and allowances 1,000
Transportation-in 3,000
Direct labor 300,000
Actual factory overhead 175,000
28. Alex Company's prime cost for January was:
a. $ 199,000.
b. $ 501,000.
c. $ 489,000.
d. $ 201,000.

29. Alex Company’s total manufacturing cost for January was:

a. $ 676,000.
b. $ 664,000.
c. $ 684,000.
d. $ 666,000.
30. Alex Company’s cost of good manufactured for January was:
a. $ 660,000.
b. $ 684,000.
c. $ 658,000.
d. $ 672,000.
31. Alex Company’s cost of goods sold for January was:
a. $ 682,000.
b. $ 676,000.
c. $ 668,000.
d. $ 652,000.