JOB Order
COSTING
METHODS OF PRODUCT COSTING
1 COST ACCUMULATION SYSTEM
defines the cost object and method of assigning
costs to production
2 VALUATION METHOD
specifi es how product costs are measured
COST ACCUMULATION SYSTEM
Regardless of the type of business, product costing is
concerned with three things:
• cost identifi cation
• cost measurement
• product cost assignment
TWO PRIMARY COST ACCOUNTING SYSTEM
1 JOB ORDER COSTING SYSTEM
used by companies that make relatively small
quantities of distinct products or perform unique
services that conform to specifications designated by
the purchaser
1 JOB ORDER COSTING SYSTEM
the word job is synonymous with client, engagement,
project, or contract
2 PROCESS COSTING SYSTEM
used by companies that make large quantities of
homogeneous goods
given the mass manufacturing process, one unit of
output cannot be readily identified with specifi c input
costs within a given period, making the use of a cost-
averaging approach necessary
VALUATION METHODS
based on three alternative valuation methods:
actual (chapter 2)
normal (chapter 3)
standard
STANDARD COST SYSTEM
use of unit norms or standards are developed for direct
material and direct labor quantities and/or costs
overhead is applied to production using a
predetermined rate that is considered the standard
allows companies to quickly recognize deviations from
expected production costs and to correct problems
resulting from excess usage and/or costs
JOB ORDER COSTING SYSTEM
costs are accumulated by job, which is a single unit or
multiple similar or dissimilar units that has or have
been produced to distinct customer specifications
if multiple outputs are produced, a per-unit cost can be
computed only if the units are similar or if costs are
accumulated for each separate unit
each job is treated as a unique cost entity or cost
object and maintained in separate subsidiary ledger
accounts and are not added together in the ledger
SEPARATE
SUBSIDIARY
LEDGER
ACCOUNTS
FOR JOBS
JOB ORDER COSTING SYSTEM
provide information important to managing profitability
and setting prices for output
cost-plus contract may be used, which allows
producers to cover all direct costs and some indirect
costs and to generate an acceptable profit margin
the trend in job order costing is to automate data
collection and data entry functions supporting the
accounting system because it relieves production
employees of that task, and electronically stored data
can be accessed to serve many purposes
JOB ORDER COSTING SYSTEM
many companies have created intranets to manage
information, especially that pertaining to jobs
produced
an intranet is a restricted network for sharing
information and delivering data from corporate
databases to local area network (LAN) desktops
JOB ORDER COSTING:
DETAILS AND DOCUMENTS
A job can be categorized by the stage of its production
cycle. There are three stages of production:
contracted for but not yet started
in process
completed
The production stages are supported by various
documents providing information about the job and
supporting the journal entries related to the job
JOB ORDER COSTING:
DETAILS AND DOCUMENTS
JOB ORDER COST SHEETS
source document that provides virtually all financial
information about a particular job
total costs contained on the job order cost sheets for
all incomplete jobs should reconcile to the WIP
Inventory control account balance in the general ledger
includes a job number, a description of the job, customer
identification, various scheduling information, delivery
instructions, and contract price as well as details regarding actual
costs for direct material, direct labor, and applied overhead
JOB
ORDER
COST
SHEETS
JOB ORDER COSTING:
DETAILS AND DOCUMENTS
MATERIAL REQUISITIONS
prepared so that material can be released from
inventory, or purchased, and sent to the production
area
source document that indicates the types and
quantities of material to be issued to production or
used to perform a service job
verifies material flow from the warehouse to the
requisitioning department and allow responsibility for
material cost to be traced to users
MATERIAL REQUISITIONS FORM
JOB ORDER COSTING:
DETAILS AND DOCUMENTS
EMPLOYEE TIME SHEETS
indicates the jobs on which each employee worked and
the direct labor time consumed
most reliable if the employees keep them current as
the day progresses
work arriving at an employee station is accompanied
by a tag or bar code specifying its job order number;
the bar codes can be scanned as products pass
through individual workstations. Th e times that work
is started and stopped are noted on the time sheet
EMPLOYEE TIME SHEETS
JOB ORDER COSTING:
DETAILS AND DOCUMENTS
OVERHEAD
actual overhead incurred during production is debited
to the Manufacturing Overhead control account
actual overhead is applied to jobs by multiplying the
actual overhead application rate by the actual measure
of activity associated with each job
normal costing is used, and overhead is applied to jobs
with one or more annualized predetermined OH rates
JOB ORDER COSTING:
DETAILS AND DOCUMENTS
COMPLETION OF PRODUCTION
When a job is completed, its total cost is removed from
Work in Process Inventory and transferred to Finished
Goods Inventory.
Job order cost sheets for completed jobs are removed
from the WIP Inventory subsidiary ledger and become
the subsidiary ledger for t
When a job is sold, its cost is transferred from Finished
Goods Inventory to Cost of Goods Sold.
JOB ORDER COSTING:
DETAILS AND DOCUMENTS
COMPLETION OF PRODUCTION
The job cost sheet then becomes a subsidiary record
for Cost of Goods Sold
This cost transfer presumes the use of a perpetual
inventory system, which is common in a job order
costing environment because goods are generally
easily identified and tracked
JOB ORDER DOCUMENTS AND COST FLOW
JOB ORDER COST ILLUSTRATION
DEAN’S IRONWORKS
Over the long term, the company’s goal is to
realize a gross profit equal to 20 percent of sales
revenue.
When a company has too much unused capacity,
prices and gross margin may be reduced to
increase the likelihood of gaining job contracts.
JOB ORDER COST ILLUSTRATION
DEAN’S IRONWORKS
Job PF108 is for Willowdale Homeowners’
Association (2,000 ft steel fence).
Contract signed: August 13, 2010.
Job Duration: Sept 1 – Nov 15, 2010.
Contract Price: $35,250.
MATERIALS ISSUED
Material Requisition Form #L40–L55:
Total raw materials issued: $5,420.
Breakdown:
Job #PF108: $4,875
Other jobs: $520
Indirect material: $25
JOURNAL ENTRY #1
Work in Process Inventory—Fabrication $4,875
Work in Process Inventory—Fabrication 520
Manufacturing Overhead Control—Fabrication 25
Raw Material Inventory $5,420
JOURNAL ENTRY #2
Work in Process Inventory—Fabrication $6,902
Work in Process Inventory—Fabrication 1,447
Manufacturing Overhead Control—Fabrication 1,250
Wages Payable $9,599
Overhead Costs
Overhead costs incurred in Fabrication: $5,900
Factory Building Equipment Depreciation: $2,500
Prepaid Insurance Expired: $200
Utility Bills Received: $1,900
Repair & Maintenance Costs: $500
Miscellaneous Expenses: $800
JOURNAL ENTRY #3
Manufacturing Overhead Control—Fabrication $5,900
Prepaid Insurance $200
Utilities Payable 1,900
Cash 800
Wages Payable 2,500
Accounts Payable 500
Fabrication department applies OH using pre-
determined rates:
$12 per direct labor hour
$30 per machine hour
Job #PF108 used:
260 direct labor hours → Applied Overhead:
$3,120
56 machine hours → Applied Overhead:
$1,950
Total Applied Overhead: $5,070
JOURNAL ENTRY #4
Work in Process Inventory—Fabrication $5,070
Work in Process Inventory—Fabrication 900
Manufacturing Overhead Control—Fabrication $5,970
TRANSFERRING WORK ACROSS
DEPARTMENTS FABRICATION
→ INSTALLATION
Work in Process Inventory—Installation $16,847
Work in Process Inventory—Fabrication $16,847
Installation → Finishing
Work in Process Inventory—Finishing $22,376
Work in Process Inventory—Installation $22,376
Finishing→ Finished Goods Inventory
Finished Goods Inventory—Job #PF108 $28,091
Work in Process Inventory—Finishing $28,091
SALE & COST OF GOODS SOLD (COGS)
JOB #PF108
SOLD TO WILLOWDALE HOMEOWNERS’
ASSOCIATION
Sales Revenue: $35,250
Cost of Goods Sold: $28,091
Journal Entry:
Accounts Receivable $35,250
Sales Revenue $35,250
Cost of Goods Sold—Job #PF108 28,091
Finished Goods Inventory 28,091
DEAN’S IRONWORKS
CUSTOM
FABRICATING
COMPLETED JOB
ORDER COST SHEET
JOB ORDER COSTING USING
STANDARD COSTS
Use of standard costs for direct material and
direct labor can minimize the effects of such cost
fluctuations in the same way that predetermined
rates do for overhead costs.
STANDARD COST SYSTEM
determines product cost by using predetermined
norms in the inventory accounts for prices and/or
quantities of cost components.
VARIANCE
The difference between the actual quantity,
price, or rate and its related standard
STANDARDS
can be used in a job order system only if a
company typically engages in jobs that produce
fairly similar products
If standards are used for price or rate amounts
only, the debits to WIP Inventory become a
hybrid of actual and standard information: actual
quantities at standard prices or rates.
EXAMPLE: A COAT OF MANY COLORS
Uses standard price for paint and standard
labor rate:
Paint: $30 per gallon
Labor: $18 per hour
No standard for paint quantity or labor
hours (varies by job).
Example job:
50 gallons used, actual cost $27 per gallon
→ $150 favorable variance
80 labor hours, actual cost $19 per hour →
$80 unfavorable variance
EXAMPLE:GREEN MANUFACTURING INC.
Uses both price & quantity standards for
material and labor.
Standard cost per box:
Material: 8 linear feet of redwood @ $0.60/ft
Labor: 1.4 hours @ $9.00/hour
Actual production (2,000 boxes in June):
16,300 linear feet used @ $0.58/ft → $325
favorable variance
2,700 hours worked @ $9.10/hr → $270
unfavorable variance
EXAMPLE:GREEN MANUFACTURING INC.
Uses both price & quantity standards for
material and labor.
Standard cost per box:
Material: 8 linear feet of redwood @ $0.60/ft
Labor: 1.4 hours @ $9.00/hour
Actual production (2,000 boxes in June):
16,300 linear feet used @ $0.58/ft → $325
favorable variance
2,700 hours worked @ $9.10/hr → $270
unfavorable variance
Net variance: $776 favorable (total costs below
expected).
JOB ORDER COSTING TO ASSIST
MANAGERS
They are interested in controlling costs in each
department as well as for each job.
Actual costs (direct material, direct labor,
overhead) are compared to budgets.
Accurate record-keeping is crucial for cost
comparison.
COST CONTROL EMPHASIS
It differs by industry
Aston Martin: Focus on labor hours (200
hours per DB9).
Jewelers: High-value materials like gold and
diamonds.
Hospitals: Managing overhead costs for
equipment and data processing.
CONCRETE CAFE
Specializes in concrete structures. The firm has a
diverse set of clients and job types.
President: Joann Bradley wanted to identify the
most profitable clients.
Problem: Costs were recorded by type (travel,
entertainment) instead of by client.
Findings
Largest accounts brought the most revenue but lowest
profit margins.
No tracking of client recruitment, travel, or entertainment
costs.
THE SOLUTION
A Job order costing implemented for individual
client cost tracking.
Unprofitable accounts were dropped.
Shifted focus to smaller, closer clients, reducing
costs and increasing profit.
PAUL’S PIROGUES
Custom manufacture small wooden
boats to customer specifications.
Implementing the job order costing system provided
Boudreaux with the following benefits:
better cost control over the jobs that were in process
better inventory valuations for financial statements
better information with which to prevent part
stockouts and production stoppages
more up-to-date information
an informed means by which to understand how
costs were incurred on jobs
PRODUCTION AND MATERIAL
LOSSES IN JOB ORDER COSTING
PRODUCTION PROCESSES
may result in losses of direct material or partially
completed products.
SHRINKAGE
Reductions and some losses, such as
evaporation, leakage, or oxidation, are
inherent in the manufacturing process
DEFECTS
Production process errors (either by humans or machines)
cause a loss of units through rejection at inspection for
failure to meet appropriate
quality standards or designated product specifications
A normal loss of units falls within a tolerance level
that is expected during production.
Any loss in excess of the set expectation level is
considered an abnormal loss
ABNORMAL SPOILAGES
The cost of all abnormal losses (net of any disposal value)
should be written off as a period cost, and unnecessary
costs should be written off in the period in which they are
incurred.
Abnormal losses are not necessary to produce good units
and the cost is avoidable in the future. This cost should
be separately identified and the cause investigated to
determine how to prevent future similar occurrences.
THANK YOU!
