Chapter 3 Costing Systems: Job Order Costing

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Chapter 3Costing Systems Job Order Costing
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Uses of Information About Costs in the Management
Cycle
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Product Costing Systems

• Organizations have a range of choices in order to
  distribute product costs. Two ends of that
  spectrum are
• Job order costing systems.
• Process costing systems.

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Product Costing Systems

• The kind of production process that an
  organization uses determines which of the two
  approaches is used.
• Organizations that make large, unique, or
  special-order products typically use job order
  costing.

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A Job Order

• A job order is a customer order for a specific
  number of specially designed, made-to-order
  products.
• Job order costing measures the cost of each
  complete unit.

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Job Order Costing Systems

• Under a job order costing system, the costs of
• Direct materials
• Direct labor
• Manufacturing overhead
• are traced or assigned to specific job orders or
  batches of products.

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Process Costing Systems

• Organizations that produce large amounts or
  similar products or liquids that have a
  continuous product flow use process costing.
  Examples include
• Bricks
• Beverages
• Paper
• Sauces
• Paint

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Process Costing Systems

• Under a process costing system, the cost of
  direct materials, direct labor, and manufacturing
  overhead are first traced to processes or work
  cells and then assigned to the products produced
  by that process or work cell.

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Hybrid Systems

• The typical product costing system combines parts
  of both job order costing and process costing to
  create a system for an organizations particular
  production process.

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Job Order Costing System

• A job order costing system records information on
  the following cost flows
• The costs of materials and supplies are first
  charged to the Materials Inventory Control
  account and to the respective materials accounts
  in the subsidiary ledger.
• Labor costs are first accumulated in the Factory
  Labor account.

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Job Order Costing System

• The various manufacturing overhead costs are
  charged to the Manufacturing Overhead Control
  account.
• As products are manufactured, the costs of direct
  materials and direct labor are transferred to the
  Work in Process Inventory Control account.

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Job Order Costing System

• Manufacturing overhead costs are applied and
  charged to the Work in Process Inventory Control
  account using a predetermined overhead rate.
  Those charges are used to reduce the balance in
  the Manufacturing Overhead Control account and
  increase the Work in Process Inventory Control
  account.

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Job Order Costing System

• When products and jobs are completed, the costs
  assigned to them are transferred to the Finished
  Goods Inventory Control account.
• When the products are sold and shipped, their
  costs are transferred to the Cost of Goods Sold
  account.

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Cost Flow

• Any balance in the Manufacturing Control account
  at the end of the period is closed to Cost of
  Goods sold.
• The effective use of procedures and documents
  facilitates a timely flow of information through
  the accounting records.

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Reconciliation of Manufacturing Overhead

• If the Manufacturing Overhead Control account has
  a balance at the end of the period
• Overhead was either over or under applied.
• Given that the amount is minor
• Close the account to Cost of Goods Sold.

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• Account for materials, labor and
• overheads in a manufacturers
• job costing system.

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Materials Cost Example

• Alec Clothing Corp. purchased raw materials on
  account for 15,000.
• Materials costing 10,000 were requisitioned for
  production.
• Of this total, 2,000 was indirect materials.

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Materials Cost Example
Direct materials
Materials Inventory
WIP Inventory
15,000
10,000
8,000
Manufacturing Overhead
2,000
Indirect materials
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Labour Costs

• Labour costs are accumulated using payroll
  registers and time tickets.
• Labour time records identify the employee, the
  amount of time spent on each job, and the labour
  cost charged to the job.

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Labour Cost Example

• The company incurred 30,000 of manufacturing
  wages for all jobs.
• Assume that 25,000 can be traced directly to the
  jobs and 5,000 is for indirect labour.

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Labour Cost Example
Direct labour
Manufacturing Wages
WIP Inventory
30,000
30,000
25,000
Manufacturing Overhead
5,000
Indirect labour
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Manufacturing Overhead Costs

• The company incurred 20,000 of plant and
  equipment amortization.

Manufacturing Overhead (Plant and
equipment) 20,000 Accumulated
Amortization (Plant and equipment) 20,000 To
record plant and equipment amortization
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Manufacturing Overhead Costs

• The general term cost assignment refers to both
  tracing direct costs and allocating indirect
  costs to cost objects.

Direct materials and direct labour
Cost Tracing
Cost Object (Job)
Cost assignment
Manufacturing overhead
Cost Allocation
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Manufacturing Overhead Rate

• At the beginning of the year, a budgeted overhead
  application rate is estimated.
• This budgeted rate is used to apply overhead to
  all jobs completed during the year.

Budgeted overhead Estimated base Rate
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Six Steps in Allocating Manufacturing Overhead
Cost

• Estimate the total overhead costs for the period.
• Identify a cost allocation base.
• Budget the total units of the cost allocation
  base.
• Compute the predetermined overhead application
  rate.

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Six Steps in Allocating Manufacturing Overhead
Cost

• Obtain actual quantities of the overhead
  allocation base.
• Allocate manufacturing overhead to jobs by
  multiplying the predetermined manufacturing
  overhead rate by the actual quantity of the
  allocation base used by each job.

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Manufacturing Overhead Example

• Alec Clothing Corp.s total budgeted overhead for
  the year equals 243,000.
• The allocation rate is based on 4,500 direct
  labour hours.
• What is the allocation rate?

243,000 4,500 54
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Manufacturing Overhead Example

• Assume that Job 51 used 200 direct labour hours.
• What is the journal entry to record the
  manufacturing overhead applied?

Work-in-Process Inventory 10,800 Manufacturing
Overhead 10,800 To record overhead applied to
Job 51
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Accounting for Finished Goods, Sales, and Cost of
Goods Sold

• As jobs are completed they are transferred to
  finished goods inventory.
• In addition to the overhead applied to Job 51,
  direct labour was 4,000 and direct materials
  totaled 30,000.
• How much was transferred to Finished Goods
  Inventory?

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Accounting for Finished Goods, Sales, and Cost of
Goods Sold

• Direct materials 30,000
• Direct labour 4,000
• Manufacturing overhead 10,800
• 44,800

Work in Process 44,800
Finished Goods 44,800
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Accounting for Finished Goods, Sales, and Cost of
Goods Sold

• Assume that Job 51 was sold for 74,800.
• What are the journal entries?

Accounts Receivable 74,800 Sales
Revenue 74,800 Cost of Goods
Sold 44,800 Finished Goods Inventory 44,800
To record sale of Job 51
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Accounting for Finished Goods, Sales, and Cost of
Goods Sold
Work in Process 44,800
Finished Goods 44,800 44,800
Cost of Goods Sold 44,800
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Disposing of Underallocated or Overallocated
Overhead

• Suppose that the company incurred 232,000 of
  actual manufacturing overhead during the year,
  and that actual direct labour hours worked were
  4,000.
• The actual manufacturing overhead rate would have
  been 232,000 4,000 58.
• The predetermined rate was 54.

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Disposing of Underallocated or Overallocated
Overhead

• How much overhead was allocated to the various
  jobs?
• 4,000 direct labour hours 54 216,000
• What is the underallocated amount?
• 232,000 actual 216,000 allocated
  16,000

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Disposing of Underallocated Overhead to Cost of
Goods Sold
Manufacturing Overhead 232,000 216,000
16,000
0
Cost of Goods Sold
16,000
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Disposing of Overallocated Overhead to Cost of
Goods Sold

• Assume the opposite situation, in which allocated
  overhead is 232,000 and actual overhead is
  216,000.
• How do we dispose of overallocated overhead?
• Debit the Manufacturing Overhead account and
  credit the Cost of Goods Sold account to decrease
  the costs that went to the income statement.

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Disposing of Overallocated Overhead to Cost of
Goods Sold
Manufacturing Overhead 216,000 232,000
16,000
0
Cost of Goods Sold 16,000
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The Job Order Cost Card

• All costs of
• direct materials
• direct labor
• manufacturing overhead
• for a particular job are accumulated on a job
  order cost card.

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The Job Order Cost Card (contd)

• It also shows
• Job order number
• Product specifications
• Customer name
• Order date
• Projected completion date
• A cost summary

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Job Order Cost Card Manufacturing Company
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Job Order Cost Card Service Organization
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The Job Order Cost Card

• Because all manufacturing costs are accumulated
  in the Work in Process Inventory Control account,
  individual job order cost cards serve as
  subsidiary ledgers so that costs are identified
  to specific jobs.
• Ending balance in the Work in Process Inventory
  account equals the totals of costs shown on job
  order cost cards.

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Computing Product Unit Costs

• Product unit cost in a job order system is
  calculated by
• Totaling all manufacturing costs accumulated on a
  particular job order cost card.
• Dividing total manufacturing costs by the number
  of units produced for that job.

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Job Order Cost Card - Service Organization
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Job Order Costing in a Service Organization

• In service organizations, costs are not
  associated with a product that can be assembled,
  stored and valued.
• Services cannot be held in inventory.
• The most important cost is labor, which is
  carefully tracked.
• Other costs include materials, supplies and
  service overhead.
• Cost-plus contracts add a pre-determined profit
  to the total costs incurred on the job

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Project Costing

• Projects are complex, multidisciplinary
  approaches to the production of goods and
  services. Examples building construction,
  software development.
• Project Costing links many different job orders
  and processes by transferring costs from one job
  or process to another. Costs are accumulated and
  summarized in various ways to provide internal
  controls.

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Transaction Analysis -Job Order Cost Flow

• (T1) Purchased cart frames (572) and wheels
  (340) from supplier A
• (T2) Indirect material costing 82 was purchased
  from supplier B
• (T3) Total direct material used (both jobs CC and
  JB) is 1880. Details as follows cart frames
  1240 , cart wheels 640 Job CC a work-in-process
  require 1038 of additional direct material and
  job JB require 842 Indirect material required
  is 96.
• (T4) Total labor (direct and indirect) required
  is 2400
• (T5) Job CC and JB require 1320 and 320 of
  direct labor
• (T6) Other indirect overheads paid is 295
• (T7) Factory depreciation for period is 240
• (T8) Overhead is applied using a pre-determined
  rate of 85 of direct labor
• (T9) Job CC is completed and transferred to
  finished goods storage area, Job JB is partially
  complete
• (T10) Company sold general purpose golf carts
  worth 2040. The cost of the carts sold is 1940
• (T11) At the end of the period company reconciles
  the overhead account
• Required Prepare the T accounts and show the
  job order cost flow