JOB ORDER COSTING
CHAPTER 5
PERFORM JOB ORDER IDENTIFY AND PREPARE PREPARE A JOB ORDER USE A PREDETERMINED
COST ACCUMULATION THE EIGHT BASIC COST SHEET OVERHEAD RATE IN JOB
ENTRIES INVOLVED ORDER COSTING
01 02 03 04
In job order costing , Details about a job are Each cost sheet collects Contents and
costs are accumulated recorded on a job order data for one specific arrangement of cost
for each separate job sheet (cost sheet ) jobs sheet may differ from
• A job is the output identified one business to one
to fill a certain customer another
order or to replenish an item
of stock on hand
Job Order Cost
Systems for
Manufacturing
Businesses
A job order cost system records and
summarizes manufacturing costs by
jobs.
• Exhibit 2 indicates that
although the materials for
Jobs 71 and 72 have been
added, both jobs are still in
the production process.
• Thus, Jobs 71 and 72 are
part of Work in Process
Inventory.
• In contrast, Exhibit 2
indicates that Jobs 69 and
70 have been completed.
Thus, Jobs 69 and 70 are
part of Finished Goods
Inventory.
• Exhibit 2 also indicates that
when finished guitars are
sold to music stores, their
costs become part of Cost of
Goods Sold
Materials
The materials account in the
Exhibit 4 shows Legend Guitars’
general ledger is a controlling
materials ledger account for
account. A separate account for
maple. Increases (debits) and
each type of material is
decreases (credits) to the
maintained in a subsidiary
account are as follows:
materials ledger.
Increases (debits) are based on Decreases (credits) are based on
receiving reports such as materials requisitions such as
Receiving Report No. 196 for Requisition No. 672 for $2,000
$10,500, which is supported by for Job 71 and Requisition No.
the supplier’s invoice. 704 for $11,000 for Job 72.
• A receiving report is prepared when
materials that have been ordered are
received and inspected. The quantity
received and the condition of the materials
are entered on the receiving report. When
the supplier’s invoice is received, it is
compared to the receiving report. If there
are no discrepancies, a journal entry is made
to record the purchase. The journal entry to
record the supplier’s invoice related to
Receiving Report No. 19
• The storeroom releases materials for use in
manufacturing when a materials requisition
is received. Examples of materials
requisitions are shown in Exhibit 4. The
materials requisitions for each job serve as
the basis for recording materials used. For
direct materials, the quantities and amounts
from the materials requisitions are posted to
job cost sheets.
Factory Labor
• When employees report for
work, they may use electronic
badges, clock cards, or in-and-
out cards to clock in. When
employees work on an
individual job, they use time
tickets to record the amount
of time they have worked on a
specific job.
• Exhibit 5 shows that on December 13, 2016, D. McInnis spent six hours working on
Job 71 at an hourly rate of $10 for a cost of $60 (6 hrs. × $10).
• Exhibit 5 also indicates that a total of 350 hours was spent by employees on Job 71
during December for a total cost of $3,500. This total direct labor cost of $3,500 is
posted to the job cost sheet for Job 71, as shown in Exhibit 5.
• Likewise, Exhibit 5 shows that on December 26, 2016, S. Andrews spent eight hours on
Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. × $15). A total of 500 hours
was spent by employees on Job 72 during December for a total cost of $7,500. This
total direct labor cost of $7,500 is posted to the job cost sheet for Job 72, as shown in
Exhibit 5.
• A summary of the time tickets is used as the basis for the journal entry recording direct
labor for the month. This entry increases (debits) Work in Process and increases
(credits) Wages Payable
• Factory overhead includes all
manufacturing costs except
direct materials and direct labor.
• Factory overhead costs come
from a variety of sources,
including the following:
• Indirect materials comes from a
summary of materials requisitions.
Factory • Indirect labor comes from the salaries
of production supervisors and the
wages of other employees such as
janitors.
Overhead • Factory power comes from utility bills.
• Factory depreciation comes from
Accounting Department computations
of depreciation
• To illustrate the recording of factory overhead, assume that Legend
Guitars incurred $4,600 of overhead during December, which
included $500 of indirect materials, $2,000 of indirect labor, $900
of utilities, and $1,200 of factory depreciation. The $500 of indirect
materials consisted of $200 of glue and $300 of sandpaper. The
entry to record the factory overhead is as follows:
• Unlike direct materials and direct labor, actual overhead costs are not traced directly to individual jobs. Still, each job’s
total cost must include estimated overhead costs. Overhead Process Accounting for overhead costs follows the four-step
process.
• Overhead accounting requires managers to first estimate what total overhead costs will be for the coming period.
Overhead cost, not exactly precise, is needed to estimate a job’s total costs before its completion. Such estimated costs
are useful in setting prices and identifying costs that are out of control.
• At the end of the year, the company adjusts its estimated overhead to the actual amount of overhead incurred for that
year and then considers whether to change its predetermined overhead rate for the next year.
• Estimating overhead in advance requires a
Set predetermined overhead rate, also called
predetermined overhead allocation (or application)
Predetermined rate. This requires an estimate of total overhead cost
and an estimated activity base such as total direct
labor cost before the start of the period. Some
Overhead Rate companies use multiple predetermined overhead
rates for different types of products and services
Overhead Activity Base
• We apply overhead by linking it to another factor used
in production, such as direct labor or machine hours.
The factor to which overhead costs are linked is known
as the activity (or allocation) base.
• There should be a “cause and effect” relation between
the base and overhead costs.
• A manager must think carefully about how many and
which activity bases to use.
• This managerial decision influences the accuracy with
which overhead costs are applied to individual jobs,
which might impact a manager’s decisions for pricing or
performance evaluation
Apply Estimated Overhead
• Road Warriors applies (also termed allocates, assigns, or charges)
overhead by linking it to direct labor costs using this formula.
At the start of the current year, management estimates total
direct labor costs of $125,000 and total overhead costs of
$200,000. Using these estimates, management computes its
predetermined overhead rate as 160% of direct labor cost
($200,000 ÷ $125,000). Earlier we showed that Road Warriors
used $4,200 of direct labor in March. We now apply the
predetermined overhead rate of 160% to get $6,720 (equal to
$4,200 × 1.60) of estimated overhead for March. The entry is
Record Actual Overhead
• Actual overhead costs are not recorded in job cost
sheets.
• Factory overhead includes all factory costs other
than direct materials and direct labor.
• Two major sources of overhead costs are indirect
materials and indirect labor. These costs are
recorded from materials requisition forms for
indirect materials and from salary contracts or
time tickets for indirect labor.
• Actual factory overhead costs are recorded with
debits to the Factory Overhead general ledger
account and with credits to various accounts
ADJUSTING
OVERHEAD
• Companies usually wait until the end of the year to adjust the
Factory Overhead account for differences between actual and
applied overhead
• The company applies overhead (credits the Factory Overhead
account) using a predetermined rate estimated at the beginning
of the year. During the year, the company records actual
overhead costs with debits to the Factory Overhead account.
• At year-end we determine whether applied overhead is more or
less than actual overhead.
• When less overhead is applied than is actually incurred, the
remaining debit balance in the Factory Overhead account is
called underapplied overhead.
• When more overhead is applied than is actually incurred, the
resulting credit balance in the Factory Overhead account is called
overapplied overhead.
• When overhead is underapplied, it means that individual jobs have
not been charged enough overhead during the year, and cost of goods
sold for the year is too low.
• When overhead is overapplied, it means that jobs have been charged
too much overhead during the year, and cost of goods sold is too
high.
• In either case, a journal entry is needed to adjust Factory Overhead
and Cost of Goods Sold.
• Example of job sheet
Labor Accounting:
maintains payroll related records
Charge direct labor to jobs
Material Accounting
Charge indirect labor to overheads
:maintains material inventory records
Charge direct material to jobs
Charge indirect material to overheads
Overhead accounting:
maintains overhead detail records
Charges a share of overhead to each
to jobs
Charge indirect material to overheads
– Accounting for Jobs completed and products sold .
The company completed job no 5574 and 5575 during January at costs of 5,254$ and $56,926
respectively.
Job directly sold: Job 4474 was shipped directly to customer
Accounts Receivable 7860
Sales 7860
Cost of goods Sold 5254
Work in Process 5254
Job completed transferred to replenish stock But Job 5575 is transferred to finished goods
Finished Goods 56926
work in process 56926
Company shipped finished goods costing 52300 , consisting of a portion of job 5575
an portions of that job which were completed in the preceding year
The sales price was $70,000
Account receivable 70,000
Sales 70,000
Cost of Goods sold 52,300
finished goods 52300
Job Cost sheet
• Job cost sheet is a document used in a job-order costing system to
record all the costs incurred on a job. In addition to job identification
details such as job number, customer name, etc., it includes
particulars of direct material, direct labor and manufacturing
overheads incurred on the job.
• In a process costing system, the purpose of the job cost sheet is
fulfilled by the cost of production report.
