MANAGERIAL ACCOUNTING

JOB-ORDER
COSTING

Presented by Benjie M. Velado

 OBJECTIVES

01 Distinguish between job order costing and process costing

02 Describe and Identify the Three Major Components of Product Costs under Job Order Costing

03 Describe cost systems and the flow of costs in a job order system.

04 Use a job cost sheet to assign costs.

05 Demonstrate how to determine and use the predetermined overhead rate.

06 Prepare entries for manufacturing and service jobs completed and sold.
 OBJECTIVE 1
Job Order Costing vs. Process Costing

Job- order Costing Process Costing

• Products are manufactured to • Used when a large volume of
order.
similar products are
• Costs are assigned to each
job or batch. manufactured
• Each job or batch has its own • One unit of product is
distinguishing characteristics. indistinguishable from other
• The unique nature of each units of product.
order requires tracing or • Costs are assigned to
allocating costs to each job,
and maintaining cost records
departments or processes for a
for each job. specified period of time
 JOB ORDER COST SYSTEM

Illustration shows the recording of costs in a job order cost system for Disney as it produced
two different films.

ILLUSTRATION
Job order cost system for
Disney
PRODUCT COST SYSTEM

Potato Chips Production

ILLUSTRATION 2.
Process cost system
 OBJECTIVE 2
Key Components of Product Cost

Direct Direct Labor Manufacturing

Materials Overhead
Direct materials are all raw Direct labor refers to the Manufacturing overhead
materials that are specifically labor costs directly encompasses all indirect
used in the manufacturing of a attributable to the costs associated with the
product. They are easily traceable production of specific production process that
goods. This includes wages cannot be directly traced
and represent a significant
for employees who are to specific jobs, such as
portion of the total cost in job
physically involved in the utilities, depreciation, and
order costing.
manufacturing process, maintenance costs. It is
and it plays a crucial role in allocated to jobs using a
determining job costs. predetermined overhead
rate.
 OBJECTIVE 3
Job Order Costing Flow

Flow of costs parallels physical flow of materials as they are converted into finished
goods.

• Manufacturing costs are assigned to Work in Process (WIP) Inventory

account
• Cost of completed jobs is transferred to Finished Goods Inventory
account
• When units are sold, cost is transferred to Cost of Goods Sold account
 JOB ORDER COST FLOW

Fire Truck Production

ILLUSTRATION
Flow of costs in job order costing
 ACCUMULATING MANUFACTURING
COSTS
Raw Materials Costs

Illustration: Wallace Company purchases 2,000 lithium batteries (Stock

No. AA2746) at $5 per unit ($10,000) and 800 electronic modules
(Stock No. AA2850) at $40 per unit ($32,000) for a total cost of
$42,000 ($10,000 + $32,000). The entry to record this purchase on
January 4 is:

Jan. 4 Raw Materials Inventory 42,000

Accounts Payable (Cash) 42,000
 ACCUMULATING MANUFACTURING
COSTS
Factory Labor Costs

Illustration: Wallace incurs $32,000 of factory labor costs. Of that

amount, $27,000 relates to wages payable and $5,000 relates to
payroll taxes payable in February. The entry to record factory labor for
the month is:

Jan. 31 Factory Labor 32,000

Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000
 ACCUMULATING MANUFACTURING
COSTS
Manufacturing Overhead Costs

Illustration: Using assumed data, the summary entry for

manufacturing overhead in Wallace Manufacturing is:
Jan. 31 Manufacturing Overhead 13,800
Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated Depreciation 3,000
Property Taxes Payable 1,400
 OBJECTIVE 4

Assigning Manufacturing Costs

Assigning manufacturing costs to work in process results in the

following entries.

1. Debits made to Work in Process Inventory

2. Credits made to
• Raw Materials Inventory
• Factory Labor
• Manufacturing Overhead
 ASSIGNING MANUFACTURING COSTS

Job Cost Sheet

• Used to record costs chargeable to specific jobs

• Constitutes subsidiary ledger for work in process account
• Each entry to Work in Process Inventory must be accompanied by a
corresponding posting to one or more job cost sheets
ASSIGNING MANUFACTURING COSTS

Job Cost Sheet

ILLUSTRATION
Job cost sheet
ASSIGNING MANUFACTURING COSTS

Raw Materials Costs

Assigned to a job when materials are issued in response to requests.

Materials requisition slip
• Written authorization for issuing raw materials
• May be directly issued to use on a job - direct materials
(charged to Work in Process Inventory)
• May be considered indirect materials – charged to
Manufacturing Overhead
 ASSIGNING MANUFACTURING COSTS

Material’s Requisition Slip

ILLUSTRATION
Materials requisition slip
 ASSIGNING MANUFACTURING COSTS

Raw Materials Costs

Illustration: Wallace uses $24,000 of direct materials and $6,000 of indirect materials in
January, the entry is:
Jan. 31 Work in Process Inventory 24,000
Manufacturing Overhead 6,000
Raw Materials Inventory 30,000

Raw Materials Inventory Work in Process Inventory

42,000 30,000 24,000

Manufacturing Overhead
13,800
6,000
ASSIGNING MANUFACTURING COSTS
ILLUSTRATION
Job cost sheets–posting
of direct materials
1

2
ASSIGNING MANUFACTURING COSTS
ILLUSTRATION
Factory Labor Costs TIME TICKET
 ASSIGNING MANUFACTURING COSTS

Factory Labor Costs

Illustration: The time tickets are later sent to the payroll department, which applies the
employee’s hourly wage rate and computes the total labor cost. If the $32,000 total factory
labor cost consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is:
Jan. 31 Work in Process Inventory 28,000
Manufacturing Overhead 4,000
Factory Labor 32,000
 ASSIGNING MANUFACTURING COSTS

Factory Labor Costs

Jan. 31 Work in Process Inventory 28,000
Manufacturing Overhead 4,000
Factory Labor 32,000

Factory Labor Work in Process Inventory

32,000 32,000 24,000
28,000

Manufacturing Overhead
13,800
6,000
4,000
 1

ILLUSTRATION
Job cost sheets–direct
labor
 OBJECTIVE 5

Predetermined Overhead Rate

Manufacturing Overhead Costs

• Relates to production operations as a whole

• Cannot be assigned to specific jobs based on actual costs incurred
• Companies assign to work in process and to specific jobs on an
estimated basis through use of a …
Predetermined Overhead Rate
 PREDETERMINED OVERHEAD RATE

• Based on relationship between estimated annual overhead costs and expected

annual operating activity.
• Expressed in terms of an activity base such as:
 Direct labor costs
 Direct labor hours
 Machine hours
 Any other measure that will provide an equitable basis for applying overhead
costs to jobs
 PREDETERMINED OVERHEAD RATE

• Established at beginning of year

• Small companies often use a single, company-wide predetermined rate
• Large companies often use a different rate for each department and each
department may have a different activity base
• Formula for computing the predetermined rate overhead rate is:

Estimated Annual ÷ Estimated Annual = Predetermined

Overhead Costs Operating Activity Overhead Rate
 PREDETERMINED OVERHEAD RATE

Illustration: Wallace Company uses direct labor cost as the activity base. Assuming that
the company expects annual overhead costs to be $280,000 and direct labor costs for
the year to be $350,000, compute the overhead rate.

Estimated Annual Estimated Annual Predetermined

Overhead Costs ÷ Operating Activity = Overhead Rate

$280,000 ÷ $350,000 = 80%

 PREDETERMINED OVERHEAD RATE

Illustration: Wallace applies manufacturing overhead to work in process when it assigns

direct labor costs. Calculate the amount of applied overhead assuming direct labor
costs were $28,000.
$28,000 x 80% = $22,400
The following entry records this application.
Jan. 31 Work in Process Inventory 22,400
Manufacturing Overhead 22,400
 PREDETERMINED OVERHEAD RATE

The following entry records this application.

Jan. 31 Work in Process Inventory 22,400
Manufacturing Overhead 22,400
This entry reduces the balance in Manufacturing Overhead and increases Work in
Process Inventory by $22,400.

Manufacturing Overhead Work in Process Inventory

13,800 22,400 24,000

6,000 28,000

4,000 22,400

1,400
ILLUSTRATION
Job cost sheets–manufacturing from ILLUSTRATION
slide 22 Job cost sheets–manufacturing
overhead applied
PREDETERMINED OVERHEAD RATE

At the End of Each Month:

Balance in Work in Process Inventory
should equal sum of costs shown on job
cost sheets of unfinished jobs.

Job Cost Sheets Work in Process Inventory

No 101 $39,000 24,000

102 23,200 28,000

103 12,200 22,400

$74,400 74,400
 OBJECTIVE 6

Entries for Jobs Completed

Assigning Costs to Finished Goods

When a job is completed, Wallace Company summarizes the costs and

completes the lower portion of the applicable job cost sheet.
 32

ILLUSTRATION
Completed job cost sheet

LO 4
 ASSIGNING COSTS TO FINISHED
GOODS
Illustration: When a job is completed, Wallace makes an entry to transfer its total cost to
finished goods inventory.
Jan. 31 Finished Goods Inventory 39,000
Work in Process Inventory 39,000
 ASSIGNING COSTS TO FINISHED
GOODS
Illustration: On January 31 Wallace Manufacturing sells on account Job 101. The job cost
$39,000, and it sold for $50,000. Entries to record the sale and recognize cost of goods sold
are:
Jan. 31 Accounts Receivable 50,000
Sales revenue 50,000
Cost of Goods Sold 39,000
Finished Goods Inventory 39,000

Finished Goods Inventory Cost of Goods Sold

39,000 39,000 39,000

ILLUSTRATION
Flow of costs in a job
order cost system
 SUMMARY OF JOB ORDER COST FLOWS

ILLUSTRATION
Flow of documents in a
job order cost system
 JOB ORDER COSTING FOR SERVICE
COMPANIES
While service companies do not have inventory, techniques of job order costing are still quite
useful in many service-industry environments.
Consider, for example, the Mayo Clinic (health care), PricewaterhouseCoopers (accounting),
and Goldman Sachs (investment banking).
These companies need to keep track of the cost of jobs performed for specific customers to
evaluate profitability of medical treatments, audits, or investment banking engagements.
 JOB ORDER COSTING FOR SERVICE
COMPANIES
Illustration: Dorm Decor, an interior design company. The entry to record the assignment of
$9,000 of supplies to projects ($7,000 direct and $2,000 indirect) is:
Service Contracts in Process 7,000
Operating Overhead 2,000
Supplies 9,000
 JOB ORDER COSTING FOR SERVICE
COMPANIES
Illustration: Dorm Decor, an interior design company. The entry to record the assignment of
service salaries and wages of $100,000 ($84,000 direct and $16,000 indirect) is:
Service Contracts in Process 84,000
Operating Overhead 16,000
Service Salaries and Wages 100,000
 JOB ORDER COSTING FOR SERVICE
COMPANIES
Illustration: Dorm Decor, an interior design company. Dorm Decor applies operating overhead
at a rate of 50% of direct labor costs. The entry to record the application of overhead
($84,000 × 50%) based on the $84,000 of direct labor costs is:
Service contracts in process 42,000
Operating overhead 42,000
 JOB ORDER COSTING FOR SERVICE
COMPANIES
Illustration: Dorm Decor, an interior design company. The entry to record the completion of a
service contract of $34,000 is:
Cost of Completed Service Contracts 34,000
Service Contracts in Process 34,000
 ADVANTAGES AND DISADVANTAGES OF JOB ORDER
COSTING
Advantages
• More precise in assignment of costs to projects than process costing
• Provides more useful information for determining profitability of particular projects and
for estimating costs when preparing bids on future jobs

Disadvantage
• Requires a significant amount of data entry
 Wallace Company
Cost of Goods Manufactured Schedule
For the Month Ending January 31, 2020

Work in process, January 1 $ 0

Direct materials used $24,000
Direct labor 28,000
Manufacturing overhead applied 22,400
Total manufacturing costs 74,400
Total cost of work in process 74,400
Less: Work in process, January 31 35,400
Cost of goods manufactured $39,000
 APPLIED MANUFACTURING OVERHEAD

The cost of goods manufactured schedule:

• Shows manufacturing overhead applied rather than actual overhead costs.
• Applied overhead is added to direct materials and direct labor to determine total
manufacturing costs
UNDER OR OVERAPPLIED MANUFACTURING OVERHEAD

• A debit balance in manufacturing overhead means that overhead is underapplied

• A credit balance in manufacturing overhead means that overhead is overapplied

ILLUSTRATION
Under- and overapplied overhead
UNDER OR OVERAPPLIED MANUFACTURING OVERHEAD

Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods

sold.
• Underapplied overhead is debited to COGS
• Overapplied overhead is credited to COGS
UNDER OR OVERAPPLIED MANUFACTURING OVERHEAD

Manufacturing Overhead
13,800 22,400 Applied
Incurred 6,000
4,000
1,400

Illustration: Wallace has a $1,400 debit balance in Manufacturing Overhead at December 31.
The adjusting entry for the under-applied overhead is:
Dec. 31 Cost of Goods Sold 1,400
Manufacturing Overhead 1,400
 Wallace Company
Income Statement (partial)
For the Month Ending January 31, 2020

Sales revenue $50,000

Cost of goods sold

Finished goods inventory, January 1 $ 0

Cost of goods manufactured (see Illustration 20.17) 39,000

Cost of goods available for sale 39,000

Less: Finished goods inventory, January 31 0

Cost of goods sold—unadjusted 39,000

Add: Adjustment for underapplied overhead 1,400

Cost of goods sold—adjusted 40,400

Gross profit $9,600

THANK YOU