1. Chapter 3 Costing Systems: Job Order Costing

2. Uses of Information About Costs in the Management Cycle

3. 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.

4. 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.

5. 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.

6. 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.

7. 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

8. 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.

9. Hybrid Systems
The typical product costing system combines parts of both job order costing and process costing to create a system for an organization’s particular production process.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. Account for materials, labor and overheads in a manufacturer’s
job costing system.

17. 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.

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

19. 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.

20. 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.

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

22. 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) ,000
To record plant and equipment amortization

23. 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

24. 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

25. 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.

26. 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.

27. 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

28. 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 ,800
To record overhead applied to Job 51

29. 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?

30. Accounting for Finished Goods, Sales, and Cost of Goods Sold
Direct materials $30,000
Direct labour ,000
Manufacturing overhead 10,800
$44,800
Work in Process
44,800
Finished Goods
44,800

31. 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 ,800
Cost of Goods Sold 44,800
Finished Goods Inventory 44,800
To record sale of Job 51

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

33. 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.

34. 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

35. Disposing of Underallocated Overhead to Cost of Goods Sold
Manufacturing Overhead
232, ,000
16,000
Cost of Goods Sold
16,000

36. 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.

37. Disposing of Overallocated Overhead to Cost of Goods Sold
Manufacturing Overhead
216, ,000
16,000
Cost of Goods Sold
16,000

38. 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.

39. The Job Order Cost Card (cont’d)
It also shows:
Job order number
Product specifications
Customer name
Order date
Projected completion date
A cost summary

40. Job Order Cost Card – Manufacturing Company

41. Job Order Cost Card – Service Organization

42. 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.

43. 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.

44. Job Order Cost Card - Service Organization

45. 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

46. 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.

47. 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