1. Job Order Costing
Chapter 2

2. Learning Objectives
Describe cost accounting systems used by manufacturing businesses.
Describe and illustrate a job order cost accounting system.
Describe the use of job order cost information for decision making.
Describe the flow of costs for a service business that uses a job order cost accounting system.

3. Learning Objective 1
Describe cost accounting systems used by manufacturing businesses.

4. Cost Accounting Systems Overview
Cost accounting systems measure, record, and report product costs. The two main types of cost accounting systems for manufacturing are:
Job order cost systems
Process cost systems

5. Cost Accounting Systems Overview
A job order cost system provides product costs for each quantity of product that is manufactured.
Each quantity of product that is manufactured is called a job.
Manufacturers that use a job order cost system are sometimes called job shops.
Examples: an apparel manufacturer, such as Levi Strauss & Co, or a guitar manufacturer like Washburn Guitars

6. Cost Accounting Systems Overview
A process cost system provides product costs for each manufacturing department or process.
Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process.
Examples: Oil refineries, paper producers, chemical processers, and food processors.

7. Learning Objective 2
Describe and illustrate a job order cost accounting system.

8. Job Order Cost System for Manufacturing

9. Job Order Cost System for Manufacturing

10. Materials
The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger.

11. Materials
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items.

12. Materials a. To Materials Requisitions To Materials Requisitions
(continued)

13. From Materials Ledger Accountb. b. b. b.

14. Materials
A receiving report is prepared when materials that have been ordered are received and inspected.
750 units of No. 8 Maple Wood

15. Materials
If there are no discrepancies, a journal entry is made to record the purchase.

16. Materials
The storeroom releases materials to use in manufacturing when a materials requisition is received. A materials requisition for Job No. 71 is shown below.

17. Materials
For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job cost sheets make up the work in process subsidiary ledger. Job No. 71 is shown below.

18. Materials
A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month.

19. Factory Labor
When employees report for work, they may use clock cards, in-and-out cards, or electronic badges to clock in. When employees work on an individual job, they use time tickets.

20. Factory Labor

21. Factory Labor
A summary of the time tickets is used as the basis for the journal entry recording direct labor for the month.

22. Factory Overhead Cost
Factory overhead costs come from a variety of sources including the following:
Indirect materials comes from a summary of materials requisitions.
Indirect labor comes from the salaries of production supervisors and the wages of other employees such as janitors.
Factory power comes with the utility bills.
Factory depreciation comes from Accounting Department data.

23. Factory Overhead Cost
Legend Guitars incurred $4,600 of overhead in December. The $500 of materials consisted of $200 of glue and $300 of sandpaper.

24. Allocating Factory Overhead
The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation.
The factory overhead costs are allocated to jobs using a common measure related to each job. This measure is called an activity base, allocation base, or activity driver.

25. Predetermined Factory Overhead Rate
Factory overhead costs are normally allocated or applied to jobs using a predetermined factory overhead rate. The predetermined factory overhead rate is computed as follows:
Predetermined Factory Overhead Rate
Estimated Total
Factory Overhead Costs
Estimated Activity Base =

26. Predetermined Factory Overhead Rate
Legend Guitars estimates the total factory overhead cost as $50,000 for the year and the activity base as 10,000 direct labor hours.
Estimated Total Factory Overhead Costs
Estimated Activity Base
Predetermined Factory Overhead Rate =
$50,000
10,000 direct labor hours
Predetermined Factory Overhead Rate =
= $5 per direct labor hour
Predetermined Factory Overhead Rate

27. Applying Factory Overhead

28. Applying Factory Overhead
Using a factory overhead rate of $5 per direct labor hour, $4,250 of factory overhead is applied as follows:

29. Applying Factory Overhead

30. A Closer Look at Job 72
On December 26, 2014, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. x $15). A total of 500 hours was spent by all employees who worked on Job 72 during December, for a total cost of $7,500.
(continued)

31. December Job 72 (500 hours) for a total cost of $7,500
A Closer Look at Job 72
December Job 72 (500 hours) for a total cost of $7,500
to Job Cost Sheet
(continued)

32. from materials requisitions
A Closer Look at Job 72
from materials requisitions
from time tickets
500 hrs. x $5

33. Applying Factory Overhead
The factory overhead account is:
Increased (debited) for the actual overhead costs incurred.
Decreased (credited) for the applied overhead.

34. Applying Factory Overhead
If the applied overhead is less than the actual overhead incurred, the debit balance is called underapplied factory overhead or underabsorbed factory overhead.
If the applied overhead is more than the actual overhead incurred, the credit balance is called overapplied factory overhead or overabsorbed factory overhead.

35. Applying Factory Overhead
The factory overhead account for Legend Guitars shown below illustrates both underapplied and overapplied factory overhead.

36. Disposal of Factory Overhead Balance
If there is an ending debit balance (underapplied overhead) in the factory overhead account, it is disposed of by the entry shown below.

37. Disposal of Factory Overhead Balance
If there is an ending credit balance (overapplied overhead) in the factory overhead account, it is disposed of by the entry shown below.

38. Disposal of Factory Overhead Balance
The journal entry to dispose of Legend Guitars’ December 31, 2014, underapplied overhead balance of $150 is as follows:

39. Work in Process
During the period, Work in Process is increased (debited) for the following:
Direct materials cost
Direct labor cost
Applied factory overhead cost

40. Work in Process

41. Work in Process
During December, Job 71 was completed. Upon completion, the product costs are totaled. The job’s total cost of $10,250, divided by the 20 Jazz Series guitars produced as Job 71, provides a unit cost of $ Job 71 is transferred from production to finished goods inventory by the following entry:

42. Finished Goods
The finished goods account is a controlling account for the subsidiary finished goods ledger, or stock ledger.

43. Sales and Cost of Goods Sold
During December, Legend Guitars sold 40 Jazz Series guitars for $850 each, generating total sales of $34,000 ($850 x 40). Exhibit 7 (previous slide) indicates that the cost per guitar sold was $500 or a total cost of $20,000 ($500 x 40).
Two entries are required, one for the sale and one to record the cost of goods sold and to reduce the finished goods account.

44. Sales and Cost of Goods Sold

45. Period Costs
Period costs are used in generating revenue during the current period, but are not involved in the manufacturing process. They are recorded as either selling or administrative expenses.
Selling expenses are incurred in marketing and delivering the product.
Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions.

46. Summary of Cost Flows for Legend Guitars
Direct
Labor
Factory Overhead
Materials
Purchases
Product Costs
Costs & Expenses
Balance Sheet
Materials
Inventory
Work in
Process
Inventory
Cost of goods manufactured
Finished
Goods
Inventory

47. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(a) ,500
Materials Ledger
Credit Accounts Payable, $10,500
No. 8 Wood—Maple
Dec. 1 6,000
(a) 10,500
Glue
Dec
a. Materials purchased during December
Sandpaper
Dec

48. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(a) ,500
(b) ,000
Materials Ledger
Job Cost Sheets
No. 8 Wood—Maple
20 Units of Jazz Series Guitars, Job 71
Dec. 1 3,000
Dec. 1 6,000
(b) 13,000
(a) 10,500
Glue
Dec
60 Units of American Series Guitars, Job 72
Sandpaper
b. Materials requisitioned to jobs
Dec
(continued)

49. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(a) ,500
(b) ,000
Materials Ledger
Job Cost Sheets
No. 8 Wood—Maple
20 Units of Jazz Series Guitars, Job 71
Dec. 1 3,000
Dec. 1 6,000
(b) 13,000
(a) 10,500
(b) Direct materials 2,000
Glue
Dec
60 Units of American Series Guitars, Job 72
(b) Direct materials 11,000
Sandpaper
b. Update job cost sheets
Dec
(continued)

50. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(a) ,500
(b) ,000
(c) 11,000
Materials Ledger
Credit Wages Payable, $11,000
No. 8 Wood—Maple
Dec. 1 6,000
(b) 13,000
(a) 10,500
Glue
Dec
c. Factory labor used in production of jobs
Sandpaper
Dec
(continued)

51. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(a) ,500
(b) ,000
(c) 11,000
Materials Ledger
Job Cost Sheets
No. 8 Wood—Maple
20 Units of Jazz Series Guitars, Job 71
Dec. 1 3,000
(b) Direct materials 2,000
Dec. 1 6,000
(b) 13,000
(a) 10,500
(c) Direct labor 3,500
Glue
Dec
60 Units of American Series Guitars, Job 72
(b) Direct materials 11,000
(c) Direct labor 7,500
Sandpaper
Dec
c. Update the job cost sheets
(continued)

52. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(d) 500
(a) ,500
(d) 500
(b) ,000
(c) 11,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1 6,000
(b) 13,000
(a) 10,500
d. Factory overhead incurred in production (indirect materials used, $500)
Glue
Dec
Sandpaper
Dec
(continued)

53. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(d) 500
(a) ,500
(d) 500
(d) 900
(b) ,000
(c) 11,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1 6,000
(b) 13,000
Credit Utilities Payable, $900
(a) 10,500
d. Factory overhead incurred in production (utility bill, $900)
Glue
Dec
Sandpaper
Dec
(continued)

54. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(d) 500
(a) ,500
(d) 500
(d) 900
(b) ,000
(d) 1,200
(c) 11,000
Credit Accumulated Depreciation, $1,200
Materials Ledger
No. 8 Wood—Maple
Dec. 1 6,000
(b) 13,000
(a) 10,500
d. Factory overhead incurred in production (depreciation on factory machinery, $1,200)
Glue
Dec
Sandpaper
Dec
(continued)

55. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(d) 500
(a) ,500
(d) 500
(d) 900
(b) ,000
(d) 1,200
(c) 11,000
(d) 2,000
Credit Wages Payable, $2,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1 6,000
(b) 13,000
(a) 10,500
d. Factory overhead incurred in production (indirect labor, $2,000)
Glue
Dec
Sandpaper
Dec
(continued)

56. Summary of Cost Flows for Legend Guitars
e. Factory overhead is applied to jobs according to the predetermined overhead rate
(continued)

57. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(d) 500
(a) ,500
(d) 500
(d) 900
(e) 4,250
(b) ,000
(d) 1,200
(c) 11,000
(d) 2,000
(e) 4,250
Materials Ledger
Job Cost Sheets
No. 8 Wood—Maple
20 Units of Jazz Series Guitars, Job 71
Dec. 1 3,000
(b) Direct materials 2,000
(c) Direct labor 3,500
Dec. 1 6,000
(b) 13,000
(a) 10,500
(e) Factory overhead 1,750
Glue
Dec
(d) 200
60 Units of American Series Guitars, Job 72
(b) Direct materials 11,000
(c) Direct labor 7,500
Sandpaper
(e) Factory overhead 2,500
Dec
(d) 300
(continued)

58. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(d) 500
(a) ,500
(d) 500
(d) 900
(e) 4,250
(b) ,000
(d) 1,200
(f) 150
(c) 11,000
(d) 2,000
(e) 4,250
Materials Ledger
Debit Cost of Goods Sold, $150
No. 8 Wood—Maple
Dec. 1 6,000
(b) 13,000
(a) 10,500
Glue
Dec
(d) 200
f. Closed underapplied factory overhead to cost of goods sold
Sandpaper
Dec
(d) 300
(continued)

59. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(d) 500
(g) 10,250
(a) ,500
(d) 500
(d) 900
(e) 4,250
(b) ,000
(d) 1,200
(f) 150
(c) 11,000
(d) 2,000
(e) 4,250
Materials Ledger
Job Cost Sheets
No. 8 Wood—Maple
20 Units of Jazz Series Guitars, Job 71
Dec. 1 3,000
(b) Direct materials 2,000
(c) Direct labor 3,500
(d) Factory overhead 1,750
10,250
Dec. 1 6,000
(b) 13,000
(a) 10,500
Glue
Dec
(d) 200
g. Job 71 completed in December
Sandpaper
Dec
(d) 300
(continued)

60. Summary of Cost Flows for Legend Guitars
Materials Factory Overhead Work in Process
Dec. 1 6,500 Dec Dec ,000
(b) ,000
(d) 500
(g) 10,250
(a) ,500
(d) 500
(d) 900
(e) 4,250
(b) ,000
(d) 1,200
(f) 150
(c) 11,000
(d) 2,000
(e) 4,250
Finished Goods
Materials Ledger
Dec. 1 20,000
No. 8 Wood—Maple
(g) 10,250
Dec. 1 6,000
(b) 13,000
(a) 10,500
Glue
Dec
(d) 200
Finished Goods Ledger
Jazz Series Guitars
Dec. 1 20,000
Sandpaper
(g) 10,250
Dec
(d) 300
(continued)

61. Summary of Cost Flows for Legend Guitars
Work in Process
Cost of Goods Sold
Dec ,000
(g) 10,250
(f)
(b) ,000
(c) 11,000
(e) 4,250
Finished Goods
h. Sold 40 units of Jazz Series guitars on account
Dec. 1 20,000
(g) 10,250
Finished Goods Ledger
Jazz Series Guitars
Accounts Receivable XXX
Sales XXX
Dec. 1 20,000
(g) 10,250
(continued)

62. Summary of Cost Flows for Legend Guitars
Work in Process
Cost of Goods Sold
Dec ,000
(g) 10,250
(f)
(b) ,000
(i) ,000
(c) 11,000
(e) 4,250
Finished Goods
Dec. 1 20,000
(i) 20,000
(g) 10,250
i. Cost of 40 units of Jazz Series guitars sold
Finished Goods Ledger
Jazz Series Guitars
Dec. 1 20,000
(i) 20,000
(g) 10,250
(continued)

63. Summary of Cost Flows for Legend Guitars

64. Summary of Cost Flows for Legend Guitars

65. Learning Objective 3
Describe the use of job order cost information for decision making.

66. Job Order Costing for Decision Making
A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs.

67. Job Order Costing for Decision Making

68. Learning Objective 4
Describe the flow of costs for a service business that uses a job order cost accounting system.

69. Job Order for Professional Services
Since the “product” of a service business is service, management’s focus is on direct labor and overhead costs.
A job cost sheet is used to accumulate the costs for each client’s job. When the job is completed and the client billed, the costs are transferred to a cost of services account.

70. Job Order for Professional Services

71. Job Order Costing
The End