1. JOB ORDER COST ACCOUNTING
Chapter 19
JOB ORDER COST ACCOUNTING
Chapter 19: Job Order Cost Accounting
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved.

2. COST ACCOUNTING SYSTEMS
19 - 2
COST ACCOUNTING SYSTEMS
C 1
Process Costing
Job Costing
Chapter 20
Used for production of large, unique, or high-cost items.
Built to order rather than mass produced.
Many costs can be directly traced to each job.
There are two basic types of cost accounting systems: job order cost accounting and process cost accounting. This chapter addresses job order cost accounting and process cost accounting is explained in the next chapter. Job order costing is typically used by manufacturers of custom products or providers of custom services. The jobs must be large enough in scope and value to justify the accounting effort to trace costs to the jobs. Job order production can apply to both manufacturing and service companies.

3. JOB ORDER PRODUCTION Process Costing Job Costing Chapter 20
19 - 3
JOB ORDER PRODUCTION
C 1
Process Costing
Job Costing
Chapter 20
Typical job order cost applications:
Special-order printing
Building construction
Also used in service industry
Hospitals
Law firms
Here you see some examples where job order costing is used. Another example familiar to many of us is an automobile repair shop. When you take your car in for an inexpensive job like an oil change, you expect to be charged the cost of an oil change instead of an expensive engine repair. The shop’s accounting system must be able to handle multiple jobs with differing amounts of materials and labor costs that are incurred each day.

4. EVENTS IN JOB ORDER COSTING
19 - 4
EVENTS IN JOB ORDER COSTING
C 1
Receive order from customer.
Schedule production of the job.
The initial event in a job order system is receipt of a customer order. A less common case is to begin work on a job before the company has a signed contract. This is referred to as jobs produced on speculation.
The sales price of the job may be a cost-plus, such as with a government contract, or it may be determined by market factors. The company may then decide whether the price will provide a reasonable profit.
The job is then scheduled, necessary materials are obtained, and the work is begun.
Predict cost to complete job.
Negotiate a sales price and decide whether to pursue the job.

5. JOB ORDER PRODUCTION ACTIVITIES
19 - 5
JOB ORDER PRODUCTION ACTIVITIES
C 1
Direct
Materials
Indirect
Factory Overhead
Allocate
Goods in Process
Finished Goods
Direct materials and direct labor are traced directly to jobs in the goods in process inventory account. Indirect materials and indirect labor flow through the factory overhead account into goods in process. Completed jobs are transferred from the goods in process inventory account to the finished goods inventory account. When the finished jobs are delivered to customers, the cost of these jobs becomes an expense on the income statement called cost of goods sold.
Cost of Goods Sold
Indirect
Direct
Labor

6. JOB ORDER COST DOCUMENTS
19 - 6
C 2
The primary document for tracking the costs associated with a given job is the job cost sheet.
A job cost sheet is a separate record maintained for each job that is used to account for material, labor, and factory overhead costs for each job. The job cost sheet may be a paper record, but most likely it is a computerized file.
Let’s investigate

7. 19 - 7
JOB COST SHEET
C 2
Here’s an example of a job cost sheet showing customer identification, job number, relevant dates, along with materials, labor, and overhead expenditures for the job.

8. 19 - 8
JOB COST SHEET
C 2
A materials requisition is used to authorize the use of materials on a job.
Materials cost entered on the job cost sheet may be summarized from a materials requisition form.
Let’s see one

9. MATERIALS REQUISITION
19 - 9
MATERIALS REQUISITION
P 1
C. Luther
M. Bateman
When materials are needed for a job, the production manager, C. Luther, prepares a materials requisition and sends it to the materials manager. The materials manager, M. Bateman, will not release materials from the materials storage facility without this authorization.
C. Luther
C. Luther

10. MATERIALS REQUISITION
MATERIALS REQUISITION
P 1
Cost of material is charged to Job B15.
Proper authorization
C. Luther
M. Bateman
In addition to the proper signature authorizing the transfer of materials, the job number of the job where the material is to be used is noted on the requisition.
C. Luther

11. MATERIALS REQUISITION
P 1
Type and quantity of material charged to Job B15.
Pre-printed, sequentially numbered form
C. Luther
M. Bateman
Materials requisitions are sequentially numbered just like checks in a checkbook This feature enhances the control of materials use. The requisition also contains a description of the material along with the inventory stock number.
C. Luther

12. MATERIALS REQUISITION
MATERIALS REQUISITION
P 1
C. Luther
M. Bateman
When material is transferred from the materials storage facility, an accounting entry is made to reduce the materials inventory balance. The materials requisition is the source document supporting the accounting entry, which we will see in a subsequent slide.
The materials requisition form also serves as the source document for recording material usage in the accounting records.
C. Luther

13. MATERIALS LEDGER CARD P 1
MATERIALS LEDGER CARD
P 1
The materials ledger card is a perpetual inventory record of the material M This record may be a paper record, but most likely it is a computerized file. Here we see that $225 of material M-347 has been issued on materials requisition R This entry on the ledger card reduces the inventory balance from $675 to $450.

14.
JOB COST SHEET
P 1
Here we see the summary information for the material used on Job B15 entered on the job cost sheet. If additional information about this material is needed, it can be found on materials requisition R-4705.

15.
JOB COST SHEET
P 2
Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.
Let’s see one
Labor cost entered on the job cost sheet is summarized from an employee’s time ticket.

16. LABOR TIME TICKET C. Luther P 2
LABOR TIME TICKET
P 2
Production managers use labor time tickets to assign labor costs to individual jobs. In addition to the proper signature authorizing the labor cost assignment, the time ticket includes labor time, rate, job number, date, and employee identification. Labor time tickets are the source documents supporting the payroll accounting entries.
C. Luther

17.
JOB COST SHEET
P 2
Here we see the summary information for the labor cost of Job B15 entered on the job cost sheet. If additional information about the labor cost is needed, it can be found on time ticket L This will generate an accounting entry (to be shown later).

18.
JOB COST SHEET
P 3
Overhead is an indirect manufacturing cost that includes all production costs other than direct materials and direct labor. Entries for various overhead items will be shown on a subsequent slide. Unlike labor and materials, overhead cannot be traced directly to individual jobs. We must use a predetermined overhead rate to allocate overhead to jobs. The predetermined overhead rate may be based on such production factors as direct labor hours, direct labor cost, or machine hours.
Allocate manufacturing overhead to jobs using a predetermined overhead rate
Let’s do it

19.
JOB COST SHEET
P 3
Road Warriors assigns overhead to jobs using a predetermined overhead rate of 160 percent of direct labor cost. In other words, for each $1 of direct labor incurred on a job, $1.60 of overhead will be charged to the job. For Job B15, the labor cost was $60 on time ticket L-3479; so multiplying $1.60 times $60 yields $96 of overhead assigned to the job. This process is repeated for all direct labor on Job B15.

20. PREDETERMINED OVERHEAD RATE
PREDETERMINED OVERHEAD RATE
P 3
Road Warriors uses a predetermined overhead rate (POHR) based on direct labor cost to apply overhead to jobs.
Estimated total manufacturing overhead cost for the coming period
Estimated total direct labor costs for the coming period
POHR =
POHR = = 160% of direct labor $
$200,000
$125,000
The term predetermined means that the overhead rate is computed before the operating period begins. Overhead costs and labor costs are estimated for the coming period as a part of the company’s budgeting process. The activity chosen for the denominator is known as an allocation base. Overhead and the allocation base are linked such that as the allocation base increases, overhead increases. For Road Warriors, we could say that overhead supports direct labor costs, or that incurrence of direct labor costs causes additional overhead costs.

21. JOB ORDER COST FLOWS AND REPORTS
JOB ORDER COST FLOWS AND REPORTS
Let’s summarize the document flow we have been discussing in a job-order costing system.
Let’s look at the flow diagrams that will help us put job order document flows into perspective.

22. Material Cost Flows and Documents
P 1
Material Cost Flows and Documents
The materials requisition indicates the cost of direct materials to charge to jobs and the cost of indirect materials to charge to overhead.
Direct materials
Job Cost Sheets
Factory Overhead Account
Materials Ledger Cards
Materials Ledger Cards
Materials Ledger Cards
Materials Requisition
Materials used are classified as either direct or indirect. We charge direct materials costs on the job cost sheet. We charge indirect materials costs in the factory overhead account. Later, factory overhead will be applied to the job using a predetermined overhead rate.
Indirect materials

23. Labor Cost Flows and Documents
P 2
Labor Cost Flows and Documents
Direct Labor
Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Labor costs are also classified as either direct or indirect. We charge direct labor costs on the job cost sheet. We charge indirect labor costs in the factory overhead account. Later, factory overhead will be applied to the job using a predetermined overhead rate.
Factory Overhead Account
Indirect Labor

24.
Summary of Cost Flows
Let’s examine the cost flows in a job order system. We will use T-accounts and start with materials.
T-accounts for a job order system are helpful in visualizing the cost flows. We will start with the purchase of materials.

25. Summary of Cost Flows Direct Material Material Purchases
P 1
Summary of Cost Flows
Dr Cr
Dr Cr
Direct Material
Material
Purchases
Actual Overhead Costs
Indirect Material
Dr Cr
Material purchases are entered as debits (left side) in the raw materials inventory account. A credit entry (right side) in the materials inventory account is recorded when material is withdrawn. Direct materials usage is recorded in the goods in process inventory account and on the job cost sheet for an individual job. Indirect material usage is recorded in the factory overhead account.
Next, we will see how the remaining two product costs, direct labor and applied factory overhead, are entered into the accounts.

26. / Summary of Cost Flows = Direct Labor Direct Material Incurred
P 2
Summary of Cost Flows
P 3
Dr Cr
Dr Cr
Direct Labor
Direct Material
Incurred
Indirect Labor
Actual Overhead Costs
Overhead
Overhead Applied to Work in Process
Dr Cr
Actual Applied factory factory overhead overhead = /
an adjustment is needed. We will look at how to accomplish this later.
When
Direct labor cost is recorded in the goods in process inventory account and on the job cost sheet for an individual job. Indirect labor cost is recorded in the factory overhead account. Factory overhead is applied to jobs in the goods in process inventory account using a predetermined overhead rate. Because of the estimating process used in calculating the predetermined overhead rate, the amount of overhead assigned to all jobs in an operating period may differ from the actual overhead costs incurred in the same period.
Once we have added the proper amount of direct labor and factory overhead into Goods in process to convert material into a finished product, we will move the product out of the factory and prepare it for sale with our next entries into the job order cost accounts.

27. Direct Material Direct Labor Overhead
P 3
Summary of Cost Flows
Dr Cr
Dr Cr
Direct Material Direct Labor Overhead
Cost of Goods Mfd.
Cost of Goods Sold
Dr Cr
Direct material, direct labor, and factory overhead are combined in goods in process. As jobs are completed, they are transferred to finished goods and then sold (delivered to customers). The dollar amount of the transfer from the goods in process inventory account to the finished goods inventory account is called cost of goods manufactured.

28. Tell me again how we use the POHR to assign overhead to jobs.
OVERHEAD APPLICATION
P 4
Tell me again how we use the POHR to assign overhead to jobs.
We multiply the POHR times the number of activity units (direct labor cost for Road Warriors) incurred for the job.
Overhead is an indirect manufacturing cost. Unlike direct material and direct labor, overhead cannot be traced directly to individual jobs. We must use a predetermined overhead rate to assign overhead to jobs. Road Warriors uses an overhead rate of 160% of direct labor cost. For each $1 of direct labor incurred on a job, Road Warriors will assign $1.60 of overhead to the job.

29.
OVERHEAD APPLICATION
P 4
Reasons for using a POHR (predetermined overhead rate)
Overhead is not incurred uniformly during the year.
Actual overhead rate might vary from month to month.
Predetermined rate makes it possible to estimate job costs sooner.
We cannot wait until the end of the period when all actual overhead costs are known to charge overhead costs to jobs. Jobs are completed continually during the year. Perpetual inventory records must be updated in a timely manner, not at the end of the period. Customers expect to know the total cost of jobs at the time jobs are delivered, not at the end of the period. Using a predetermined overhead rate allows us to assign overhead in a timely and consistent fashion to accomplish these objectives.

30. ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
P 4
The POHR is based on estimates.
What happens if actual results differ from the estimates?
The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period.
Here, let me show you.
Because of the estimating process used in calculating the predetermined overhead rate, the amount of overhead assigned to all jobs in an operating period may differ from the actual overhead costs incurred in the same period. The difference between actual and applied overhead is referred to as either overapplied or underapplied overhead. Cost of goods sold is adjusted for these amounts at the end of the period.

31. ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
P 4
Overhead is overapplied.
Overhead applied to Work in Process
(POHR × Activity)
Actual overhead costs incurred
When the amount of overhead applied to all jobs in a period is greater than the actual amount of overhead incurred, overhead is overapplied.

32. ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
P 4
Overhead is underapplied.
Actual overhead costs incurred
Overhead applied to Work in Process
(POHR × Activity)
When the amount of overhead applied to all jobs in a period is less than the actual amount of overhead incurred, overhead is underapplied.

33. ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
P 4
Adjusting Cost of Goods Sold for underapplied or overapplied overhead
If overhead is underapplied, the cost of goods sold does not include all production costs incurred. Therefore, the end-of-period adjustment for underapplied overhead increases cost of goods sold.
If overhead is overapplied, the cost of goods sold includes more costs than were incurred. The end-of-period adjustment for overapplied overhead decreases cost of goods sold.

34.
Kaizen Costing
Kaizen, a philosophy of continuous improvement, lead to the idea of Kaizen costing which is an emphasis on gradual and ongoing cost reduction.
Target Costing, as pioneered by Japanese companies, is an extension of Kaizen costing, in which acceptable levels of costs are determined by what is an acceptable selling price of the product in the market.
Pioneering companies that use Kaizen costing include Isuzu, Toyota, Nissan, Sony and Sharp.
Expensive European sports cars are often built according to individual customer specifications. Customers place orders for their dream cars, and then each car is built to order and shipped to the customer. Porsche AG manufactures high-performance sports cars for customers in this manner.

35.
PRICING FOR SERVICES
A 1
Pricing for services is based on direct labor. Any material costs are usually incidental and are a part of overhead.
Acme Consulting prepared the following bid for a job that will require a total of 1,000 hours of direct labor.
Although job order costing is used primarily by manufacturing companies, the concepts and procedures are also applicable to service companies. The major difference is that service companies use little or no materials. Any material usage is typically classified as supplies, a component of overhead.
Consider Acme Consulting with two types of direct labor, consultants at $75 per hour, and research staff at $40 per hour. Acme also has overhead costs that it assigns using two different predetermined overhead allocation rates: $50 per consulting hour and $30 per research hour. The total cost of a 1,000- hour job (600 consulting hours and 400 research hours) is $103,000.

36. ENTRIES FOR JOB ORDER PRODUCTION COSTS
Let’s look at summary accounting journal entries for the job order cost system at Road Warriors. The dollar amounts are from Exhibit in your textbook.
The following journal entries illustrate the recording process for the job order cost system at Road Warriors.

37. ENTRIES FOR JOB ORDER PRODUCTION COSTS
P 1
To record material purchased on account, we increase the raw materials inventory account with a debit and we increase accounts payable with a credit.
When the material is used on a job, we increase goods in process with a debit and decrease raw materials inventory with a credit.

38. ENTRIES FOR JOB ORDER PRODUCTION COSTS
P 1
P 2
When indirect material is used, we increase the factory overhead account with a debit and decrease raw materials inventory with credit.
To record the wages earned by employees, we debit factory payroll and credit cash.

39. ENTRIES FOR JOB ORDER PRODUCTION COSTS
P 2
To assign costs of direct labor to jobs, we increase goods in process with a debit and decrease factory payroll with a credit.
To record the costs of indirect labor, we increase the factory overhead account with a debit and decrease factory payroll with a credit.

40. ENTRIES FOR JOB ORDER PRODUCTION COSTS
P 3
Other actual costs for factory overhead items are recorded with a debit to the factory overhead account.
Factory overhead is applied to jobs using a predetermined overhead rate by debiting goods in process inventory and crediting factory overhead.

41. ENTRIES FOR JOB ORDER PRODUCTION COSTS
P 3
Completed jobs are transferred from the goods in process inventory account to the finished goods inventory account. We record the increase in finished goods with a debit and decrease the goods in process with a credit.
When the jobs are sold, we reduce the finished goods inventory account with a credit. Cost of goods sold is an expense account that is recorded with a debit.

42.
END OF CHAPTER 19
End of Chapter 19.