1. Job Order Cost Accounting
Chapter 19
Job Order Cost Accounting
Chapter 19: Job Order Cost Accounting

2. Cost Accounting Systems
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
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
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
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 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.

7. Predetermined Overhead Rate
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.

8. Factory Overhead Account
Material Cost Flows and Documents
P 1
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

9. Factory Overhead Account
Labor Cost Flows and Documents
P 2
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

10. Summary of Cost Flows Direct Material Material Purchases
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.

11. / Summary of Cost Flows = Direct Labor Direct Material Incurred
P 2
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.

12. Direct Material Direct Labor Overhead
Summary of Cost Flows
P 3
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.

13. Reasons for using a POHR (predetermined overhead rate)
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.

14. Adjustment of Overapplied or Underapplied Overhead
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.

15. Adjustment of Overapplied or Underapplied Overhead
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.

16. Adjustment of Overapplied or Underapplied Overhead
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.

17. End of Chapter 19
End of Chapter 19.