JOB ORDER COSTING

Brian Christian S. Villaluz, CPA

ADVANCED FINANCIAL ACCOUNTING & REPORTING
REVIEW HANDOUT NO. 11: JOB ORDER COSTING

INTRODUCTION
No product can be produced without incurring material, labor, and overhead costs. Similarly, no service
can be rendered without incurring labor and overhead costs.

DEFINITION OF COST
Cost – An amount of money that has to be paid or given up to attain an objective such as producing a
product, performing a service or buy or obtain something.

Cost object – any item for which costs are being accumulated.
 A cost object may be a product, service, or department.

COST CLASSIFICATIONS
A. AS TO TRACEABILITY WITH THE COST OBJECT
1. Direct costs – costs that are easily and economically traceable to the cost object.
 Direct materials and direct labor

2. Indirect costs – costs that are not economically traceable to the cost object.
 Manufacturing overhead

B. AS TO CLASSIFICATION ON THE FINANCIAL STATEMENTS

1. Unexpired cost – cost that appear in an entity’s statement of financial position.
2. Expired costs – cost that appear in an entity’s income statement.

C. AS TO FUNCTION
1. Product costs – costs to produce or manufacture a product.
 Also known as inventoriable costs.
 Includes:
(1) Direct materials – materials which are used to manufacture a product, and which
are economically traceable to the product.
(2) Direct labor – the salaries or wages paid to employees who work specifically on a
product or performing a service.
(3) Manufacturing overhead – costs, other than direct materials and direct labor,
incurred in the factory.
 As a rule, if a cost could not be classified as direct, it is classified as factory overhead.
 Can be classified as:
(1) Expense – product costs of the units sold.
 Presented as cost of goods sold in the income statement.
(2) Asset – product costs of the units unsold.
 Presented as part of assets (specifically current asset) in the statement of
financial position.
 When the three elements of production cost are combined, the following costs can be
determined until a product is produced:
(1) Manufacturing costs – this is the sum of the three costs elements: Direct materials,
direct labor, manufacturing overhead. This is sometimes called as production cost
or factory cost.

Page 1 of 7
 JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
(2) Work-in-process – the portion of the total manufacturing costs that pertains to the
goods under process which are not yet 100% completed at the end of the
accounting period.
(3) Cost of goods manufactured – the portion of the total manufacturing costs
pertaining to the work which is 100% completed, transferred to finished goods.

2. Period costs – costs related to non-production departments, such as selling and

administrative department.
 These costs are expensed when incurred.
 Includes:
(1) Selling expenses – expenses incurred by the sales department.
 Also known as distribution costs.
 EXAMPLES: freight out, salesperson salaries, depreciation of delivery van, etc.
(2) General and Administrative expenses – expenses incurred by the administrative
department.
 EXAMPLES: office salaries, depreciation of office equipment, etc.

PRIME COST AND COVERSION COST

Prime cost – consists of direct materials and direct labor used to make a product.
- Also called direct cost because the primary materials and main labor are combined in making
the product.

Conversion cost – consists of direct labor and manufacturing overhead.

- Called as such because the direct labor and overhead costs transform the raw materials to
finished goods.

DEPARTMENTS IN A MANUFACTURING COMPANY

Production Area Non-Production Area

Production Department Sales Department Administrative Department

The department in charge of The department in The department in charge
manufacturing the products of charge of selling the with the organizational,
a company. products of a executive management of an
company. organization.

Classifications of Classifications of Non-Manufacturing Costs:

Manufacturing Costs:
1. Direct materials 1. Selling costs 2. Administrative costs
2. Direct labor
3. Manufacturing
overhead

Product costs Period costs

- Recognized as - Recognized as outright expense in the period
expense when incurred.
products are sold.

Page 2 of 7
 JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
ACCUMULATION AND ALLOCATION OF MANUFACTURING OVERHEAD
 Manufacturing overhead is an indirect cost that is not easily and economically traceable to the
product.

Cost allocation – the assigning of an indirect cost to one or more cost objects using some reasonable
allocation base or driver.
 Overhead can be allocated to cost objects in one of the following ways: Actual cost system and
Normal cost system.

SCHEDULE OF COST OF GOODS MANUFACTURED

Raw materials, beg. xx
Add (Deduct): Net purchases
Purchases xx
Freight-in xx
Purchase discounts (xx)
Purchase returns & allowances (xx) xx
Raw materials available for use Xx
Less:
Raw materials, end xx
Indirect materials xx (xx)
Direct materials used xx
Add:
Direct labor xx
Factory overhead xx xx
Total manufacturing costs xx
Add: Work-in-process, beg. xx
Cost of goods to account for* xx
Less: Work-in-process, end (xx)
Cost of goods manufactured xx
* Also called Cost of Goods put into process.

SCHEDULE OF COST OF GOODS SOLD

Cost of goods manufactured Xx
Add: Finished goods, beg. Xx
Cost of goods available for sale Xx
Less: Finished goods, end (xx)
Cost of goods sold Xx

JOURNAL ENTRIES FOR A MANUFACTURING COMPANY UNDER ACTUAL COST SYSTEM

Purchase of raw materials

Raw Materials Inventory xx
Cash or Accounts payable xx

Raw materials issued to production

Work-in-Process Inventory (for DM) xx
Manufacturing Overhead Control (for IDM) xx
Raw Materials Inventory xx

Page 3 of 7
 JOB ORDER COSTING
Brian Christian S. Villaluz, CPA

Labor incurred in the production

Work-in-Process Inventory (for DL) xx
Manufacturing Overhead Control (for IDL) xx
Cash or accrued payroll xx

Indirect expenses incurred in the production department

Manufacturing Overhead Control xx
Various Accounts xx

Transfer of goods completed during the period

Finished Goods Inventory xx
Work-in-Process Inventory xx

Sold goods to customers

Accounts receivable/Cash xx
Sales xx

Cost of goods sold xx

Finished Goods Inventory xx

Expenses incurred in the Non-production department

Operating Expenses xx
Various Accounts xx

PROBLEM: (Basic Cost Flow) [WITH ANSWERS]

Cattleya Manufacturing Company produces notebooks and pad papers. The company’s raw material
inventory account includes the costs of both the direct and indirect materials. Account balances for the
company at the beginning and end of November 2012 follow:

Inventories November 30 October 31

Raw materials P69,600 P93,200
Work-in-process 120,000 146,400
Finished goods 104,800 72,000

During the month, the company purchased P656,000 of raw materials, direct material used during the
period amounted to P504,000. Factory payroll costs for November were P788,000, of which 75% was
related to direct labor. Overhead charges for depreciation, insurance, utilities, and maintenance totaled
P600,000 for November.

Compute for the following:

1. Prime cost. 1,095,000
2. Conversion cost. 972,600
3. Total manufacturing cost. 2,067,600
4. Cost of goods manufactured. 2,094,000
5. Cost of goods sold. 2,061,200

Page 4 of 7
 JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
JOB ORDER COSTING WITHOUT LOSSES

PROBLEM 1:
The following information pertains to Beta Company for September 20X4.

Direct Material Direct Labor Overhead

Job #323 P3,200 P4,500 ?
Job #325 ? 5,000 ?
Job #401 5,670 ? P5,550

Beta Company applies overhead for Job #323 at 140 percent of direct labor cost and at 150 percent of
direct labor cost for Jobs #325 and #401. The total cost of Jobs #323 and #325 is identical.

1. What is the amount of direct materials for Job #325?

2. Assume that Jobs #323 and #401 are incomplete at the end of September. What is the balance
in Work in Process Inventory at that time?

PROBLEM 2:
Cajun Company uses a job order costing system. During April 2014, the following costs appeared in the
Work in Process Inventory account:

Beginning balance P 24,000

Direct material used 70,000
Direct labor incurred 60,000
Applied overhead 48,000
Cost of goods manufactured 185,000

Cajun Company applies overhead on the basis of direct labor cost. There was only one job left in Work in
Process at the end of April which contained P5,600 of overhead.

1. What amount of direct material was included in this job?

PROBLEM 3:
Watson Manufacturing Company employs a job order cost accounting system and keeps perpetual
inventory records. The following transactions occurred in the first month of operations:

 Direct materials requisitioned during the month:

Job 101 P22,000
Job 102 16,000
Job 103 24,000
62,000

 Direct labor incurred and charged to jobs during the month was:
Job 101 P30,000
Job 102 26,000
Job 103 20,000
76,000

Page 5 of 7
 JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
 Manufacturing overhead was applied to jobs worked on using a predetermined overhead rate
based on 75% of direct labor costs.

 Actual manufacturing overhead costs incurred during the month amounted to P66,000.

 Job 101 consisting of 1,000 units and Job 103 consisting of 200 units were completed during the
month.

1. How much manufacturing overhead was applied to Job 103 during the month?
2. Compute the unit cost of Jobs 101 and 103.
3. What is the balance in Work in Process Inventory at the end of the month?
4. Determine if manufacturing overhead was under- or overapplied during the month. How much?
5. How much is the total manufacturing cost of the three jobs assuming actual costing system is
used?

JOB ORDER COSTING WITH LOSSES

PRODUCT AND MATERIAL LOSSES IN JOB ORDER COSTING

Defective goods – goods that can be reworked and sold.

Spoiled goods – goods that cannot be reworked.

PROBLEM 1:
Prudoe Compounds produces article “A”. For 2010, Prudoe Compounds estimated the following:

Overhead costs, other than spoilage ‒ $600,000

Estimated spoilage cost ‒ 50,000
Estimated sales value of spoiled materials ‒ 20,000
Estimated direct labor hours ‒ 40,000

The actual cost of a unit of article “A” is P20. During the production 150 units of article “A” are considered
spoiled. Each spoiled unit of article “A” can be sold for P16.

1. If spoilage is inherent in production, what is the predetermined overhead rate using direct labor
hours as activity base?
2. Using the information in item no. 1, prepare the journal entry to record the remove the spoiled
units of article “A” from the WIP account.
3. Assuming the spoilage relate only to a specific job, what is the predetermined overhead rate
using direct labor hours as activity base?
4. Using the information in item no. 3, prepare the journal entry to record the remove the spoiled
units of article “A” from the WIP account.

PROBLEM 2:
For the year ended December 31, 2016, A Company incurred the following costs on job number 0177 for
manufacturing 500 units:

Original cost accumulation:

Direct materials P500,000
Direct labor 400,000
Page 6 of 7
 JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
Manufacturing overhead 100,000

Direct costs of reworking 100 units

Direct materials P100,000
Direct labor 200,000

1. What is the cost per unit of Job number 0177 if the rework costs were attributable to internal
failure?
2. Using the information in item 1, prepare the journal entry to record the incurrence of rework
cost.
3. What is the cost per unit of Job number 0177 if the rework costs were attributable to the
exacting specification of job number 0177?
4. Using the information in item 3, prepare the journal entry to record the incurrence of rework
cost.

PROBLEM 3:
ABC Co. has completed Job 007, containing 1,100 shoes, during 2016 at the following unit costs:

Direct materials P2,000

Direct labor 1,000
Factory overhead
(including an allowance of P300 for spoiled work) 1,300

Final inspection of Job 007 disclosed 100 spoiled shoes which were sold to a department for P200,000.

1. What is the unit cost of the good shoes produced on Job 007 if spoilage is charged to all
production?
2. Using the information in item 1, prepare the journal entry for the sale of spoiled shoes.
3. What is the unit cost of the good shoes produced on Job 007 if spoilage is charged to specific
Job 007?
4. Using the information in item 3, prepare the journal entry for the sale of spoiled shoes.

END OF HANDOUT

Page 7 of 7