2 Job Order Costing

Learning Objectives
1 Describe cost systems and the flow of costs in a job order system.

2 Use a job cost sheet to assign costs to work in process.

Demonstrate how to determine and use the predetermined

3 overhead rate.

Prepare entries for manufacturing and service jobs completed and

4 sold.

Distinguish between under- and overapplied manufacturing

5 overhead.
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Describe cost systems and the flow of

LEARNING
OBJECTIVE
1
costs in a job order system.
Process Cost System

Cost Accounting involves  Used when a large volume of similar products are
manufactured - (cereal, refining of petroleum,
Measuring,
production of ice cream).
Recording, and
 Costs are accumulated for a time period – (week or
Reporting product costs. month).

 Accounts are fully integrated into the general ledger.  Costs are assigned to departments or processes for a
specified period of time.
 Perpetual inventory system provides immediate, up-to-date
information on the cost of a product.

 Two basic types: (1) a process order cost system and (2) a
job order cost system.

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Process Cost System Job Order Cost System

 Costs are assigned to each job or batch.

 Important feature: Each job or batch has its own

distinguishing characteristics.

 Objective is to compute the cost per job.

 Measures costs for each job completed – not for set time
Illustration 2-1
Process cost system periods.

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 Job Order Cost System

Illustration 2-2 shows the recording of costs in a job order cost

system for Disney as it produced two different films.

Illustration 2-2
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Job Order Cost Flow Job Order Cost Flow

The flow of costs parallels the physical flow of the materials

as they are converted into finished goods

 Manufacturing costs are assigned to the Work in

Process (WIP) Inventory account.

 Cost of completed jobs is transferred to the Finished

Goods Inventory account.

 When units are sold, the cost is transferred to the Cost Illustration 2-3
Flow of costs in job Basic overview of the flow of costs in a manufacturing
of Goods Sold account. order costing
setting for production of a fire truck.

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Accumulating Manufacturing Costs Accumulating Manufacturing Costs

Raw Material Costs Factory Labor Costs

Illustration: Wallace Company purchases 2,000 lithium Consists of three costs:
batteries (Stock No. AA2746) at $5 per unit ($10,000) and 800
1. Gross earnings of factory workers,
electronic modules (Stock No. AA2850) at $40 per unit
($32,000) for a total cost of $42,000 ($10,000 + $32,000). The 2. Employer payroll taxes on these earnings, and
entry to record this purchase on January 4 is: 3. Fringe benefits (such as sick pay, pensions, and vacation
pay) incurred by the employer.
Jan. 4 Raw Materials Inventory 42,000
Accounts Payable 42,000

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 Accumulating Manufacturing Costs Accumulating Manufacturing Costs

Factory Labor Costs Manufacturing Overhead Costs

Illustration: Wallace incurs $32,000 of factory labor costs. Of  Many types of overhead costs
that amount, $27,000 relates to wages payable and $5,000 ► For example, property taxes, depreciation, insurance,
relates to payroll taxes payable in February. The entry to record and repairs related to the manufacturing process.
factory labor for the month is:
 Costs unrelated to manufacturing process are expensed.
Jan. 31 Factory Labor 32,000
 Costs related to manufacturing process are accumulated
Factory Wages Payable 27,000
in Manufacturing Overhead account.
Employer Payroll Taxes Payable 5,000
► Manufacturing overhead subsequently assigned to
work in process.

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Accumulating Manufacturing Costs 1 Accumulating Manufacturing Costs

Manufacturing Overhead Costs During the current month, KRT Company incurs the following
manufacturing costs:
Illustration: Using assumed data, the summary entry for
manufacturing overhead in Wallace Manufacturing Company is: (a) Raw material purchases of $4,200 on account.

(b) Factory labor of $18,000. Of that amount, $15,000 relates to

Jan. 31 Manufacturing Overhead 13,800
wages payable and $3,000 relates to payroll taxes payable.
Utilities Payable 4,800
(c) Factory utilities of $2,200 are payable, prepaid factory
Prepaid Insurance 2,000 insurance of $1,800 has expired, and depreciation on the
Accounts Payable (for repairs) 2,600 factory building is $3,500.
Accumulated Depreciation 3,000 Prepare journal entries for each type of manufacturing cost.
Property Taxes Payable 1,400

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1 Accumulating Manufacturing Costs 1 Accumulating Manufacturing Costs

Prepare journal entries for each type of manufacturing cost. Prepare journal entries for each type of manufacturing cost.

(a) Raw material purchases of $4,200 on account. (c) Factory utilities of $2,200 are payable, prepaid factory
insurance of $1,800 has expired, and depreciation on the
Raw Materials Inventory 4,200
factory building is $3,500.
Accounts Payable 4,200
Manufacturing Overhead 7,500
(b) Factory labor of $18,000. Of that amount, $15,000 relates to
Utilities Payable 2,200
wages payable and $3,000 relates to payroll taxes payable.
Prepaid Insurance 1,800
Factory Labor 18,000
Accumulated Depreciation 3,500
Factory Wages Payable 15,000
Employer Payroll Taxes Payable 3,000

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 LEARNING Use a job cost sheet to assign costs to work in LEARNING Use a job cost sheet to assign costs to work in
2 2
OBJECTIVE process. OBJECTIVE process.

Assigning manufacturing costs to work in process results in Job Cost Sheet

the following entries.  Used to record costs chargeable to specific jobs.
1. Debits made to Work in Process Inventory  Constitutes the subsidiary ledger for the work in process
2. Credits made to account.

► Raw Materials Inventory  Each entry to Work in Process

Inventory must be accompanied
► Factory Labor by a corresponding posting to
► Manufacturing Overhead one or more job cost sheets.

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Raw Material Costs

 Assigned to a job when materials are issued in

response to requests.

 Materials requisition slip

► Written authorization for issuing raw materials.

► May be directly issued to use on a job - direct

materials (charged to Work in Process Inventory).

► May be considered indirect materials – charged to

Manufacturing Overhead.

Illustration 2-4
Job cost sheet

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Raw Material Costs

Illustration: Wallace uses $24,000 of direct materials and $6,000 of

indirect materials in January, the entry is:

Jan. 31 Work in Process Inventory 24,000

Manufacturing Overhead 6,000
Raw Materials Inventory 30,000

Illustration 2-5
Materials requisition slip

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 Raw Material Costs Illustration 2-6
Job cost sheets–posting
of direct materials

Illustration 15-6
The sum of the direct
materials columns of
the job cost sheets
should equal the
direct materials
debited to Work in
Process Inventory
account.

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Factory Labor Costs Factory Labor Costs

 Assigned to jobs on the basis of time tickets.

 Time tickets are prepared when the work is performed.

 Time tickets indicate:

► Employee

► Hours worked

► Account and job charged

► Total labor cost

Illustration 2-7
Time ticket

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Factory Labor Costs Factory Labor Costs

Illustration: The time tickets are later sent to the payroll Jan. 31 Work in Process Inventory 28,000
department, which applies the employee’s hourly wage rate and Manufacturing Overhead 4,000
computes the total labor cost. If the $32,000 total factory labor Factory Labor 32,000
cost consists of $28,000 of direct labor and $4,000 of indirect
labor, the entry is:

Jan. 31 Work in Process Inventory 28,000

Manufacturing Overhead 4,000
Factory Labor 32,000

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 Factory Labor Costs 2 Work in Process

The sum of the Danielle Company is working on two job orders. The job cost
direct labor sheets show the following:
columns of the job
Direct materials—Job 120 $6,000; Job 121 $3,600
cost sheets should
Direct labor—Job 120 $4,000; Job 121 $2,000
equal the direct
Manufacturing overhead—Job 120 $5,000; Job 121 $2,500
labor debited to
Work in Process Prepare the three summary entries to record the assignment of
Inventory. costs to Work in Process from the data on the job cost sheets.

Illustration 2-8
Job cost sheets–
direct labor

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2 Work in Process 2 Work in Process

Danielle Company is working on two job orders. The job cost Danielle Company is working on two job orders. The job cost
sheets show the following: sheets show the following:

Direct materials—Job 120 $6,000; Job 121 $3,600 Direct materials—Job 120 $6,000; Job 121 $3,600
Direct labor—Job 120 $4,000; Job 121 $2,000 Direct labor—Job 120 $4,000; Job 121 $2,000
Manufacturing overhead—Job 120 $5,000; Job 121 $2,500 Manufacturing overhead—Job 120 $5,000; Job 121 $2,500

Prepare the three summary entries to record the assignment of Prepare the three summary entries to record the assignment of
costs to Work in Process from the data on the job cost sheets. costs to Work in Process from the data on the job cost sheets.

Work in Process Inventory 9,600 Work in Process Inventory 6,000

Raw Materials Inventory 9,600 Factory Labor 6,000

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Demonstrate how to determine and use the

2 Work in Process
LEARNING
OBJECTIVE
3
predetermined overhead rate.

Danielle Company is working on two job orders. The job cost

Manufacturing Overhead Costs
sheets show the following:
 Relates to production operations as a whole.
Direct materials—Job 120 $6,000; Job 121 $3,600
Direct labor—Job 120 $4,000; Job 121 $2,000  Cannot be assigned to specific jobs based on actual
Manufacturing overhead—Job 120 $5,000; Job 121 $2,500 costs incurred.
Prepare the three summary entries to record the assignment of  Companies assign to work in process and to specific jobs
costs to Work in Process from the data on the job cost sheets. on an estimated basis through the use of a …

Work in Process Inventory 7,500 Predetermined Overhead Rate

Manufacturing Overhead 7,500

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 Predetermined Overhead Rate Predetermined Overhead Rate

 Based on the relationship between estimated annual  Established at the beginning of the year.
overhead costs and expected annual operating activity.
 Small companies often use a single, company-wide
 Expressed in terms of an activity base such as: predetermined rate.

► Direct labor costs  Large companies often use a different rate for each
► Direct labor hours department and each department may have a different
activity base.
► Machine hours
 Formula for computing the predetermined rate
► Any other measure that will provide an equitable
overhead rate is:
basis for applying overhead costs to jobs. Illustration 2-9

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Predetermined Overhead Rate Predetermined Overhead Rate

Manufacturing overhead costs are assigned to Work in Process Illustration: Wallace Company uses direct labor cost as the activity
during the period to get timely information about the cost of a base. Assuming that the company expects annual overhead costs
completed job. to be $280,000 and direct labor costs for the year to be $350,000,
compute the overhead rate.

This means that for every dollar of direct labor, Wallace will
80 cents of manufacturing overhead to a job.
assign _________
Illustration 2-10
Using predetermined
overhead rates

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Predetermined Overhead Rate Predetermined Overhead Rate

Illustration: Wallace applies manufacturing overhead to work in The sum of the

process when it assigns direct labor costs. Calculate the amount of manufacturing
overhead columns
applied overhead assuming direct labor costs were $28,000.
of the job cost
sheets should
$28,000 x 80% = $22,400
equal the
manufacturing
The following entry records this application.
overhead debited
(i.e., applied) to
Jan. 31 Work in Process Inventory 22,400
Work in Process
Manufacturing Overhead 22,400 Inventory.

Illustration 2-12
Job cost sheets–
manufacturing
overhead applied
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 Predetermined Overhead Rate 3 Predetermined Overhead Rate

At the End of Each Month: Stanley Company produces specialized safety devices. For the
year, manufacturing overhead costs are expected to be
The balance in the Work in Process Inventory should equal the
$160,000. Expected machine usage is 40,000 hours. The
sum of the costs shown on the job cost sheets of unfinished
company assigns overhead based on machine hours. Job No.
jobs.
302 used 2,000 machine hours. Compute the predetermined
overhead rate.

Solution

$160,000 ÷ 40,000 hours = $4.00 per machine hour

Illustration 2-13
Proof of job cost sheets to
work in process inventory

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3 Predetermined Overhead Rate 3 Predetermined Overhead Rate

Stanley Company produces specialized safety devices. For the Stanley Company produces specialized safety devices. For the
year, manufacturing overhead costs are expected to be year, manufacturing overhead costs are expected to be
$160,000. Expected machine usage is 40,000 hours. The $160,000. Expected machine usage is 40,000 hours. The
company assigns overhead based on machine hours. Job No. company assigns overhead based on machine hours. Job No.
302 used 2,000 machine hours. Determine the amount of 302 used 2,000 machine hours. Prepare the entry to assign
overhead to allocate to Job No. 302. overhead to Job No. 302 on March 31.

Solution Solution

2,000 hours x $4.00 = $8,000 Work in Process Inventory 8,000

Manufacturing Overhead 8,000

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Prepare entries for manufacturing and service

LEARNING
OBJECTIVE
4
jobs completed and sold.
Assigning Costs to Finished Goods

Assigning Costs to Finished Goods Illustration: When a job is completed, Wallace makes an
entry to transfer its total cost to finished goods inventory.
When a job is
completed, Jan. 31 Finished Goods Inventory 39,000
Wallace Work in Process Inventory 39,000
Company
summarizes the
costs and
completes the
lower portion of
the applicable
job cost sheet.
Illustration 2-14
Completed job
cost sheet
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 Assigning Costs to Finished Goods Summary of Job Order Cost Flows

Illustration: On January 31 Wallace Manufacturing sells on

account Job 101. The job cost $39,000, and it sold for $50,000.
Entries to record the sale and recognize cost of goods sold are:

Jan. 31 Accounts Receivable 50,000

Sales revenue 50,000
Cost of Goods Sold 39,000
Finished Goods Inventory 39,000

Illustration 2-15
Flow of costs in a job
order cost system

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Summary of Job Order Cost Flows Job Order Costing for Service Companies

Illustration 2-16
Flow of documents in a
While service companies do not have inventory, the
job order cost system
techniques of job order costing are still quite useful in many
service-industry environments.

Consider, for example, the Mayo Clinic (health care),

PricewaterhouseCoopers (accounting), and Goldman Sachs
(investment banking).

These companies need to keep track of the cost of jobs

performed for specific customers to evaluate the profitability of
medical treatments, audits, or investment banking
engagements.

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Job Order Costing

Advantages
 More precise in assignment of costs to projects than
process costing.

 Provides more useful information for determining the

profitability of particular projects and for estimating costs
when preparing bids on future jobs.

Disadvantage
 Requires a significant amount of data entry.

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 Distinguish between under- and overapplied
4 Completion and Sale of Jobs
LEARNING
OBJECTIVE
5
manufacturing overhead.

During the current month, Onyx Corporation completed Job 109 Illustration 2-17
Cost of goods
and Job 112. Job 109 cost $19,000 and Job 112 costs $27,000. manufactured
schedule
Job 112 was sold on account for $42,000. Journalize the entries
for the completion of the two jobs and the sale of Job 112.

Finished Goods Inventory 46,000

Work in Process Inventory 46,000
Accounts Receivable 42,000
Sales Revenue 42,000
 Shows manufacturing overhead applied rather than actual overhead
Cost of Goods Sold 27,000 costs.
Finished Goods Inventory 27,000  Applied overhead is added to direct materials and direct labor to
determine total manufacturing costs
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Cost of Goods Manufactured Under- or Overapplied Overhead

Partial Income Statement  A debit balance in manufacturing overhead means

Illustration 2-18
that overhead is underapplied.
 A credit balance in manufacturing overhead means
that overhead is overapplied.
Illustration 2-19
Under- and overapplied
overhead

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Under- or Overapplied Overhead 5 Applied Manufacturing Overhead

Any Year-End Balance in manufacturing overhead is For Karr Company, the predetermined overhead rate is 140% of
eliminated by adjusting cost of goods sold. direct labor cost. During the month, Karr incurred $90,000 of factory
labor costs, of which $80,000 is direct labor and $10,000 is indirect
 Underapplied overhead is debited to COGS
labor. Actual overhead incurred was $119,000. Compute the
 Overapplied overhead is credited to COGS amount of manufacturing overhead applied during the month.
Determine the amount of under- or overapplied manufacturing
Illustration: Wallace has a $2,500 credit balance in Manufacturing overhead.
Overhead at December 31. The adjusting entry for the over-applied Manufacturing overhead
(140% x $80,000) = $112,000
overhead is: applied

Dec. 31 Manufacturing Overhead 2,500 Underapplied

($119,000 - $112,000) = $7,000
manufacturing overhead
Cost of Good Sold 2,500

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