JOBCOSTING

JOB ORDER COSTING
Concepts
 The basic purpose of any costing system is to allocate the costs of production (direct materials,
direct labor and the manufacturing overhead) to the units produced.
 Job Order Costing is a system for allocating costs to groups of unique products made to
customer specification. It is applicable to the production of customer-specified products such as
the manufacture of special machines.
 Each job becomes a cost center for which costs are accumulated. A subsidiary record (job cost
sheet) is needed to keep track of all unfinished jobs (work in process) and finished jobs (finished
goods).
 Accounting for manufacturing overhead is an important part of job order costing and any other
costing system. Overhead consists of all manufacturing costs other than direct materials and
direct labor.
 The distinguishing feature of manufacturing overhead is that while it must be incurred in order
to produce goods, it cannot be directly traced to the traced to the final product as can direct
materials and direct labor. Therefore, overhead must be applied rather directly charged, to
goods produced.
 Spoilage and similar items. The following terms are commonly used:
a. Spoilage – inferior goods either discarded or sold for disposal value.
b. Defective units – inferior goods reworked and sold as normal product.
c. Waste – materials lost in the manufacturing process.
d. Scrap – material residue which has some salvage value.
 In a job order costing system, the cost of normal spoilage and defective units (which are a
product costs) can be handled in two different ways.
 When spoilage is attributable to general factory conditions, net spoilage cost are
allocated to all jobs through overhead application (i.e., estimated spoilage costs
are included other overhead in the computation of the overhead application
rate).
 When spoilage is attributable to exacting job specification, net spoilage costs are
charged to specific jobs. With this approach, spoilage is not reflected in the
predetermined overhead rate.
Under both methods, the proceeds from the sale of spoiled good should be offset against the
cost of spoiled goods produced.
To compute the unit cost of goods produced on a given job, spoiled units are excluded from the
calculation. However, defective units that have been reworked are included as good output.
 Costs of abnormal spoilage are a period costs (expense) and should not be charged to jobs but
should be written off as a loss of the period.
 To allocate the cost of normal spoilage or other overhead to units produced, an activity base
must be chosen for use in the computation of a predetermined overhead rate. This activity base
should bear a casual relationship to the incurrence of overhead costs. Examples of activity bases
are:
a) Direct labor hours
b) Direct labor cost
c) Machine hours
d) Material cost
EXERCISES:
1. Quest Co. is a print shop that produces jobs to customer specifications. During January 2020, Job
#3051 was worked on and the following information is available:
Direct material used P 2,500

Direct labor hours worked 15
Machine time used 6
Direct labor rate per hour P 7
Overhead application rate per hour of machine time P18
What was the total cost of Job #3051 for January?

a. P2,713
b. P2,770
c. P2,812
d. P3,052
DM: P2,500
DL: (15 HOURS*P7) 105
MOH: (P18*6 HOURS) 108
TOTAL COSTS P2,713
ITEM 2 -4
Alpha Company
Alpha Co. uses a job order costing system. At the beginning of January, the company had two
jobs in process with the following costs:
Direct Material Direct Labor Overhead

Job #456 P 3,400 P 510 P255
Job #461 1,100 289 ?
Alpha pays its workers P8.50 per hour and applies overhead on a direct labor hour basis.
2. Refer to Alpha Company. What is the overhead application rate per direct labor hour?
a. P 0.50
b. P 2.00
c. P 4.25
d. P 30.00
JOB #456:
Actual labor hours = P510/P8.50 = 60 hours
OH rate = P255/60 hours = P4.25
3. Refer to Alpha Company. How much overhead was included in the cost of Job #461 at the
beginning of January?
a. P 144.50
b. P 153.00
c. P 2,200.00
d. P 2,456.50
JOB #461:
Actual labor hours = P289/P8.50 = 34 hours
Applied OH = P4.25 * 34 hours = P144.50
4. Refer to Alpha Company. During January, Alpha’s employees worked on Job #649. At the end of
the month, P714 of overhead had been applied to this job. Total Work in Process at the end of
the month was P6,800 and all other jobs had a total cost of P3,981. What amount of direct
material is included in Job #649?
a. P 677.00
b. P 1,391.00
c. P 2,142.00
d. P 4,658.00
5. At the end of the last fiscal year, Roberts Company had the following account balances:
Overapplied overhead P 6,000

Cost of Goods Sold P 980,000
Work in Process Inventory P 38,000
Finished Goods Inventory P 82,000
If the most common treatment of assigning overapplied overhead were used, the final balance
in Cost of Goods Sold is:
a. P 974,000.
b. P 974,660.
c. P 985,340.
d. P 986,000.
COGS, actual = COGS, normal – Overapplied OH
COGS, actual = P980,000 – 6,000
COGS, actual = P974,000

JOBCOSTING

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JOB ORDER COSTING

Direct material used P 2,500

What was the total cost of Job #3051 for January?

Direct Material Direct Labor Overhead

Overapplied overhead P 6,000

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