CHAPTER 2- JOB ORDER COSTING SYSTEM OVERVIEW

Job order cost system is used when many different products are produced each period or when
products are made based on specific customer order. It is appropriate to use job order cost system
when direct costs can be identified with specific units of production. It is widely used by custom
manufacturers such as aircraft, auto repair, Construction, Printing and service organization. Job
order costing is the accumulation of costs by specific jobs, contracts, or orders.
In job order costing, each job is an accounting unit to which materials, labor, and factory
overhead costs are assigned by means of job order numbers. The cost of each order produced for
a given customer or the cost of each lot to be placed in stock is recorded on a summary sheet called
a job order cost sheet which is designed to collect the costs of materials, labor and factory
overhead, applicable to a specific job.

MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSITNG

1. JOB ORDER COST SHEET
a. These records accumulate product costs of specific units or small batches of units for
both product costing and control purposes.
b. The file of job order cost sheets for uncompleted jobs serves as perpetual book
inventory and the subsidiary ledger for Work in Process Inventory Account.
c. A separate job cost sheet is prepared for each job.

2. MATERIALS STOCKCARD
a. These records are the perpetual book inventory of costs and quantities of materials on
hand.
b. The file of materials stock cards for unused materials is the subsidiary ledger of
Materials Inventory Account.
c. A separate stock card is prepared for each type of material on hand.

3. FINISHED GOODS STOCKCARD

a. These records are the perpetual book inventory of costs and quantities of completed
goods held for sale.
 b. The file of finished goods stock cards for unsold goods is the subsidiary ledger of the
Finished Goods Inventory Account.

4. FACTORY OVERHEAD CONTROL COST RECORD

a. These records accumulate detailed manufacturing overhead costs by department.
b. The file of these records for the accounting period is the subsidiary ledger of Factory
Overhead Control Account.

5. MATERIALS REQUISITION, TIME TICKET AND CLOCK CARD

a. As the source documents for charging costs of job and department.
b. To aid in fixing responsibility for control and usage of materials and labor.

PRODUCT FLOW IN JOB ORDER COSTING

The following diagram depicts the product flow in job order costing:

Work in process
( Job 1 )
Material
Labor Finished
Work in process Cost of Goods
Overhead ( Job 2 ) Goods
Inventory Sold

Work in process
( Job 3 )

In job order costing, each job is independent of the other jobs. Manufacturing costs (materials,
labor, and factory overhead) incurred in each job are accumulated separately in work in process
inventory. When a job is completed, the total costs are then transferred to finished goods Inventory.

FLOW OF COSTS IN JOB ORDER COST SYSTEM

Job order costing covers the following typical transactions in determining the flow of costs:
1. Purchase of direct and indirect materials and return of materials to suppliers;
2. Issuance of direct and indirect materials to production and return of materials to storeroom;
3. Incurrence, distribution and payment of payroll and accrual of employer’s share in various
contributions;
4. Incurrence of manufacturing overhead or other indirect resources;
5. Application of factory overhead to work in process;
6. Incurrence of non-manufacturing expenses;
7. Transfer of completed jobs to finished goods;
8. Sale of finished goods; and
9. Transfer of finished goods to cost of goods sold.

COMPREHENSIVE ILLUSTRATION- JOB ORDER COSTING

To illustrate the flow of cost under job order costing, assume that Dainty Manufacturing
Company manufacturers large newspapers printers. Dainty started its operation on January 1,
2018, with 2 job orders (Job X and Job Y). As of January 31, 2018, Dainty reported the following
inventories on hand:
Raw materials ₱60,000
Work in process ( 100 units ) 80,000
Finished goods ( 20 units ) 40,000

The summary of the outstanding jobs at the end of January is as follows:

Job X Job Y Total
Started 20 100 120
Completed 20 - 20
Process - 100 100

In June 2018, Dainty accepted a new order for 150 units of printing machines and a new
Job order (Job Z) was opened.

Accounting for Materials

➢ Purchase and Return of Materials
 Purchases of both the direct and indirect materials are debited to Raw Materials Inventory
account. The offsetting credit is accounts payable (if purchases are made on credit) or cash (if
purchases are paid in cash). The raw materials inventory account is credited when materials are
returned to the suppliers.
Assume during the month of June, Dainty purchased ₱124,000 of raw materials on account.
The journal entry to record the purchase is:

Debit Credit
(1) Raw materials inventory 124,000
Accounts Payable 124,000
Assume that upon inspection, Dainty found some defective materials amounting to ₱4,000,
which they returned to the supplier. The journal entry to record return of materials is:

Debit Credit
(2) Accounts Payable 4,000
Raw materials inventory 4,000
➢ Issuance of Materials to Production
A material requisition slip shows the type, quantity and cost of materials used as materials
are issued to production. The cost of direct materials is charged to Work in Process Inventory
Account, while the cost of indirect materials is charged to Factory Overhead Control Account, a
temporary account that is used to accumulate all actual factory overhead costs incurred (indirect
materials, indirect labor, and other indirect manufacturing costs) during the period.
Assume that a material issued to production was ₱95,000, including indirect materials of
₱5,000 to be used for the following jobs as:
Direct Indirect
Job Y 20,000 2,000
Job Z 70,000 3,000
Total 90,000 5,000

The journal entry to record the issuance of materials to production is:

Debit Credit
(3) Work in Process 90,000
Factory Overhead Control 5,000
Raw Materials Inventory 95,000
 Direct materials issued for specific jobs of ₱90,000 are charged to work in process
inventory account and are also recorded in their respective job cost sheets. The indirect materials
of ₱5,000 are charged to factory overhead control account.
When certain direct materials issued to production are not used and returned to the
storeroom, the return should be recorded by debiting raw materials inventory and crediting work
in process inventory.

Accounting for Labor

➢ Recording of Gross Payroll
The gross payroll obligations are debited to Payroll Account which serves as a clearing
account before the amount to be distributed to various divisions is determined. Payroll deductions
such as withholding income tax, employee’s shares in government contribution including Social
Security System (SSS), Home Development Mutual Fund (HDMF), and Philippine Health
Insurance (Phil Health) premiums are credited to appropriate liability accounts.

Assume the following payroll data for the month of June:

Selling Administrative
Total Direct Labor Indirect Labor
Expense Expense
Gross payroll 264,000 200,000 20,000 28,000 16,000
Payroll deductions:
Withholding
46,000 35,600 3,000 4,200 3,200
taxes
SSS 7,920 6,000 600 840 480
Phil health 3,050 2,275 225 350 200
HDMF 5,280 4,000 400 560 320
Total deductions 62,250 47,875 4,225 5,950 4,200
Net 201,750 152,125 15,775 22,050 11,800

The journal entry to record the accrual of payroll is:

Debit Credit
(4) Payroll 264,000
Withholding taxes payable 46,000
SSS contribution payable 7,920
Phil Health contributions payable 3,050
 HDMF contributions payable 5,280
Accrued salaries 201,750

➢ Distribution of Payroll to Various Departments

The distribution of gross payroll to various departments closes out the balance in the
payroll account. When payroll is distributed, the amount representing direct labor cost is charge to
work in process inventory, while indirect labor cost is charge to factory overhead control. Sales
salaries, general and administrative salaries are debited to appropriate operating expense accounts.
The journal entry to record the distribution of payroll to various departments is:
Debit Credit
(5) Work in process inventory 200,000
Factory overhead control 20,000
Selling expenses 28,000
Administrative expenses 16,000
Payroll 264,000

As shown above, only direct labor of ₱200,000 is charged to work in process inventory
account and will be added to the individual job cost sheets.

Assume that the direct labor costs are be allocated to the following jobs:

Job Y 50,000
Job Z 150,000
Total 200,000

➢ Payment of Payroll

The payment of net payroll obligations (gross payroll less all employee deductions such as
withholding taxes, SSS, Phil Health and Pag-ibig Contributions Payable) is debited to accrued
salaries and credited to cash.

Assume that the payroll was paid at the end of the month; the payment of payroll is
recorded as follows:
Debit Credit
(6) Accrued salaries 201,750
Cash 201,750

➢ Accrual of Employer Contributions

 Both employer and employee, have their respective share in the required government
contributions such as SSS, HDMF and Phil Health. Additionally, employers are subject to
mandatory Employee Compensation (EC) contribution by the Employee’s Compensation
Commission. The employer’s share in the SSS, Phil Health, HDMF, and EC contributions should
be accrued when payroll is prepared. The costs pertaining to direct and indirect labor (factory
employees) are debited to factory overhead control while the costs pertaining to sales and
administrative employees are debited to appropriate expense account.
Assume the following employer contributions for the June payroll:

Indirect
Total Administrative
Direct labor Labor Sales
SSS contribution ₱18,480 ₱14,000 ₱1,400 ₱1,960 ₱1,120
EC contributions ₱410 270 40 80 20
Phil Health 3,050 2,275 225 350 200

HDMF contributions 5,280 4,000 400 560 320

Total 27,220 ₱20,545 ₱2,065 ₱2,950 ₱1,660

The journal entry to accrue the employer contribution is:

Debit Credit
(7) Factory Overhead Control 22,610
Selling Expenses 2,950
Administrative Expenses 1,660
SSS Contributions Payable 18,480
EC Contributions Payable 410
Phil Health Contributions Payable 3,050
HDMF Contributions Payable 5,280

Accounting for Manufacturing Overhead

➢ Recording of Actual Manufacturing Overhead

Manufacturing overhead represents all indirect manufacturing costs. These costs are
charged directly to the factory overhead control account as they are incurred. Factory Overhead
Control Account is used to accumulate all indirect production costs and general manufacturing
overhead.

Assume that Dainty incurred factory expenses (such as utilities, rent of factory space and
other miscellaneous factory expenses) during the month of June amounting to ₱102, 390. For
purpose of this illustration, also assume that that none of these expenses had been paid and Dainty
uses accrued expenses account to recognize these transactions.

The journal entry to record the above costs is shown below:

Debit Credit
(8) Factory Overhead Control 102,390
Accrued Expenses 102,390

Assume further that Dainty recognized ₱40,000 depreciation expense on factory machinery
for the month of June. This is recorded through the following entry:

Debit Credit
(9) Factory Overhead Control 40,000
Accumulated Depreciation 40,000

➢ Recording of Applied Factory Overhead

When a job is placed into process, an entity incurs factory overhead. It is difficult to
determine how much actual overhead was incurred in each unfinished product; overhead costs
are assigned to work in process inventory by means of a predetermined rate. This rate is then used
to apply overhead to specific jobs.
Predetermined overhead rate is based on the estimate established by management at the
beginning of the accounting period. Various factors are considered in developing this estimate to
avoid having significant variances between the applied overhead and actual overhead at the end of
the period. The rate is calculated as follows:

Total estimated factory overhead

= Predetermined overhead rate
Cost allocation base
Assume that Dainty uses direct labor hours to compute the predetermined overhead rate
and that this rate is ₱30 per direct labor hour. During the month, Dainty incurred the following
direct labor hours:
 Job Y 2,000 hours
Job Z 4,000 hours
Total 6,000 hours

The journal entry to record the applied overhead is shown below:

Debit Credit
(10) Work in Process Inventory Account 180,000
Factory Overhead- applied 180,000

➢ Accounting For Under-applied Or Over-applied Overhead

The actual factory overhead was ₱190,000 while the applied factory overhead was only
₱180,000 leaving a debit balance of ₱10,000. A debit balance in factory overhead control is under
applied factory overhead while a credit balance is over applied factory overhead.
Assuming the debit balance in factory overhead control is not material, it is closed to Cost
of Goods Sold Account and the journal entry to close the under applied factory overhead is:
Debit Credit
(11) Factory Overhead- applied 180,000
Cost of Goods Sold 10,000
Factory Overhead Control 190,000

In the above illustration, two control accounts were used to facilitate the recording of
factory overhead, factory overhead control and applied factory overhead. After recording the
above entry, these two accounts will be totally closed.
In practice, companies generally maintain one control account to simply the recordkeeping
function. Whenever overhead is applied to work in process, a factory overhead control account is
credited instead of applied factory overhead account (this simplified approach will be used in the
succeeding illustrations) Assuming Dainty did not use the applied factory overhead account, the
entry to close the under applied overhead to cost of goods sold will be:
Debit Credit
(11) Cost of Goods Sold 10,000
 Factory Overhead Control 10,000

Crediting factory overhead control by the amount of under-applied overhead will leave
zero balance in the account at the end of the period. Therefore, regardless of the approach used,
the impact in cost of goods sold will be the same.
However, if the variance is material, the over or under-applied overhead is allocated on a
pro-rata basis to Work in Process, Finished Goods and Cost of Goods Sold.

➢ Recording of Non-Manufacturing Expenses

Non-manufacturing expenses include those costs relating to selling, distribution, research

and development, administrative and other general costs. These costs are not part of factory
overhead. Instead they are considered as period costs and reported as part of operating expenses
on the income statement.
Assume that Dainty incurred the following expenses during the month but not paid:
Total Selling Administrative
Rent 12,000 7,000 5,000
Depreciation 10,000 2,000 8,000
Utilities 6,000 4,000 2,000
Advertising 3,000 3,000 -
Shipping 3,000 3,000 -
Miscellaneous 1,390 1,000 390
Total 35,390 20,000 15,390

The compound entry to record the above expenses is shown below:

Debit Credit
(12) Selling Expenses 20,000
Administrative Expenses 15,390
Accumulated Depreciation 10,000
Accrued Expenses 25,390

To simplify the illustration, selling and administrative accounts are used above instead of
the specific expense accounts. These types of expenses should not be charged to factory overhead
because non-manufacturing expenses non-inventoriable.
 ➢ Cost of Goods Manufactured and Sold

Cost of Goods Manufactured

When goods are completed, they are transferred to the finished goods warehouse. A
corresponding entry is recorded to transfer the cost from work in process inventory to finished
goods inventory. The cost of a finished product is comprised of direct material, direct labor and
applied factory overhead.
Assume that Job Y is completed and transferred to finished goods warehouse. The entry to
record this transaction is:
Debit Credit
(13) Finished Goods Inventory 210,000
Work in Process 210,000

Assuming the completed Job Y produced a total of 100 units, the unit cost of each product
was ₱2,100, as calculated below:

Total cost of goods manufactured

= Unit Cost
Units produced
210,000
= P2,100 per unit
100 units

➢ Sale of Goods and Cost of Goods Sold

Goods completed during the period are added to the beginning finished goods inventory to
arrive at the total cost of goods available for sale. When finished goods are sold to the customer,
the related costs are then transferred to cost of goods sold account.
Assume that Dainty shipped the following (total of 90 units) to the customers at ₱4,000
each:

Units Sold Sales Price Total

Job X 20 P 4,000 80,000
Job Y 70 4,100 280,000
90 360,000
 Units Sold Unit Cost Total
Job X 20 2,000 40,000
Job Y 70 2,100 147,000
90 187,000

The journal entry to record the sales is:

Debit Credit
(14) Accounts Receivable 360,000
Sales 360,000

The entry to recognize the cost of goods sold is:

Debit Credit
(15) Cost of Goods Sold 187,000
Finished Goods Inventory 187,000

The journal entries discussed above will be summarized below:

Debit Credit
(1) Raw materials inventory 124,000
Accounts payable 124,000
To record the purchase of raw materials

(2) Accounts payable 4,000

Raw materials inventory 4,000
To record the return of raw materials to suppliers

(3) Work in process inventory 90,000

Factory overhead 5,000
Raw materials inventory 95,000
To record the issuance of direct and indirect materials to production

(4) Payroll 264,000

 Withholding taxes payable 46,000
SSS Contributions payable 7,920
Phil health contributions payable 3,050
HDMF contributions payable 5,280
Accrued salaries 201,750
To accrue the payroll for the month

(5) Work in process inventory 200,000

Factory overhead control 20,000
Selling expenses 28,000
Administrative expenses 16,000
Payroll 264,000
To distribute the payroll to various departments

(6) Accrued salaries 201,750

Cash 201,750
To record the payment of salaries

(7) Factory overhead control 22,610

Selling expenses 2,950
Administrative expenses 1,660
SSS contributions payable 18,480
EC contributions payable 410
Phil health contributions payable 3,050
HDMF contributions payable 5,280
To accrue the employer contributions

(8) Factory overhead 102,390

Accrued expenses 102,390
To accrue other factory expenses

(9) Factory overhead 40,000

Accumulated depreciation 40,000
To record depreciation of factory equipment

(10) Work in process inventory 180,000

Applied factory overhead 180,000
To record factory overhead applied to work in process inventory

(11) Applied factory overhead 180,000

Cost of goods sold 10,000
Factory overhead control 190,000
To close the under-applied overhead to cost of goods sold

(12) Selling expenses 20,000

Administrative expenses 15,390
Accumulated depreciation 10,000
Accrued expenses 25,390
To record general and administrative expenses incurred

(13) Finished goods inventory 210,000

Work in process inventory 210,000
 To record the transfer of cost of goods manufactured into finished goods

(14) Accounts receivable 360,000

Sales 360,000
To record the sales

(15) Cost of goods sold 187,000

Finished goods inventory 187,000
To record the cost of goods sold

The statement of cost goods manufactured will appear as follows:

Dainty Manufacturing Company
Statement of Cost of Goods Manufactured
For the month ended June 30, 2018

Raw materials inventory, June 1 ₱60,000

Add: Raw materials purchases 120,000
Total materials available for use 180,000
Less: Raw materials inventory, June 30 85,000
Total raw materials used 95,000
Less: indirect materials used 5,000
Direct materials used 90,000
Direct labor 200,000
Factory overhead – applied 180,000
Total manufacturing costs 470,000
Add: work in process inventory, June 1 80,000
Total goods placed into process 550,000
Less: Work in process inventory, June 30 340,000
Cost of Goods manufactured ₱210,000

The income statement will show the following amounts (assume 30% effective income tax rate):
Dainty Manufacturing Company
Income Statement
For the month ended June 30, 2018
Sales ₱360,000
Less: Cost of Goods Sold
Finished goods inventory, June 1 40,000
Total cost of goods manufactured 210,000
Total cost of goods available for sale 250,000
Less: Finished goods inventory, June 30 63,000
Unadjusted cost of goods sold 187,000
Add: Under applied overhead 10,000 197,000
Gross Margin 163,000
 Less: Operating expenses
Selling expenses 50,950
Administrative expenses 33,050 84,000
Operating income 79,000
Less: Income tax 23,700
Net Income ₱55,300

ACCOUNTING TREATMENT FOR UNDER APPLIED OR OVERAPPLIED OVERHEAD

At the end of the period, the amount of overhead applied to production is compared to the
actual overhead incurred. Any variances are reviewed and investigated by management. For
accounting purposes, the overhead variance is treated in one of the two ways:
1. Closed out to cost of goods sold. This method is generally used when the overhead
variances is relatively insignificant and for efficiency reasons. When an entity performs
an objective analysis and calculation of predetermined overhead tare, the applied
overhead is more or less the same as the actual overhead.
To close the under applied overhead:
Debit Credit
Cost of Goods Sold xxx
Factory overhead control xxx

To close the over applied overhead:

Debit Credit
Cost of Goods Sold xxx
Factory overhead control xxx

2. Allocated to work in process, finished goods and cost of goods sold. This method is more
practicable than just closing the variance to cost of goods sold especially if the amount
of under applied or over applied overhead is significant. While it is ideal to allocate the
variance in proportion to the amount of overhead applied in the ending balance of work
in process inventory, finished goods inventory and cost of goods sold during the current
period, most accountants ordinarily use the ending balances of these account for
convenience.
To close the under applied overhead:
Debit Credit
 Work in process inventory xxx
Finished goods inventory xxx
Cost of goods sold xxx
Factory overhead control xxx

To close the over applied overhead:

Debit Credit
Factory overhead control xxx
Work in process inventory xxx
Finished goods inventory xxx
Cost of goods sold xxx

Example 1:
Assume the following cost data:
Actual manufacturing overhead ₱690,000
Applied overhead 600,000
Cost of goods sold 900,000
Finished goods 540,000
Work in process 360,000

Using the date under applied overhead was ₱90,000. The entry to close the under applied
overhead to inventories and cost of goods is:
Debit Credit
Work in process inventory (90/180 x 90,000) 45,000
Finished goods inventory (54/180 x 90,000) 27,000
Cost of goods sold (36/180 x 90,000) 18,000
Factory overhead control 90,000