JOB ORDER COSTING

Product costing systems are used to assign production or performance costs to

products or services for internal and external nancial reporting purposes
cost of generating information < benets

2 Principal product costing

Job order - hetero and custom outputs
-more expensive
- used by companies that make relatively small quantities of distinct products
or perform unique services that conform to specications designated by the
purchaser
* job is synonymous with client, engagement, project, or contract
Process - output in batch or continuous production
- large quantities of homogeneous goods
Methods of Product Costing
Before product cost can be computed, a determination must be made about the
cost accumulation system - cost object and method of assigning costs to production
valuation method - how product costs are measured.

Cost Accumulation Systems

product costing is concerned with three things:
cost identication
cost measurement
product cost assignment
Valuation Methods

Actual cost systems - Service businesses that have few customers and/or low
volume may use an actual cost system.
Normal - POH rate = actual OH. predetermined rates provide acceptable and useful
costs
Standard - may employ standards (or predetermined benchmarks) for costs to be
incurred and/or quantities to be used. standards can then be used to plan for future
activities and cost incurrence and to value inventories. allows companies to quickly
recognize deviations or variances from expected production costs and to correct
problems resulting from excess usage and/or costs.
Job Order Costing System
- each job is a unique cost entity or cost object.
-costs of di erent jobs are maintained in separate subsidiary ledger accounts and
are not added together in the ledger.
- provide information important to managing pro tability and setting prices for
output.
Custom manufacturers typically price their goods using two methods.
cost-plus contract - cover all direct costs and some indirect costs and to generate an
acceptable pro t margin.
competitive bidding technique - must accurately estimate the costs of making the
unique products associated with each contract; otherwise, the company can incur
signi cant losses when actual costs exceed those that were estimated during the
bidding process.

intranet is a restricted network for sharing information and delivering data from
corporate databases to local area network (LAN) desktops.
three stages of production
contracted for but not yet started
in process
completed

Job Order Cost Sheet - source document that provides virtually all nancial
information about a particular job.
- job number, a description of the job, customer identi cation, various
scheduling information, delivery instructions, and contract price as well as details
regarding actual costs for direct material, direct labor, and applied overhead

material requisition form - is prepared so material can be released from inventory,

or purchased, and sent to the production area. indicates the types and quantities of
material to be issued to production or used to perform a service job.

employee time sheet indicates the jobs on which each employee worked and the
direct labor time consumed

Job Order Costing Using Standard Costs

Use of standard costs for direct material and direct labor can minimize the e ects
of such cost uctuations in the same way that predetermined rates do for overhead
costs.
variance - dierence between the actual quantity, price, or rate and its related
standard
* Standards can be used in a job order system only if a company typically engages
in jobs that produce fairly similar products.
Material: 50 ($27 actual $30 standard) 50 $3 $150 price variance (favorable)
Labor: 80 hours ($19 actual $18 standard) 80 $1 $80 rate variance (unfavorable)
Th e price variance is favorable because less was expended than what was
expected. Th e rate variance is unfavorable because the amount spent is greater
than what was expected.
One primary di erence between job order costing for manufacturing and service
organizations is that most service organizations use a fairly insigni cant amount of
materials relative to the value of labor for each job

Implementing the job order costing system provided Boudreaux with the following
bene ts:

better cost control over the jobs that were in process better inventory
valuations for nancial statements

better information with which to prevent part stockouts (not having parts in
inventory) and production stoppages

a better ability to make certain that materials acquired for a particular

custom boat were actually used for that job
more up-to-date information to judge whether to accept additional work and
to determine when current work would be completed an informed means by
which to understand how costs were incurred on jobs
to estimate costs that would be incurred on future jobs, and to justify price
quotes on future jobs

Product and Material Losses in Job Order Costing

shrinkage - production processes may result in losses of direct material or partially
completed products. Some losses, such as evaporation, leakage, or oxidation, are
inherent in the manufacturing process. such reductions.
Defects - if they can be economically reworked and sold
Spoilage - if such rework cannot be performed.

Rework cost is a product or period cost depending on whether the rework relates to
defective production that is considered to be normal or abnormal.
normal loss of units falls within a tolerance level that is expected during production.
abnormal loss - any loss in excess of the set expectation level.
Is a loss generally incurred for most jobs or is it speci cally identi ed with a
particular job? Is the loss considered normal or abnormal?
Generally Anticipated on All Jobs
OH rate should include an amount for the net loss, which equals the cost of
defective or spoiled work minus any estimated disposal value of that work.
Th is approach assumes that losses are naturally inherent and unavoidable in the
production of good.
Net loss = defective or spoiled work disposal value

Disposal Value of Defective Work 22

Manufacturing Overhead Control 35
Work in Process InventoryJob #38 57
To record disposal value of defective work incurred on Job #38 for Husserl Co.

Th e estimated cost of spoilage was originally included when calculating the

predetermined OH rate. Th erefore, as defects or spoilage occur, the disposal value
of nonstandard work is (if salable) included in Inventory, and the net cost of the
normal, nonstandard work is charged to the Manufacturing Overhead Control
account as is any other actual overhead cost.
Specifically Identified with a Particular Job
If losses are not generally anticipated but are occasionally experienced on speci c
jobs because of job-related characteristics, the estimated cost should not be
included in setting the predetermined OH rate. Because the defect/spoilage cost
attaches to the job, disposal value of such goods reduces the cost of the job that
created those goods. If no disposal value exists for the defective/spoiled goods, the
cost of those lost units remains with the job that caused the defect or spoilage.
Disposal Value of Defective Work 22
Work in Process InventoryJob #38 22
To record disposal value of defective work incurred on Job #38 for
Husserl Co.
Abnormal Spoilage
Th e cost of all abnormal losses (net of any disposal value) should be written o as
a period cost. Th is treatment is justi ed because asset cost should include only
those costs that are necessary to acquire or produce inventory; unnecessary costs
should be written o in the period in which they are incurred. Abnormal losses are
not necessary to produce good units and the cost is avoidable in the future. Th is
cost should be separately identi ed and the cause investigated to determine how
to prevent future similar occurrences.
Disposal Value of Defective Work 45
Manufacturing Overhead Control 120
Loss from Abnormal Spoilage 33
Work in Process InventoryJob #135 198
To record reassignment of cost of defective and spoiled work on Job #135