4B CHAPTER 3 JOB ORDER COSTING t Accounting System: > A cost accounting system (also called product costing system or costing system) is a framework used by firms to estimate the cost of their products for profitability analysis, inventory valuation and cost control > Estimating the accurate cost of products is critical for profitable operations. A firm must know which products are profitable and which ones are not, and this can be ascertained only when it has estimated the correct cost of the product. © There are two main cost accounting systems: the job order costing and the process costing, i. Job order costing ii, Process costing Job order costing is a cost accounting system that accumulates manufacturing costs separately for cach job. It is appropriate for firms that are engaged in production of unique products , special orders and customer specification. For example, it is the costing accounting system most appropriate Software house. Job Order Costing Characteri ‘© Related to a customer specific order. ‘+ Assigning a unique job code. ‘© Cost accumulated and preparing job order cost sheet, Basic features of Job Costing ‘+ Each job is treated as a cost unit ‘+ Allcosts are accumulated and ascertained for each job. * Each job is unique. ‘+ Each job is executed as per customer's specifications. ‘+ A separate job cost sheet or job card is used for each job and is assigned a certain number by which the job is identified. in which industries job costing is applied Job Costing is applied in those industries where the goods are manufactured or services are rendered against specific orders as per customer's specifications. It is generally applied in —Engineering industries Construction industries Ship — Building industries Furniture ~ making industries Automobiles service indus Repair Shops industries Advantages of Job order Costing Job costing enables the management To know a detailed analysis of costs of material, labour and overhead charged to each job. To ascertain profit or loss made on each job. To estimate the costs and profitability of similar jobs to be taken up in future. To control operational ine‘ficiency by comparing the actual costs with the To identify jobs where waste, scrap, spoilage and defective occurred and take corrective action against the responsible person or department. mated cost. Process Costing Process costing is a cost accounting system that accumulates manufacturing costs separately for cach process. It is appropriate for products whose production is @ process involving different departments and costs flow from one department to another. For example, it is the cost accounting system used by Textile Unit, Example of Job and Process Costing Software House. ab Order Costing Job Job Job 1L-W 666-S 555-F Direct Material Cost Direct Labor Cost FOH applied Total Production Cost Selling & Admin Overhead Total Cost Charge to job Selling Price Profit LossILLUSTRATION: A furniture Mart received an order to manufacture furniture for a school the order wa job code FS-6. FS-6 Job was priced at Rs 400,000 and selling & Admin cost allocated to the FS-6 Job was 10% of selling price. Direct Material Cost: sssigned a Date Requisition No. Cost March 05 978 25,000 March 15 1060 50,000 March 25 1100 40,000 Direct Labor Cost Date Hours Rate ‘Amount March 0S 400 50 20,000 March 15 400 50 20,000 March 25 200 50 10,000 50,000 F.O.H Applied: F.O.H cost is applied at Rs. 180 per Direct Labor hour. Direct Labor Hours = 400 + 400 + 200= 1000 Direct Labor hours x O.A.R (Overhead absorption rate) 1000 x 180 = 180,000 Job Order Cost Sheet: ‘Amount Direct Material 115,000 Direct Labor 50,000 F.O.H applied 180,000 Total Production Cost 345,000 Selling& admin overhead 40,000 Total cost charge to job 385,000 Selling price 400,000, Profit 15,000Date Particulars Debit Credit March — | W.LP(FS-6) 117,000 05 Material 25,000 Labor 20,000 FOH Applied (400 x 180) 72,000 March | WLP (FS-6) 142,000 15 Material 50,000 Labor 20,000 FOH Applied (400 x 180) 72,000 March | WLP (FS-6) 86,000 25 Material 40,000 Labor 10,000 FOH Applied (200 x 180) 36,000 March | Cost of jobs completed (FS-6) 345,000 31 wip 345,000 March | Cost of jobs completed (F-6) 40,000 31 Selling & Admin overhead 40,000 March | Income Statement 385,000 31 Cost of jobs completed 385,000 March | Account Receivable 400,000 31 Sales 400,000 March | Sales 400,000 31 Income Statement 400,000 Ledger Account: W.LP T-Account March 05 Material 25,000 31 JobCompleted 345,000 Payroll 20,000 FOH 72,000 15 Material 50,000 Payroll 20,000 FOH 72,000 25 Material 40,000 Labor 10,000 FOH 36000 345,000 345,000 46a Job Completed T- Account WLP 345,000 | cid 385,000 Selling & Admin 40,000 385,000 385,000 QNNo.1 Zafar and company provide following information for the month of April 2005. 1. Purchase material on account Rs. 65,000 Material requisition for production Rs.40,000 and indirect material issued Rs.3000 Material returned to supplier Rs.500 Payroll total Rs. 120,000, provident fund Rs.6000 and income tax Rs.6000 deducted from the payroll. Payroll consist of Rs.85,000 direct labor and Rs.35,000 indirect labor. Paid Rent of factory Rs.12,000 Recorded depreciation on factory plant Rs.12,000 Other factory overhead incurred Rs.100,000 9. Factory overhead applied 150% of direct labor. 10. Goods completed Rs.200,000 11. Cost of goods sold Rs.165,000 12, Sales price Rs.200,000 Required: Prepare General Journal entries for above transactions. Solution #1 Date Particulars Debit Credit48 QNo.2 Following information has been extracted from costing record of Abdul Engineering works in respect of Job No. 101 Material Rs.5,800 Wages: Department A 100 hours @ Rs.5 per hour Department B 200 hours @ Rs.3 per hour Overhead for the two department are estimated as follows: Variable Overhead Department A Rs.10,000 for 5,000 direct labour hours Department B Rs.30,000 for 10,000 direct labour hours Fixed Overheads: Estimated at Rs.50,000 for 50,000 normal working hours. Required: Calculate the cost of Job No. 101 and calculate the price to be charged so as to given a profit of, 20% on selling price.49 Abdul Engineering works Job Order Cost Sheet QNo.3 Classify these industries with respect to the type of cost accumulation procedure generally used--job order costing or process costing. k, Pianos |. Linoleum ‘m, Leather 4, Breakfast cereal n. Nylon ¢. Paper boxes ©. Baby foods £. Wooden furniture p. Locomotives g Toys and novelties 4q, Office machines equipment h Coke 1. Luggage i. Cooking utensils s. Paint j. Caskets 1. Tires and tubesQNo.4 Forge Machine Works collects its cost data by the job order cost accumulation procedure. For Job 642, the following data are available: Date Direct material Date Direct labor Sept 14 Rs. 1,200 Sept 20 180 brs @Rs.6.207hr Sept 20 Rs. 662 Sept 26 140 brs @ Rs. 7.30/hr Sept 22 Rs. 480 Factory overhead applied at the rate of Rs.3.50 per direct labor hour Required: a) The appropriate information on a job cost sheet. b) The sales price of the job, assuming that it was contracted w ith a markup of 40% of cost. Solution #4 Forge Machine Works Job Onder Cost Sheet QNo.5 The Karachi Company uses job order costing, At the beginning of the May, two jobs were in process: Materials Direct labor Job 369 Rs. 2,000 Rs. 1,000 Job372 Rs. 700 Rs, 300sl Applied factory overhead Rs. 1,500 Rs, 450 ‘There was no inventory of finished goods on Mayl. During the month, Jobs 373, 374, 375, 376, 378, and 379 were started. Materials requisitions for May totaled Rs.13,000, Direct labor cost, Rs.10,000 Actual factory overhead, Rs.16,000, Factory overhead is applied at a rate of 150% of direct labor cost. The only job still in process at the end of May is No. 379, with costs of Rs.1,400 for materials and Rs.900 for direct labor. Job 376, ‘The only finished job on hand at the end of May, has a total cost of Rs.2,000, Required: a) T accounts for work in process, finished goods, cost of goods sold, factory overhead control, and applied factory overhead. b) General journal entries to record: a. Cost of goods manufactured , Cost of goods sold ¢. Closing of over or under applied factory ovethead to cost of goods sold. Solution #5 Karachi Company Ledger Account For the month of MayKarachi Company General Entries For the month of May IF Particular PR [Debit On QNNo.6 Igra inc, provided the following data for January, 19B: Materials and supplies: Inventory, January 1, 19B Rs10,000 Purchases on account 30,000 Labor: Accrued, January 1, 19B 3,000 Paid during January (ignore payroll taxes) 25,000 Factory overhead costs: Supplies (issued from materials) 1,500 Indirect labor 3,500 Depreciation 1,000 Other factory overhead costs (all from outside suppliers on account) 14,500Work in process: Job1 Job? Work in process January 1, 19B Rs. 1,000 Job costs during January, 19B: Direct materials 4,000 Rs.6,000 Direct labor 5,000 8,000 Applied factory overhead 5,000 8,000 Job 1 started in December, 19, finished during January, and sold to a customer for Rs.21,000 cash Job 2 started in January, not yet Job 3 started in January, finished during January, and now in the finished goods inventory awaiting customer's disposition Finished goods inventory January 1, 198. Required: Journal entries, with detail for the respective job orders and factory overhead subsidiary records, to to record the following transactions for the January: 1 2, 3. 4 5. 6, 1, 8 9, Purchase of materials on account. Labor paid, Labor cost distribution, Materials issued Depreciation for the month. Acquisition of other overhead costs on credit. Overhead applied to production Jobs completed and transferred to finished goods Sales revenue, 10. Cost of goods sold. Solution # 6 Job3 Rs.5,000 7,000 7,000 Total Rs. 1,000 15,000 20,000 20,000 Date Particular PRQNo. Hogle Company is a manufacturing firm that uses job order costing system. On January 1, the beginning of its fiscal year, the company’s inventory balances were as follows: Raw materials Rs.20,000 Work in process Rs.15,000 Finished Goods Rs30,000 ‘The company applies overhead cost to jobs on the basis of machine-hours worked. For the current year, the company estimated that it would work 75,000 machine-hours and incur Rs.450,000 in ‘manufacturing overhead cost. The following transactions were recorded for the year Raw materials wer purchased on account, Rs.410,000. Raw materials were requisitioned for use in production, Rs.380,000 (Rs.360,000 direct materials and Rs.20,000 indirect materials). The following costs were incurred for employee services: direct labor, Rs.75,000; indirect labor, Rs.110,000; sales commission, Rs.90,000; and administrative salaries, Rs.20,000. Sales travel costs were Rs.17,000. tility costs in the factory were Rs.43,000. Advertising costs were Rs. 180,000. Depreciation was recorded for the year, 350,000 (80% relates to factory operations, and 20% relates to selling and administrative activities). Insurance expired during the year, Rs.10,000 (70% relates to factory operations, and 30% relates to selling and administrative activities). Manufacturing overhead was applied to production. Due to greater than expected demand for its products, the company worked 80,000 machine-hours during the year.10. Goods costing Rs.9,00,000 to manufacture according to their job cost sheets were completed during the year. 11. Goods were sold on account to customers during the year at a total selling price of Rs.1,500,000. The goods cost Rs.870,000 to manufacture according to their job cost sheets, Required: a) Prepare journal entries to record the preceding transactions, b) Post the entries in (1) above to T-accounts (don't forget to enter the beginning balances in the inventory accounts), ©) Is manufacturing overhead under applied or over applied for the year? Prepare journal entry to close any balance in the manufacturing overhead account to cost of goods sold (COGS). Do not allocate the balance between ending inventories and cost of goods sold (COGS). 4) Prepare an income statement for the year. Solution #7 Date | Particular PR [Debit | Credit (Cr)Accounts Receivable Raw Materials Work in Process Prepaid Insurance Accumulated Depreciation Salaries and Wages Payable nts Payabl Accounts Payable _ Manufacturing Overhead Cost of goods sold Sales Administrative Salary xpense Sales Commis: Expense Depreciation Ex Sales Travel Expense HOGLE COMPANY Income Statement For the Year Ended December 31