University of San Jose – Recoletos

School of Business and Management

Accountancy and Finance Department

Cost Accounting and Control

Mr. Jun Brian Alenton, CPA, CMA, CAT, RCA, MICB, MBA

Module 5
Cost Systems and Accumulation: Job Order Costing

Introduction
A job-order costing system accumulates manufacturing costs by job. Such a system is used when
separate jobs are identifiable, such as a furniture manufacturer, and is intended for products that are
manufactured within a department or cost center are heterogeneous or dissimilar, special or custom-
made products. This system also works for products manufactured individually or in distinct lots or
batches.
A job order costing system provides a separate record for the accumulated cost of each job through
job order cost sheets. Unit costs in a job order system are calculated by dividing the total manufacturing
cost of the job by the number of units produced in the job.
The module covers the following major topics:
A. The overview of the cost valuation methods
B. The two basic cost accumulation systems
C. Accounting for raw materials, labor and overhead
D. The manufacturing process and cost accumulation flow
E. Preparation of the Cost of goods manufactured
F. Accounting for the overhead variance
G. Accounting for the lost units

Cost Valuation Methods

Three commonly used ways to measure the costs associated with production are:
a. Actual cost system. This valuation method accumulates all product costs at their actual
amounts (actual materials, actual labor, and actual overhead). The advantage of this method is
that it eases the accumulation and accounting of costs because it only accounts for the actual
costs. However, it is rarely used because it does not provide accurate cost information on a
timely basis. Although direct materials and direct labor can be traced to the final product,
overhead does not have a direct relationship.
b. Normal costing. This valuation method accumulates product cost using actual materials, actual
labor, and applied overhead using a predetermined overhead rate is widely used. While direct
materials and direct labor are actual costs, overhead is estimated. A predetermined, or
estimated, overhead rate is used to assign overhead to the products produced throughout the
year.
c. Standard costing. This valuation method accumulates product costs using unit norms or
standards developed through careful evaluation and engineering estimates. Standard costs are
developed for direct material, direct labor, quantities and/or costs. Overhead is applied to
production using a predetermined rate that is considered the standard. This system allows
companies to quickly recognize variances from expected production costs and to correct
problems from excess usage and/or costs.

A comparison of costs used for actual costing versus normal costing follows:

Standard
Actual Costing Normal Costing
Costing
Direct materials Actual cost Actual cost Standard Cost
Direct labor Actual cost Actual cost Standard Cost
Estimated cost using a
Factory Overhead Actual cost Standard Cost
predetermined overhead rate

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Cost Accumulation Systems
a. A job order costing system is the product costing system used by entities that make
(perform) relatively small quantities or distinct batches of identifiable, unique products
(services).
b. A process costing system is the product costing system used by entities that produce
large quantities of homogeneous goods.
Job Order Costing System
In a job order costing system, product costing is concerned with:
a. cost identification;
b. cost measurement; and
c. product cost assignment.
1. Costs are accumulated individually by job in a job order product costing system.
a. A job is a single unit or group of like units identifiable as being produced to distinct
customer specifications.
b. Each job is treated as a unique cost object.
c. Direct material, direct labor, and overhead costs are accumulated for each job.
d. The normal costing method of valuation is used since actual direct material and direct labor
costs are fairly easy to identify and are associated with a particular job.
e. Overhead costs are not usually traceable to specific jobs and must be allocated to
production.
2. The output of a given job can be a single unit or multiple similar or dissimilar units.
a. The total accumulated job cost is averaged over the number of units produced to
determine a per unit cost if all the units within the batch are similar.
b. No per unit cost can be determined if the output consists of dissimilar units for which
individual cost information has not been accumulated.

KEEPING TRACK OF JOB COSTS WITH SOURCE DOCUMENTS

It is important to understand the different documents that are used in a job order system. The
document for collecting all costs that belong to a job is the job order cost sheet, which identifies the
job and collects the materials, labor, and overhead costs for the job. It serves as a subsidiary ledger to
the work-in-process account. The total of the costs for all job-cost sheets must equal the total for the
controlling work-in-process account.

The following are the source documents:

A. Job-Order Cost Sheet
A job-order cost sheet is prepared for every job; it used to accumulate the manufacturing costs
(direct materials, direct labor, and overhead) associated with a job.
Job-Order Cost Sheet
Direct materials Actual cost
Direct labor Actual cost
Applied Predetermined overhead rate × activity used on the job
overhead
Total cost Total cost of the job
Number of units Divide by the number of units in the job
Unit cost Unit cost of the job

The job-order cost sheets are the subsidiary ledgers to the Work-in-Process account.
The total costs contained in all job cost sheets for uncompleted jobs should reconcile to the Work in
Process Inventory control account balance in the general ledger. Direct material information is gathered
from the material requisition forms, while direct labor information is found on employee time sheets or
employee labor tickets. Overhead is applied to production using predetermined overhead rates.

B. Materials Requisitions
The cost of materials is traced to each job through the use of a materials requisition form. When
materials are issued to production, the materials requisition form identifies the job, the quantity

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and type of materials, and the cost of materials. This document is the source document for assigning
materials costs to individual job orders. Warehouse personnel are released from further responsibility
for issued materials, and responsibility is assigned to the department that issued the requisition.
Material costs are released from Raw Materials Inventory—materials that are direct to the job are sent
to Work in Process Inventory, while indirect materials are assigned to the Manufacturing Overhead
account. Therefore, the journal entry will be as follows:
Work in Process Inventory (for direct materials) XXX
Manufacturing Overhead (for indirect materials) XXX
Raw Materials Inventory XXX

Completed material requisition forms provide the ability to verify the flow of materials from the
warehouse to the department and job that received the materials. They are usually prenumbered and
come in multi-copy sets so that completed copies can be maintained in the warehouse and the
department for each job.

Accounting for Raw Materials

A company’s inventory records should show the quantity of each kind of material on hand and its cost.
Fortunately, in the actual practice, most manufacturing companies integrate their materials accounting
into their computerized systems for better control and monitoring.

C. Job Time Tickets/ Time Sheets

Job time tickets are the source documents used to assign labor costs to jobs. When direct laborers
work on a job, they fill out a time ticket indicating the time spent on the job, along with their wage
rate. Knowledge of employee labor rates is required in transferring employee time sheet information
to the job order cost sheet. Time sheet information is also used for payroll preparation; the journal
entry to record the information is:

Work in Process Inventory (for direct labor) XXX

Manufacturing Overhead (for indirect labor) XXX
Salaries and Wages Payable XXX

If total actual labor costs differ significantly from the original estimate, the manager responsible for
labor cost control will have to explain the difference. The number of hours worked on a cost plus
contract may also be audited by the buyer as with government contracts or other buyers. In addition,
time sheets provide information on overtime hours.

D. Accounting for Actual Overhead Costs

Actual overhead costs are recorded in the Overhead Control account.
Actual overhead costs include:
1. indirect materials
2. indirect labor, overtime premium, and idle time
3. invoices received from outside suppliers for utilities, rent, repairs, property taxes, etc.
4. internal transfers of costs, such as depreciation and the expiration of prepaid insurance.
Overhead Work in Process
Actual overhead Applied overhead
costs
(Debit) (Credit)
Applied overhead

E. Other Source Documents

Job-order cost sheets for jobs that are complete but not yet sold serve as subsidiary ledgers for Finished
Goods inventory.
Job-order cost sheets for unfinished jobs serve as subsidiary ledgers for Work in Process inventory.

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F. Accounting for Cost of Goods Sold
If the overhead variance is immaterial, it is treated as an adjustment to cost of goods sold at the end
of the year.
Normal cost of goods sold is the amount of cost of goods sold before adjustment for an overhead
variance.
Adjusted cost of goods sold is normal cost of goods sold after adjustment for an overhead variance.
G. Accounting for Nonmanufacturing Costs
Selling and general administrative costs (nonmanufacturing costs) are considered period costs and are
not assigned to the product. Selling and administrative expenses appear on the income statement.

H. Completion of Production
Job cost sheets for completed jobs are removed from the Work in Process Inventory subsidiary ledger
and are transferred to the Finished Goods Inventory file and serve as a subsidiary ledger for that
account.
Finished Goods Inventory XXX
Work in Process Inventory XXX
To transfer completed goods to FG inventory

The cost shown on the job order cost sheet is transferred to Cost of Goods Sold when goods are sold.
Cost of Goods Sold XXX
Finished Goods Inventory XXX
To transfer goods sold from FG inventory to expense

Job cost sheets for sold jobs are kept in a company’s permanent files, providing management with a
historical summary about total costs and, if appropriate, the cost per finished unit for a given job.

MANUFACTURING COST FLOW

The following diagram summarizes the flow of manufacturing cost.

Product and Material Losses in Job Order Costing

Product material losses in job order costing.

The production processes may result in losses of materials or partially completed products
Evaporation, leakage, or oxidation is inherent in the manufacturing process; such reductions are called
shrinkage. Defects are production process errors that cause a loss of units through rejection at
inspection for failure to meet appropriate quality standards or designated product specifications that
can be economically reworked and later sold. Spoilage is production process errors that cause a loss
of units through rejection at inspection for failure to meet appropriate quality standards or designated
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product specifications that cannot be economically reworked. Normal loss is a loss of units that falls
within a tolerance level that is expected during production. Normal losses are part of the cost of the
job, while abnormal losses are written off as a period cost. Abnormal loss is a loss of units in excess
of expected levels (normal loss) during production. Normal losses are part of the cost of the job, while
abnormal losses are written off as a period cost.

Generally anticipated on all jobs.

a. If a normal loss is generally anticipated on all jobs, the predetermined overhead application
rate should include an amount for all net cost of the loss, which is equal to the cost of
defective or spoiled work less the estimated disposal value, if any of that work.
b. This approach assumes that such losses are naturally inherent or unavoidable in the
production of goods and products and the estimated loss should be allocated to the goods
produced.

Specifically identified with a particular job.

If defects or spoilages are not generally anticipated but are occasionally experienced on specific jobs
because of job related characteristics, the estimated cost should not be included in setting a
predetermined overhead application rate.
Because the defects/spoilage cost attaches to the job, disposal value of such goods reduces the costs
of the job that created those goods.
The cost of the lost units remains with the job that caused the defects/spoilage.
Disposal value of defective work XXX
Work in Process Inventory – Job #38 XXX
To record disposal value of defective work incurred on Job #38 for Hussell Company

Abnormal spoilage.
The cost of abnormal losses should be written off as a period cost.
Abnormal losses should be separately identified and investigated to prevent future recurrences.

In the following journal entry, the first debit represents the defective inventory’s disposal value. The
debit to Manufacturing Overhead is for the net cost of normal spoilage. The debit to Loss from
Abnormal Spoilage is the net cost of spoilage that was unnecessary and unanticipated in setting the
predetermined application rate.

Disposal Value of Defective Work XXX

Manufacturing Overhead XXX
Loss from Abnormal Spoilage XXX
Work in Process Inventory - Job #135 XXX
To record reassignment of cost of defective and spoiled work on job #135

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PRACTICE PROBLEMS

Problem 1
The Sophomore MANUFACTURING COMPANY had the following inventories on August 1, 2020.
Finished goods P75,000
Work in process 55,500
Materials 66,000

The work in process account controls two jobs

Job 401 Job 402
Materials P9,000 P16,800
Labor 7,500 9,000
Factory overhead 6,000 7,200
P22,500 P33,000

The following information pertains to August operations:

1. Materials purchased on account, P84,000.
2. Materials issued for production, P75,000. Of this amount, P9,000 was for indirect materials; the
difference was distributed: P16,500 to Job 401; P21,000 to Job 402; and P28,500 to Job 403.
3. Materials returned to the warehouse from the factory, P2,400, of which P900 was for indirect
materials, the balance from Job 403.
4. Materials returned to vendors, P3,000.
5. Payroll after deducting P9,075 for withholding taxes, P4,800 for SSS Premiums, P1,125 for
Philhealth, and P3,600 for Pag-ibig, was P98,400. The payroll due the employees was paid during
the month.
6. The payroll was distributed as follows: P31,200 to Job 401; P37,500 to Job 402, P31,500 to Job
403 and the balance represents indirect labor.
7. The share of the employer for payroll was recorded – P6,000 for SSS Premiums, P1,125 for
Philhealth Contributions, and P3,600 for Pag-ibig Funds.
8. Factory overhead, other than any previously mentioned, amounted to P45,000. Included in this
figure were P9,000 for depreciation of factory building and equipment, and P 2,850 for expired
insurance on the factory. The remaining overhead was unpaid at the end of August.
9. Factory overhead was applied to production at the rate of 80% of direct labor cost.
10. Jobs 401 and 402 were completed and transferred to the finished goods warehouse.
11. Job 401 was shipped and billed at a gross profit of 40% of the cost of goods sold.
12. Cash collections from accounts receivable during August were P105,000.
13. Variance, if any, was considered as immaterial.
Requirements:
1. Journal entries to record the above transactions.
2. Cost of goods sold statement.

Problem 2
CEBU MANUFACTURING COMPANY. charges factory overhead to production at a predetermined rate
based on direct labor cost. The rate has remained the same for the last two years. The following
data are given on its production:
Job Job Job Job Total
No. 1 No. 2 No. 3 No. 4
Work in process - Jan. 1
Direct materials P 8,000 P15,000 P23,000
Direct labor 3,200 6,500 9,700
Applied FO 1,920 3,900 5,820
Cost added – January
Direct materials 3,000 8,500 18,000 9,500 39,000
Direct labor 1,200 3,150 7,500 2,700 14,550

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Job Nos. 1, 2, and 3 were completed during the month. Job Nos. 1 and 3 were sold at 180% of cost.
The balance of the factory overhead control account is P 11,640. The variance is material and is
allocated between cost of goods sold, finished goods, and work in process.
Required:
1. Predetermined factory overhead rate
2. The cost of the January 1 work in process inventory
3. The amount of factory overhead applied to production
4. The cost of goods completed and transferred to finished goods inventory
5. The cost of goods sold (normal)
6. The cost of goods sold (actual)
7. The cost of the finished goods inventory end.
8. The cost of the work in process inventory end.

Multiple Choice
The following information pertains to Surrey Co., manufacturing process
2020
March 1 March 31
Inventories
Direct materials P 36,000 P 30,000
Work in process 18,000 12,000
Finished goods 54,000 72,000
Additional information for the month of March:
Direct materials purchased 84,000
Direct labor payroll 60,000
Direct labor rate per hour 7.50
Factory overhead rate per direct labor hour 10.00
4. How much must be the prime cost, conversion cost, and cost of goods manufactured for the month?
Prime cost Conversion cost Cost of goods mftd
a. P90,000 P60,000 P236,000
b. 150,000 140,000 296,000
c. 144,000 170,000 230,000
d. 150,000 140,000 236,000

Adams Company uses a job order costing system and the following information is available from the
records. The company has 3 jobs in process: 501, 502 and 503.
Raw materials used P120,000
Direct labor per hour P8.50
Overhead applied based on direct labor cost 120%
Direct material was requisitioned as follows for each job, respectively: 30%, 25%, and 25%, the
balance of the requisitions were considered indirect. Direct labor hours per job are 2,500, 3,100, and
4,200, respectively. Indirect labor is P33,000. Other actual overhead costs totaled P 36,000.

5. What is the total amount of actual factory overhead?

a. P 36,000 c. P 93,000
b. P 69,000 d. P 99,960

6. If Job 503 is completed and transferred, how much is the total cost transferred to Finished Goods
Inventory?
a. P 96,700 c. P 108,540
b. P 99,020 d. P 139,540

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Miracle Company provides you with the following information
Jan. 1, 2020 Jan. 31, 2020
Inventories:
Materials P ? P50,000
Work in process 80,000 95,000
Finished goods 60,000 78,000
January
transactions:
Purchases of materials, P 46,000
Factory overhead (75% of direct labor cost) P 63,000
Selling and adm. expenses (12.5% of sales, P 25,000
Factory overhead control, P 62,800
Net income for January, P 25,200
Indirect materials used, P 1,000
7. Compute for materials inventory, Jan. 1, cost of goods manufactured and cost of goods sold
(normal) for the month of January, 2020.
Materials Cost of goods Cost of goods
Invty. Jan. 1 manufactured sold
a. P 40,000 P168,200 P150,200
b. 40,200 168,000 150,000
c. 40,800 167,800 149,800
d. 41,000 168,000 150,000

Work in process of Alonzo Corporation on July 1, 2020 (per general ledger) is P 22,800.
Per cost sheets:
Job 101 Job 102
Direct materials P6,000 P8,000
Direct labor 3,000 2,500

Amount charged to Work in process for July, 2020

Job 101 Job 102 Job 103 Job 104
Direct materials P 3,000 P 2,000 P6,000 P4,500
Direct labor 1,000 1,500 2,600 2,000
Factory overhead is applied to production based on direct labor cost. Jobs 101 and 103 are completed
during the month
8. Cost of goods put into process must be:
a. P 42,100 c. P 45,400
b. P 26,860 d. P 49,660

9. The cost of goods manufactured for the month of July is

a. P 21.600 c. P 25,560
b. P 15,400 d. P 31,800

Marco Corporation has a job order cost system. The following debits (credits) appeared in the general
ledger account work-in-process for the month of September, 2020:
September 1 Balance P 12,000
September 30, DM 40,000
September 30, DL 30,000
September 30, FO 27,000
Sept. 30, to FG (100,000)
Marco applies overhead to production at a predetermined rate of 90% based on the direct labor cost.
Job no. 232, the only job still in process at the end of September, 2020, has been charged with factory
overhead of P2,250.
10. What was the amount of direct materials charged to Job 232 as at end of September, 2020?
a. P2,250 c. P4,250
b. P2,500 d. P9,000

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Justine Company budgeted total variable overhead costs at P180,000 for the current period. In addition,
they budgeted costs for factory rent at P215,000, costs for depreciation on office equipment at P
12,000, costs for office rent at P92,000, and costs for depreciation of factory equipment at P 38,000.
All these costs were based upon estimated machine hours of 80,000. Actual factory overhead for the
period amounted to P387,875 and machine hours used totaled 74,000 hours.
11. What was the over or underapplied factory overhead for the period?
a. P12,650 overapplied c. P 108,850 overapplied
b. P12,650 underapplied d. P108,850 underapplied

Job No. 41 (consisting of 5,000 units) was started in September, 2020 and it is special in nature because
of its strict specifications. Factory overhead is charged at P 0.80 per unit and includes a P.05 provision
for defective work. The prime costs incurred in September are: Direct materials, P 9,000 and Direct
labor, P 4,800. Upon inspection, 80 units were found with imperfections and required the following
reprocessing costs, Direct materials, P 1,500 and direct labor, P 800.

12. The unit cost of Job No. 41, upon completion, is:
a. P 4.10 c. P 3.98
b. P 4.05 d. P 3.62

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