Module 1: 

Cost Accumulation
Lesson 4: Job Order Costing
LEARNING OUTCOMES:
At the end of this lesson you should be able to calculate manufacturing costs in accordance
with the job order costing system.

TIME FRAME: 180 MINUTES

INTRODUCTION
Job order costing and process costing are the primary cost accumulation systems in
cost accounting. This lesson will focus on job order costing and we will look into the
distinguishing characteristics as well as the primary supporting documents of this
system. Take note that these accumulation systems may use various cost valuation
methods; actual costing, normal costing and standard costing. This lesson however
will focus on the application of actual and normal costing valuation methods in the job order
system as there will be a separate discussion on standard costing.
ACTIVITY
Scenario: Mitchell Manufacturing is a small company that produces
specialty bicycles. Each bicycle is made to order per customer specifications.
Orders are taken by the customer service department, and handed off to an
engineering support person to configure the job. A parts list is made and then
the job is moved to production. Every Monday morning, the engineering
group, manufacturing supervisor and accounting manager meet to go over the orders for the
week.

A job number is assigned to each order. Then a bill of materials, or list of the direct materials
needed for each bicycle is created. From this list, the purchasing department can get all of the
items in order, using a materials requisition form.

The accounting department needs to ensure that the job cost sheet is generated, that it
includes all of the materials for the job, and that the labor involved and manufacturing
overhead is added As the job goes through the manufacturing process, each step in the
process is added to the job cost sheet which accumulates all of the costs involved in the
building of this one job. When the job is completed, the accounting department has all of the
information necessary to total the costs involved in making this bike, thus knowing whether
the initial price quoted was accurate.

(adapted)
ANALYSIS
Illustrate the scenario above through a process flowchart.

Is your flowchart similar to what is presented below?

The scenario indicates that the company is producing bicycles to order and based on customer
specifications. Therefore, the best accumulation cost system is the job order system.

ABSTRACTION
So what exactly is the job order cost system?

Job Order Costing is a system for assigning and accumulating manufacturing costs of an
individual unit of output. The job order costing system is used when the various items
produced are sufficiently different from each other and each has a significant cost
(Averkamp. 2020). As such it requires the use of a job order cost sheet that tracks the flow of
direct materials, direct labor and applied and actual factory overhead costs in each job order.
Further, the job order cost generally uses normal costing where factory overhead costs are
estimated using a predetermined overhead rate and subsequently compared to the actual
overhead cost at the end of the period to determine any over or under application. From the
aforementioned, we can conclude that the distinguishing characteristics of job order costing
are as follows:

● Costs are accumulated by job

● A unique cost will be determined for each job considering that each job are different
 ● Requires a job order cost sheet for each job

The following are the essential documents needed for each job order;

● Job order cost sheets: it contains financial information about the job. This document
supports inventory accounts such as WIP, inventory for jobs not yet completed and
FG, inventory for jobs already completed and yet to be delivered. Further, this
document may serve as a ledger for the cost of goods sold for orders completed and
delivered. Example of this document is presented below:

● Material Requisition Forms: this document supports the issuance of raw materials
to WIP inventory to ensure that DM costs are included in the job order cost sheet of a
specific job. Example:
 ● Employee Time Sheets: The record of time spent and worked by the employee on a
specific job. This document is maintained to ensure that direct labor will be included
in the job order cost sheet. Example

How to accumulate cost in job order costing?

Step 1: DM and DL are included in the job cost sheet

Step 2: Indirect Materials and Labor as well as other overhead are recorded using an
overhead control accounts

Step 3: Overhead is applied using a predetermined overhead rate at the completion of the job.

Step 4: Jobs and their costs are transferred to another departments and to finished goods
inventory if completed

Step 5: Deliver the finished goods and remove the cost from the finished goods inventory and
transfer to cost of goods sold.

Illustration: Let’s do a practice

On January 2, Jennifer Newsprint Manufacturing purchased 5 rolls of paper on account at

P6,000 per roll for use in the production process. On January 5, 4 rolls of this paper were
issued to Job 01 in the printing department. The printing department records P35,000 in direct
labor and P50,000 factory overhead to Job 01. On January 8, the printing department
transfers Job 01 to the folding department. The folding department applies P25,000 in direct
labor and factory overhead at 120% of direct labor to Job 01. The Job 01 was transferred to
finished goods inventory on January 9.

To record the purchase of paper to raw materials inventory the journal entry would be;

Raw Materials Inventory (5 x P6,000) P30,000

Accounts Payable P30,000

To record the transfer of raw materials to work in process, the application of direct labor and
manufacturing overhead to Job 01 while in the printing department the journal entry would
be;

Work in Process- Job 01- Printing (4 x P6,000) P24,000

Raw Materials Inventory P24,000

Work in process-Job 01- Printing P35,000

Wages Payable/Cash P35,000

Factory Overhead Control P50,000

Various Accounts P50,000

This JE is to record the actual FOH in the printing dept.

Work in process-Job 01- Printing P50,000

Factory Overhead Control P50,000

Notice that the printing department uses the actual costs of factory overhead rather than a
predetermined rate. This is because the department uses actual costing valuation.

To record the transfer of Job 01 to the folding department at actual cost, the journal entry
would be:

Work in Process- Job 01- Folding P109,000

Work in Process- Job 01- Printing P109,000

Notice that the total amount transferred represents the accumulated cost of DM, DL and FOH
in the printing department for the job.

To record the application of direct labor and overhead in the folding department, the entry
would be:
Work in process-Job 01- Folding P25,000

Wages Payable/Cash P25,000

Work in Process-Job 01-Folding P30,000

Applied FOH (P25,000 x 120%) P30,000

Notice that the folding department uses a predetermined rate to estimate the factory overhead
for the job. Hence, the use of normal costing valuation. This is normally the case whenever it
is impractical to identify the actual FOH. Therefore, at the end of the period the applied FOH
will be compared to the actual FOH to assess any over/under application of FOH. Any
resulting over/under application will be charged to and against the cost of goods sold account
for underapplied and overapplied, respectively.

To record the transfer of Job 01 to finished goods inventory upon completion, the journal
entry would be:

Finished Goods Inventory P164,000

Work in Process-Job 01-Folding P164,000

When you prepare a T- account for WIP-Job 01-Folding, you will get an ending balance of
P164,000. Such cost will be transferred to Finished goods Inventory when the job is done.

When delivery of the completed job is done, a journal entry to record the transfer of cost from
finished goods inventory account to cost of goods sold is necessary:

Cost of Goods Sold P164,000

Finished Goods Inventory P164,000

At this point, you need to gain mastery of the concepts just presented. Proceed to the next
section for further application.
APPLICATION
Instruction: Answer must be handwritten.
Refer to the problem set below:
The following costs were incurred in the February 2020 by Tigasin Corp., which produces
customized steel storage bins:

Direct Material purchased on account P80,000

Direct Material used for Jobs:

Job # 143 48,000

Job # 144 11,200

Other jobs 57,600

Direct Labor Costs for the month

Job # 143 14,400

Job # 144 18,000

Other jobs 23,600

Actual Overhead Cost for February 224,000

The balance in WIP inventory on February was P20,800 which consisted of P13,200 for Job
#143 and P7,600 for Job #144. The February beginning balance of Direct Materials inventory
was P48,600. Overhead is applied to jobs at a rate of P8.95 per peso of direct labor cost. Job
#143 was completed and transferred to finished goods inventory during February. Job #143
was delivered to the customer at the agreed price also in February.

In a separate paper,

1. Prepare journal entries to record the preceding information.

2. Determine the February ending balance in WIP inventory. How much of this balance
relates to Job # 144?
3. Determine any over or underapplied in factory overhead.
CLOSURE
Congratulations! You’re done with your fourth lesson in this module. You
may now proceed to the next lesson which shall cover topics on process
costing.