Job Order Costing

Job-order costing keeps track of the cost of materials and

labor used on each job and then applies, absorbs, or assigns
some amount of manufacturing overhead to each job.

Job Order Costing

• Wide variety of distinct products are produced each period
• Products are manufactured to order.
• Accumulates costs by job Calculate the Predetermined Overhead Rate (POHR) and
allocate overhead costs
Process Costing
• Homogenous products Valuation Method
• One unit of product is indistinguishable from other units of • Actual
product o Actual direct material
• Accumulates costs by process o Actual direct labor
o Actual overhead
Flow of Product Costs in Job Order Costing
• Normal
o Actual direct material
o Actual direct labor
o Predetermined overhead
• Standard
o Standard direct material
o Standard direct labor
o Standard overhead

The flow of costs – direct materials, direct labor,

manufacturing overhead - parallels the physical flow of the
materials as they are converted into finished goods

1. Manufacturing costs are assigned to Work in Process

2. Cost of completed jobs is transferred to Finished Goods

3. When units are sold, the cost is transferred to Cost of Illustration:

Goods Sold
AMCAR Manufacturing, estimated the following costs. direct
labor cost is the activity base:

Estimated annual costs:

Overhead costs P 420,000
Direct labor costs P 840,000

Solution:

POHR = P 420,000 ÷ P840,000 = 50%.

Overhead applied is P23,200

(P46,400 January direct labor costs x 50%)

and recorded as follows:

Work in Process Inventory 23,200

Manufacturing Overhead 23,200
Example Problem: • Specific to a job
AMCAR Company estimates that annual manufacturing - Applied to the specific job
overhead costs will be P800,000. Estimated annual operating - Include cost less the estimated disposal value
activity bases are: direct labor cost P400,000; direct labor
hours 40,000; and machine hours 100,000. Compute the Abnormal Spoilage
predetermined overhead rate for each activity base. Period cost – includes cost of abnormal loss less
any disposal value.
Solution:
Base Calculation
DL Cost P800,000 ÷ P400,000 = 200%
DL Hours P800,000 ÷ 40,000 = P20/DL hour
Machine Hours P800,000 ÷ 100,000 = P8/Mach hour

PROBLEM 1.
The work in process account of Meyers Company showed:

Accounting for Finished Goods, Sales and Cost of Goods Sold

Direct materials P 60,000
Direct labor 12,000 Materials charged to the one job still in process amounted to
Manufacturing overhead 23,200 $5,000. Factory overhead is applied as a predetermined
Total cost for Job 19 P 95,200 percentage of direct labor cost.

Required: Compute the following:

(1) The amount of direct labor cost in finished goods.
(2) The amount of factory overhead in finished goods.

• Assume that Job 419 was sold for P120,000. SOLUTION

• What are the journal entries?
Accounts Receivable 120,000
Sales Revenue
Cost of Goods Sold 95,200
Finished Goods Inventory
(To record sale of Job 419)
(1) The amount of direct labor in finished goods:
Finished goods $68,000
Materials included in finished goods ( 17,000)
120,000 Direct labor and factory overhead in finished goods $51,000
Let x = direct labor in finished goods
95,200 2.5x = $51,000 direct labor and factory overhead in finished goods
x = $20,400 direct labor in finished goods

Product and Material Losses (2) The amount of factory overhead in finished goods:
• Shrinkage x = $20,400
o Evaporation 1.5x = 1.5($20,400)
o Leakage 1.5x = $30,600 factory overhead in finished goods
o Oxidation
• Production Errors PROBLEM 2
o Defects can be economically reworked Teddy Company is to submit a bid on the production of 5,500
o Spoilage cannot be economically reworked vases. It is estimated that the cost of materials will be $8,500,
and the cost of direct labor will be $12,000. Factory overhead
Normal Loss is applied at 50% of direct labor cost in the Molding
• Normal Loss – Expected during production Department and at $7.50 per direct labor hour in the Finishing
- Include cost when calculating predetermined overhead Department. Of the above direct labor, it is estimated that
application rate 500 direct labor hours at a cost of $4,000 will be required in
- Include cost less the estimated disposal value
Finishing. The company wishes a markup of 100% of its total
production cost. e. Overhead is applied to production based on 110 percent of
Required: Determine the following: direct labor cost.
(1) Estimated cost to produce.
Work-In-Process Inventory 36,410
(2) Estimated prime cost.
Manufacturing Overhead 36,410
(3) Estimated conversion cost.
(4) Bid price.
f. Goods costing $97,600 were completed during the period.
SOLUTION Finished Goods Inventory 97,600
(1) Materials $ 8,500 Work-In-Process Inventory 97,600
Direct labor 12,000
Factory overhead: g. Goods costing $51,320 were sold on account for $77,600.
Molding (50% x $8,000) 4,000
Finishing (500 DLH x $7.50) 3,750 Accounts Receivable 77,600
Estimated cost to produce $ 28,250 Sales 77,600

(2) Materials $ 8,500 Cost of Goods Sold 51,320

Direct labor 12,000 Finished Good Inventory 51,320
Estimated prime cost $ 20,500
2. The Western Corporation began operations on October 1. It
(3) Direct labor $ 12,000 employs a job order costing system. Overhead is charged at
Factory overhead 7,750 a normal rate of $2.50 per direct labor hour. The actual
Estimated conversion cost $ 19,750 operations for the month of October are summarized as
(4) Estimated cost to produce $ 28,250 follows:
Markup ($28,250 x 100%) 28,250 a. Purchases of raw material, 25,000 pieces @ $1.20/piece.
Bid price $ 56,500 b. Material and labor costs charged to production:
Job No: Units Material Direct Labor Cost Direct Labor Hours
Learning Exercises 2 101 10,000 4,000 6,000 3,000
102 8,800 3,600 5,400 2,700
1. Prepare the necessary journal entries from the following
103 16,000 7,000 9,000 4,500
information for Nuzelt Company, which uses a perpetual
104 8,000 3,200 4,800 2,400
inventory system.
105 20,000 8,000 3,600 1,800
a. Purchased raw material on account, $56,700.
c. Actual overhead costs incurred:
Raw Materials Inventory 56,700 Variable 18,500
Accounts Payable 56,700 Fixed 15,000
d. Completed jobs: 101, 102, 103, and 104
b. Requisitioned raw material for production as follows: direct
e. Sales-$105,000. All units produced on Jobs 101, 102, and
material-80 percent of purchases; indirect material-15 percent
103 were sold.
of purchases.

Work-In-Process Inventory 45,360 Required:

Manufacturing Overhead 8,505
Raw Materials Inventory
c. Direct labor wages of $33,100 are accrued as are indirect
labor wages of $12,500.
Work-In-Process Inventory 33,100
Manufacturing Overhead 12,500
Salaries Payable
d. Overhead incurred and paid for is $66,900.
Manufacturing Overhead 66,900
Cash
Compute the following balances on October 31:
53,865 a. Material inventory
- Purchases of Raw Materials - (All Materials) = Raw
Materials Inventory, end
- $30,000 - ($4,000 + $3,600 + $7,000 + $3,200 + $8,000) =
$4,200
b. Work in process inventory
45,600 - Job 105 Material + Direct Labor Cost + (Direct Labor Hours
x Normal Rate per Direct Labor Hour) = Work-In-Process
Inventory
- Job #105 $8,000 + $3,600 + ($1,800 x 2.50) = $16,100
66,900
c. Finished goods inventory 4. Sanderson Company manufactures custom-built conveyor
- Job 104 Material + Direct Labor Cost + (Direct Labor Hours systems for factory and commercial operations. Erin Smith is
x Normal Rate per Direct Labor Hour) = Finished Goods Inv. the cost accountant for Sanderson and she is in the process of
- Job #104 $3,200 + $4,800 + ($2,400 x 2.50) = $14,000 educating a new employee, Heather Fontenot about the job
order costing system that Sanderson uses. (The system is
d. Cost of goods sold
based on normal costs; overhead is applied based on direct
- Job # 101 $4,000 + $6,000 + ($3,000 x 2.50) = $17,500
labor cost and rounded to the next whole dollar.) Lisa gathers
- 102 $3,600 + $5,400 + ($2,700 x 2.50) = 15,750
the following job order cost records for July:
- 103 $7,000 + $9,000 + ($4,500 x 2.50) = 27,250
$60,500 Job No: Direct Material Direct Labor Applied Overhead Total Cost
667 5,901 1,730 1,990 9,621
e. Under- or overapplied overhead
669 18,312 1,810 2,082 22,204
- Applied 14,400 x $2.50 = $36,000
670 406 500 575 1,481
- Actual 33,500
671 51,405 9,500 10,925 71,830
- Overapplied $2,500
672 9,615 550 633 10,798
3. Steel Company uses a job order costing system and develops
To explain the missing job number, Erin informed Heather that
its predetermined overhead rate based on machine hours.
Job #668 had been completed in June. She also told her that
The company has two jobs in process at the end of the cycle,
Job #667 was the only job in process at the beginning of July.
Jobs #177 and #179.
At that time, the job had been assigned $4,300 for direct
Budgeted Overhead 100,300 material and $900 for direct labor. At the end of July, Job #671
Budgeted Machine Hours 85,000 had not been completed; all others had. Erin asked Heather
Raw Material 63,000 several questions to determine whether she understood the
Labor Cost 50,000 job order system.

a. Refer to the Steel Company. What amount of overhead is Required:

charged to Jobs #177 and #179? Machine hours are split a. What is the predetermined overhead rate used by ABC
between Jobs #177 and #179-65 percent and 35 percent, Company?
respectively. Actual machine hours equal budgeted machine - (Any) Manufacturing Overhead / Direct Labor =
hours. Predetermined Overhead Rate
- OH Applied = Machine Hours Cost x Percent Overhead Rate - Job 670 575 / 500 = 1.15 or 115%
- Job #177: 85,000 MH x 65%= 55,250 x $1.18 = $65,195
b. What was the total cost of beginning Work in Process
- Job #179: 85,000 MH x 35%= 29,750 x $1.18 = $35,105 inventory?
b. Refer to the Steel Company. Fifty-four percent of raw - Job 667 Direct Material + Direct Labor + Manufacturing
material belongs to Job 17 and 38 percent belongs to Job 179, Overhead (Direct Labor x Predetermined Overhead Rate)
and the balance is considered indirect material. What amount
Direct Material 4,300
of raw material used was allocated to overhead as indirect
Direct Labor 900
material?
Manufacturing Overhead (900 x 115%)s 1,035
- Percent of Raw Material that belongs to Job 17 + Percent of
Total Cost of Work-In-Process Inventory $6,235
Raw Materials that belongs to Job 179 = Percentage of Direct
Materials; 100% - Percentage of Direct Material = Percentage c. What was the total prime cost incurred for the month of
of Indirect Materials or (Percentage of Indirect Material x Raw July?
Material) - Prime Cost = (All) Direct Material + (All) Direct Labor (Less
- 54% + 38% = 92%; 100% - 92 = 8% or $5,040 (.08 x $63,000) the Work-In-Process Inventory, end if have)
c. Refer to Steel Co. Labor cost was split 25 percent and 70 Direct Material 85,639 - 4,300 81,339
percent, respectively, between Jobs #177 and #179 for direct Direct Labor 14,090 - 900 13,190
labor. The remainder was indirect labor cost. What are the Prime Cost $94,529
total costs of Jobs #177 and #179?
d. What was the cost of goods manufactured for July?
Job 177 Job 179
- Cost of Goods Manufactured = (All) Total Cost (except Job
Direct Material $34,020 $23,940
671 which is not completed)
Direct Labor 12,500 35,000
- 9,621 + 22,204 + 1,481 + 10,798 = $44,104
Manufacturing Overhead 65,195 35,105
Total Cost $111,715 $94,045