Ming Lu

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Ch. 2- Job Order Cost Accounting

I. Cost accounting system- is a system used to accumulate/gather manufacturing costs for financial
reporting and decision-making purposes
There are 2 main types:
A. Process cost system
1. Used in situations where the company produces many units of a single product for long periods
2. Another way of saying this is that industries that use this system are characterized by homogeneous
products that flow through the production process on a continuous basis.
3. Costs are accumulated for each department or processes within a factory. We will talk more about this
when I lecture on this topic in the next chapter.
4. Examples: Bricks, orange juice, paper production, etc.

B. Job order cost system

1. Used in situation where many different (heterogeneous) products are produced for each period.

2. Job order cost accounting may be used for

a. 1 unit of a customized product called a job
Examples: Customizing someone’s car, remodeling someone’s kitchen, preparing a corporate tax
return, etc.

b. More than 1 unit of a custom product called a job lot or a job batch
Example: Levi Strauss
A particular order might consist of 1,000 stonewashed men’s jeans style A312 with a 32 inch waist and
a 30 inch inseam.

3. Costs are traced and allocated to jobs and then the costs are divided by the number of units in the job to
arrive at an average cost per unit.

4. Cost records must be maintained for each distinct product or job. Thus, job order costing requires more
work than process order costing.

5. Job order costing is oftentimes used in by companies that are characterized by diverse large scale projects
Example: Bechtel International, an engineering firm, uses job ordering costing for each of its projects
(i.e. project 1 is constructing a dam in Zaire, project 2 is building a bridge in Indonesia).

6. Job order costing is used extensively in the service industry. Accounting firms, law firms, hospitals,
movie studios, ad agencies, etc. all use this system.

7. Observe the flow of documents diagram in a job order cost system below
II. Job order cost system- below is an example to help better understand this system
As you look at the sample documents below examine how relates to the flow of documents diagram. Also, as
you look at the materials requisition form, time ticket, and job cost sheet make sure to examine how the data
flows b/t each document.

Problem:
We will follow a special job as it progresses through the manufacturing process. Yost Precision Machine
Co. has agreed to produce for Loops Unlimited, a manufacturer of roller coasters, 2 couplings. The job # is
2B47

A. Once an agreement is reached with the customer concerning quantity, price, and shipment date for the
order, a production order is issued.

B. Materials requisition form (aka materials requisition slip)

1. After the a production order is issued, the production department prepares a material requisition form.
2. This form:
a. Specifies the type and quantity of materials to be drawn from the storeroom
b. Identifies the job to which the cost of the materials are to be charged
c. Is used to control the flow of materials into production and also making JE in accounting records.
3. This form is given to the storeroom clerk who then issues the necessary raw materials. The clerk is not
allowed to release materials without such a form bearing an authorized signature.

4. Yost Precision Machine Co. example:

Materials Requisition Form

 Materials Requisition
Number 14873 Date March 2
Job Number to Be Charged 2B47
Department Milling

Description Quantity Unit Cost Total Cost

M46 Housing 2 $124 $248
G7 Connector 4 103 412
$660

Authorized
Signature Bill White

Notice that the company’s Milling Department requested 2 M46 Housing and 4 G7 Connectors for this job.

C. Time ticket
1. Each worker in a factory uses time tickets to record the time they spend on each job and task. When
working on a specific job, the employee enters the job number on the ticket and notes the amount of time
spent on each job. When not assigned to a specific job, the employee records the nature of the indirect task
(i.e. cleanup and maintenance) and amount of time spent on the task. Nowadays, employees often just scan
a bar code when they start and end work on a job and the computer records the time.
2. Yost Precision Machine Co. example:

Employee Time Ticket

Time Ticket No. 843 Date March 2

Mary
Employee Holden Station 4

Time
Complete
Started Ended d Rate Amount Job Number
7:00 12:00 5.0 $9 $45 2B47
12:30 2:30 2.0 9 18 2B50
Maintenanc
2:30 3:30 1.0 9 9 e
Totals 8.0 $72

Supervisor R.W. Pace

D. Job cost sheet

1. After being notified the production order has been issued, the Accounting Department prepares a job cost
sheet.
2. This is a form:
a. Prepared for each separate job that records the materials, labor, and overhead costs charge to each job.
b. It also serves as a WIP subsidiary ledger. They are detailed records for jobs in process that add up to
WIP.
3. Yost Precision Machine Co. example:

JOB COST SHEET

Job
Number 2B47 Date Initiated March 2
Date Completed March 8
Departme
nt Milling
Special order
Item coupling Units Completed 2
For Stock

Direct Materials Direct Labor Manufacturing Overhead

Req. No. Amount Ticket Hours Amount Hours Rate Amount
/ $216
14873 $660 843 5 $45 27 $8 DLH
 (estimat
14875 506 846 8 60 e)
14912 238 850 4 21
$1,404 851 10 54
27 $180

Cost Summary Units Shipped

Direct Materials $ 1,404 (DM) Date Number Balance
Direct 180
abor $  (DL) March 8 - 2
Manufacturing 216
verhead $  (MOH)
Total Cost $ 1,800
Unit Product Cost 90 (2 units
$ 0 complete
d)

E. Manufacturing Overhead
1. MOH must be included in the job cost sheet b/c it is also a product cost. However, calculating the cost is
difficult b/c
a. Since it is an indirect cost, it is hard to trace these costs to a particular product or job.
Example: How can the cost of electricity be traced to each job?
b. MOH consists of many different items from the grease used in machines to the annual salary of the
production manager
Note: Manufacturing costs remain relatively constant due to the presence of fixed costs.

2. Allocating MOH cost

a. Given the above, the best way to assign overhead costs to a cost object (job) is to use cost allocation.
b. Generally, MOH is allocated by linking it to another factor used in production such as direct labor hours
or machine hours
c. Steps
i. First, estimate that the total MOH cost for the year.
ii. Next, select an appropriate activity base (aka allocation base or activity driver). This should reflect the
consumption or use of MOH cost. Example: 40,000 Direct labor-hours (DLH), 20,000 machine-hours
(MH), etc.
iii. Divide your estimated total MOH cost by your estimated allocation base to get your predetermined rate.

_______Estimated total MOH______

Estimated total units in activity base

iv. Multiply your predetermined rate against your actual hours/units to get your MOH for the job.
Example:
Yost Precision Machine Co.’s estimated total MOH cost for the year was $320,000 and that its activity base
was 40,000 direct labor hours. The predetermined rate calculated would be $8 per direct labor hour. You
then multiply this by 27 direct labor hours from the job cost sheet to get $216 which is the total MOH cost.

(320,000/40,000) = $8 per direct labor hour

3. Things to note
a. Your textbook calculates the predetermined OH rate as a percentage which it then uses to multiple
against the labor costs for the specified job. However, on your exam, I want you to know how to calculate
using the way I showed you above because that method is more commonly used in industry.

b. The predetermined OH rate is calculated using estimates at the beginning of the period rather than actual
results, b/c companies are concerned with timely information. Had the company waited until the end of an
accounting period when all the overhead costs were known, the allocated MOH would be accurate but not
timely.

Going back to our sample job cost sheet, we now have all the information necessary to calculate the cost of
the job.

(Work on Rand Co. practice problem before reading this.)

F. 2 Methods of Disposal of Under-or Overapplied Overhead Balances
1. Allocation B/t Accounts
a. This method allocates under- or overapplied overhead b/t WIP, Finished Goods, and COGS.
b. This method is more accurate, but also more complex. The textbook does not cover this, so I won’t cover
it either.

2. Closing out to COGS

a. We studied before that we make an estimate of using a predetermined OH rate to calculate factory
overhead to be applied to WIP. This number could be over and under the actual amount.
b. As the name states, closing out to COGS, disposes the difference b/t actual and estimated cost to COGS.

Now, refer back to the Rand Co. problem. We stated before, the estimated factory overhead was $90,000
($6 X 15,000)

Underapplied
Scenario #1
If the actual factory overhead cost is later known to be $95,000, then there was underapplied overhead of
$5,000. You would need to make the following JE.

Cost of Goods Sold 5,000

Manufacturing Overhead 5,000

This would affect COGS.

Unadjusted COGS from entry 13 $ 118,500
Add underapplied overhead $ 5,000
Adj. COGS $ 123,500

Overapplied
Scenario #2
If the actual factory overhead cost is later known to be $85,000, then there was overapplied overhead of
$5,000. You would need to make the following JE.

Manufacturing Overhead 5,000

Cost of Goods Sold 5,000

This would affect COGS.

Unadjusted COGS from entry 13 $ 118,500
Subtract overapplied overhead $ (5,000)
Adj. COGS $ 113,500