JOB ORDER AND PROCESS

COSTING
JOB ORDER COSTING
A system for allocating costs to groups of unique products

Applicable to production of customer-specified products and event to cost a

particular service
Each job becomes a cost center for which costs are accumulated

A subsidiary record is needed to keep track of all unfinished jobs (WIP) and finished
jobs (Finished Goods)
Balances are used as basis in transferring from WIP to FG to COGS
ACCOUNTING FOR OVERHEAD
Overhead items are grouped by cost behavior (fixed or variable)

Fixed and variable overhead costs are estimated for the coming
period
An activity base is chosen: commonly used are direct labor hours
or machine hours
Actual activity level is estimated for the coming year
ACCOUNTING FOR OVERHEAD
Determine the normal capacity of the facility

Determine predetermined overhead rates (actual for variable;

normal for fixed)
Actual overhead costs are debited to FOH accounts

Applied overhead uses predetermined rates

ACCOUNTING FOR OVERHEAD
Overapplied – more is
applied than incurred
• Costs were overestimated
• Actual activity greater than
normal capacity
• Actual overhead costs
were less than expected
Underapplied – less
overhead is applied than
incurred
• Costs were underestimated
• Actual activity less than
normal capacity
• Actual overhead costs
were more than expected
 If amount is immaterial, it is
frequently written off to cost of
Disposition of goods sold
Under and
Over Applied If amount is material, adjustments
FOH must be made to all goods which
were costed: Work in Process,
Finished Goods, and Cost of Goods
Sold
SPOILAGE IN JOB ORDER COSTING
Spoiled Goods Defective goods

• Items that cannot be sold as good
items and cannot be corrected by
reworking
• Cost is debited at their estimated
sales value
• The loss in the difference between
the cost of producing them and their
resale value is either charged to the
specific job or to the entire
production
• Items that are found defective where
reworking is possible to make items
salable
• Additional cost of materials, labor, or
overhead are charged either to a
specific job or the entire production
SPOILAGE IN JOB ORDER COSTING
When spoilage is attributable to general factory conditions, net spoilage costs are
allocated to all jobs through overhead application

When spoilage is attributable to exacting job specifications, net spoilage costs are
charged to specific jobs

Under both methods, the net spoilage cost (proceeds from sale and cost of spoiled
goods produced) is charged to FOH in the first case and left in WIP in the second case

Defects or spoilages caused by extra-ordinary circumstances are taken up as abnormal

loss and treated as a period cost
PROCESS COSTING

Applicable to a continuous process of production of the same

or similar goods (oil refining, chemical production, etc.)

Since the product is uniform, there is no need to determine

costs of different groups of products

Each processing department becomes a cost center

 PROCESS COSTING COMPUTATIONS
1. Visualize the physical flow of units
2. Compute the equivalent units of production
3. Determine costs to allocate
4. Compute unit costs
5. Allocate total costs to:
1. Finished and Transferred Goods
2. Ending Work in Process
 EQUIVALENT UNITS OF PRODUCTION
(EUP)
• EUP is the amount of work equivalent to completing one unit from
start to finish
• Two primary EUP methods used
• Weighted Average – current costs are combined with prior costs, and all units
are carried at an average cost of production
• FIFO – the first batch into production is assumed to be the first batch
completed. The batch is treated as a separate, distinct layer – separate from
goods that are started and completed during the period
EUP Computation
SPOILAGE
IN
PROCESS
COSTING
 Included in the computation of EUP,
to the extent of work done where
ABNORMAL the spoilage occurs. The cost of
SPOILAGE abnormal spoiled units is computed
separately from the cost of the good
units
THE END.