LEARNING PACKET 4

TOPIC: Accounting for Job Order Costing

I. CONCEPT NOTES

Cost Management and Strategy

As manufacturers, the main concern is the cost incurred in making your products, in order to:
1. Evaluate and possibly minimize
2. For Pricing
3. Valuation of assets

3 Steps in Product Costing:

1. Cost Identification (Those costs that are relevant and related to the product are considered)
2. Cost Measurement (appropriate amount to be used)
3. Cost Assignment (where will it be pooled)
✔ We have to evaluate the kind of production the firm has

✔ 2 Kinds of Cost Assignment methods:

i. Job Order Costing- we assign costs to every job (product itself, a client, engagement,
contract, project) because the nature allows us to assign per product; heterogenous,
specific, customized, few production
ii. Process Costing- we assign costs to processes/departments because it would be very costly
to assign costs to every product because of its number; homogenous, mass production
iii. Hybrid Costing – mix between job order and process costing

Job Order Costing

Job Order Costing System

● Costs are accumulated by job.
● A “job” pertains to a single unit or multiple similar or dissimilar units that has or have been produced to
distinct customer specifications.
● Each job is treated as a unique cost entity or cost object.

Features
● Actual direct materials and direct labor costs are fairly easy to identify and associate with particular jobs.
● However, overhead costs are usually not traceable to specific jobs and must be applied to production using
a predetermined OH rate multiplied by some actual cost driver (such as cost or quantity of materials used
or number of direct labor hours required).
● All information pertaining to a job is contained in a Job Cost Sheet which includes a job number, job
description, customer identification, scheduling information, delivery instructions, contract price, as well as
details regarding actual costs for direct materials, direct labor, and applied overhead.

Documentation
● Job Order Sheet- done for every job that contains vital information unique to that job. It is produced by the
Production Department as documentation of their operations. It contains:
✔ Job number (usually prenumbered)

✔ Description of the job

✔ Contract Price

✔ Costs to be incurred for that job

● Materials requisition- signifies that a certain production department is in need of these materials for
production, and is the trigger point to either buy or issue raw materials. It contains:
✔ Form Number (prenumbered)

✔ Job number of the job where it will be used

✔ Item code of the material needed

✔ Quantity needed
 ✔ Unit Costs and Total Costs

● Employee Time Sheet-indicates the details related to labor for every job. It contains:
✔ Employee Code or ID

✔ Amount of time consumed

✔ Employee rate per time and Total labor cost

✔ Job number of the job where it was worked

● Overhead Application (normal costing)

✔ POHR or a certain rate is provided

✔ All applied overhead are put into WIPI

✔ Actual Overhead is still recorded on a control account

✔ Closing of applied overhead is the same

Accounting for Job Order Costing

● Usually, separate accounts for both WIPI and FGI is used for every job
● For some, subsidiary ledgers are used but a control account is present for both WIPI and FGI
● Same entries are done for other transactions

Accounting for Rework and Spoilage

● Production processes may result in losses of direct material or partially completed products.
● Some losses, such as evaporation, leakage, or oxidation, are inherent in the manufacturing process. Such
reductions are called shrinkage.
● Production process errors (either by humans or machines) cause a loss of units through rejection at
inspection for failure to meet appropriate quality standards or designated product specifications. Such
units are called defects (if they can be reworked or sold), or spoilage (if such rework cannot be performed).

Rework
● units that were damage but still reparable, and therefore needs repair that incurs costs
✔ Treated differently depending on nature:
i. Rework of particular job- charged to WIPI
ii. Rework for common jobs- charged to Factory Overhead
iii. Abnormal Rework- charged to a loss account

Spoilage
● units that are unacceptable according to the normal standards of the product as to quality and therefore,
discarded or sold at disposal value
✔ Has two kinds:
i. Normal Spoilage- expected to be incurred in the normal operations
ii. Abnormal Spoilage- Spoilage beyond the normal expected spoilage of the company
✔ Spoilage are treated differently in accounting:
i. Normal Spoilage by particular job- should be part of costs of that job, in accounting, retain in
WIPI but decrease by amount of disposal value
ii. Normal Spoilage to common jobs- should be applied to all jobs, in accounting, the cost, net of
disposal value is transferred to Factory Overhead
iii. Abnormal Spoilage- treated as outright expense for the period, in accounting, transfer cost, net
of disposal value to a loss account

II. CHECKING FOR UNDERSTANDING

PROBLEM 1: Crown Fence Company has the following transactions:

● During September 2013, material requisition forms L-40-L55 indicated that raw materials costing P5,420
were issued from the warehouse to the Fabrication Department. This Raw Material Inventory account may
 include the costs of both direct and indirect materials. When material is used, its cost is released from the
Raw Material Inventory. If the material is considered direct to a job, the cost is assigned to WIP inventory; if
the material is indirect, the cost is assigned to Manufacturing Overhead Control. The raw material
requisitioned in September included P4,875 of direct materials used on Job #PF108 and P520 of direct
materials used on other jobs. The remaining P25 raw materials issued during September were indirect.
● The September time sheets and payroll summaries for the Fabrication Department workers were used to
trace direct and indirect labor to that department. Total labor cost for the Fabrication Department for
September was P9,599. Job #PF108 required P6,902 of direct labor cost combining the two biweekly pay
periods in September. The remaining jobs in process required P1,447 of direct labor cost, and indirect labor
cost for the month totaled P1,250.
● The Fabrication Department incurred overhead costs in addition to indirect material and indirect labor
during September. Factory building and equipment depreciation of P2,500 was recorded. Insurance on the
factory building was prepaid and one month (P200) of that insurance had expired. A P1,900 bill for factory
utility costs was received and would be paid in October. Repair and maintenance costs of P500 were paid in
cash. Additional miscellaneous OH costs of P800 were incurred; these costs are credited to “Various
accounts”.
● Crown prepares financial statements monthly. To do so, WIP inventory must include all production costs:
DM, DL, and OH. Overhead is applied to production at Crown Fence Company based on departmental
predetermined OH rates. The company is organized into three departments: Fabrication, Installation, and
Finishing. Each department may have more than one rate. In Fabrication, overhead is applied using two
pre-determined OH rates: P12 per direct labor hour and P30 per machine hour. In September, Fabrication
employees committed 260 hours of direct labor time to Job #PF108, and 65 machine hours were consumed
on that job. The other jobs worked on during September were committed with 25 direct labor hours and 20
machine hours.

REQUIRED: Provide the necessary entries.

PROBLEM 2: The Smith Company manufactures special purpose machines to order. Because the products are
tailored for the customers’ preference, completed units are automatically sold to gain 20% profit on billed price. On
1/1/2017 there were two jobs in process, 405 and 406. The following costs were applied to them in 2016:

Job 405 Job 406

Direct material P 5,000 P 8,000
Direct labor 4,000 3,000
Overhead 4,400 3,300
Total P13,400 P14,300

During January of 2017, the following transactions took place:

● Raw material costing P40,000 was purchased on account.
● Jobs #407, 408, and 409 were started and the following costs were applied to them:

Job 407 Job 408 Job 409

Direct materials P3,000 P10,000 P 7,000
Direct labor 5,000 6,000 4,000

● Job P405 and Job #406 were completed after incurring additional direct labor costs of P2,000 and P4,000,
respectively. Job 408 is also completed on January.
● Wages paid to production employees during January totaled P25,000.
● Depreciation of factory equipment for the month of January totaled P10,000.
● Utilities bills (where 30% of the utilities are related to office, while the remaining can be attributed to the
factory) in the amount of P10,000 were paid for December 2016 operations.
● Supplies costing P2,000 were used. Only 40% is used by the factory, while the 60% is used for promotional
activities (flyers, etc.). Office rent totaling P5,000 were billed for January operations.
● Miscellaneous overhead expenses totaled P13,300 for January.

Any over- or underapplied overhead is considered material for the company.

REQUIRED:
1. How much is the total manufacturing costs for January?
2. Give the entry to record the closing of over-underapplied overhead for the period.
3. How much is the adjusted ending Work-in-Process Inventory?
4. How much is the Net income for January?

PROBLEM 3: Barrett Kitchens produces a variety of items in accordance with special job orders from hospitals,
plant cafeterias, and university dormitories. An order for 2,100 cases of mixed vegetables costs $9 per case: direct
materials, $4; direct manufacturing labor, $3; and manufacturing overhead allocated, $2. The manufacturing
overhead rate includes a provision for normal spoilage. Consider each requirement independently.

1. Assume that a laborer dropped 420 cases. Suppose part of the 420 cases could be sold to a nearby prison for
$420 cash. Prepare a journal entry to record this event. Calculate the unit cost of the remaining 1,680 cases.
2. Refer to the original data. Tasters at the company reject 420 of the 2,100 cases. The 420 cases are disposed of
for $840. Assume that this rejection rate is considered normal. Prepare a journal entry to record this event, and
do the following:
a. Calculate the unit cost if the rejection is attributable to exacting specifications of this particular job.
b. Calculate the unit cost if the rejection is characteristic of the production process and is not attributable to
this job.
c. Are unit costs the same in requirements 2a and 2b?
3. Refer to the original data. Tasters rejected 420 cases that had insufficient salt. The product can be placed in a
vat, salt can be added, and the product can be reprocessed into jars. This operation, which is considered
normal, will cost $420. Prepare a journal entry to record this event and do the following:
a. Calculate the unit cost of all the cases if this additional cost was incurred because of the exacting
specifications of this particular job.
b. Calculate the unit cost of all the cases if this additional cost occurs regularly because of difficulty in
seasoning.
c. Are unit costs the same in requirements 3a and 3b?