COSTING SYSTEMS: JOB ORDER COSTING

Objective 1: Discuss the role that information about costs plays in the
management process, and explain why unit cost is important.
36. Throughout the management process, managers rely on the cost
information that management accounting provides. When managers
plan, information about unit costs helps them estimate product or service
costs, set reasonable selling prices, establish performance goals, and
develop budgets. In performing daily operations, managers use timely
cost and volume information to support decisions about controlling costs,
managing volume, ensuring product or service quality, and negotiating
prices. When managers evaluate performance, they watch for changes
in costs and quality. They compare actual and targeted costs and
monitor relevant price and volume information. This enables them to
make necessary adjustments to their plans and decision-making
strategies. When managers communicate results to shareholders, they
use unit costs in preparing financial statements and performance
evaluation reports.
Objective 2: Distinguish between the two basic types of product costing
systems, and identify the information that each provides.
37. A product costing system is a set of procedures used to account for an
organization’s product costs and to provide timely and accurate unit
cost information for pricing, cost planning and control, inventory
valuation, and financial statement preparation. Job order costing and
process costing are the two basic types of product costing systems.
38. Companies that make one-of-a-kind, special-order products or that
provide custom services, such as shipyards, makers of custom cabinets,
or wedding planners, use a job order costing system. Such a system
traces the costs of direct materials, direct labor, and overhead to a
specific batch of products or job order. A job order is a customer order
for a specific number of specially designed, custom-made products or
services. A job order costing system measures the cost of each complete
unit and summarizes the costs of all jobs in a single Work in Process
Inventory account that is supported by job order cost cards. A job order
cost card is a record of all costs incurred in the production of a particular
job order.
39. Companies that produce large amounts of similar products or liquid
products or that have a continuous production flow—for example,
makers of paint, cars, or breakfast cereal—typically use a process
costing system. Such a system first traces the costs of direct materials,
direct labor, and overhead to processes, departments, or work cells and
then assigns the costs to the products manufactured by those processes,
departments, or work cells. A process costing system uses several Work in
Process Inventory accounts, one for each department, process, or work
cell.
40. Production processes are rarely a perfect match for either a job order
costing system or a process costing system. The typical product costing
system therefore combines features of job order costing and process
costing to create a hybrid system designed specifically for a company’s
production processes.
Objective 3: Explain the cost flow in a manufacturer’s job order costing
system.
41. A job order costing system traces the costs of a specific order or batch of
products to provide timely, accurate cost information and to facilitate
the smooth and continuous flow of that information.
42. Because a job order costing system emphasizes cost flow, it is important
to understand how costs are incurred, recorded, and transferred within
the system.
a. In a manufacturer’s job order costing system, the purchase of
materials is recorded by increasing Materials Inventory and
decreasing Cash or increasing Accounts Payable. When materials
are issued into production, Work in Process Inventory is increased for
the direct materials portion, Overhead is increased for the indirect
materials portion, and Materials Inventory is reduced.
b. The total cost of wages earned during the period is debited to the
Factory Payroll account. The factory payroll is distributed to the
production accounts by increasing the Work in Process Inventory for
direct labor, increasing Overhead for indirect labor, and decreasing
Factory Payroll for the amount of direct labor.
c. Overhead costs, other than indirect materials and indirect labor
costs, increase the Overhead account, and an appropriate
account, such as Cash or Accounts Payable, is also recognized.
Overhead is applied to specific jobs by recording it in the Work in
Process Inventory account and the Overhead account.
d. Upon completion of a specific job, Finished Goods Inventory is
increased, and Work in Process Inventory is decreased.
e. When the finished goods are sold, two accounting entries are made.
First, the sale is recorded by increasing Cash or Accounts Receivable
and increasing Sales for the total sales price. Second, Cost of Goods
Sold is recognized, and Finished Goods Inventory is reduced for the
cost attached to the goods sold.
f. At the end of the period, an adjustment must be made for under- or
overapplied overhead.
g. Because all manufacturing costs are accumulated in one Work in
Process Inventory account, a separate accounting procedure is
needed to trace those costs to specific jobs. The solution is the
subsidiary ledger made up of job order cost cards. Each job being
worked on has a job order cost card, which records the costs of
direct materials used, direct labor, and overhead assigned to the
job. When the job is completed, the product unit cost is computed
by dividing the total costs for the job by the total number of units
produced.
Objective 4: Prepare a job order cost card, and compute a job order’s
product unit cost.
43. In a job order costing system, all manufacturing costs are accumulated
in one Work in Process Inventory account. Job order cost cards are used
to connect these costs to specific jobs. Each job has its own job order
cost card, which becomes part of the subsidiary ledger for the Work in
Process Inventory account. The job order cost card includes the cost of
direct materials used, direct labor, and overhead assigned to the job.
When the job is completed, the product unit cost is computed by
dividing the total cost for the job by the number of units produced.
Objective 5: Apply job order costing to a service organization.
44. Many service organizations use job order costing to compute the cost of
rendering services. Because service organizations do not manufacture
products, their materials costs are usually negligible. Their most important
cost is labor.
a. Job order cost cards are used to track the costs of labor for a job, as
well as the costs of materials, supplies, and service overhead.
Service jobs are often based on cost-plus contracts, which require
the customer to pay all costs incurred in performing a job plus a
predetermined amount of profit.
b. When a job is finished, the costs on the completed job order cost
card become the cost of services. The cost of services is adjusted at
the end of the accounting period for the difference between the
applied service overhead costs and the actual service overhead
costs.
Objective 6: Distinguish between job order costing and project costing.
45. Projects are broader and more complex than jobs. They require a
multidisciplinary approach to the development and delivery of a
product or service. Examples include the construction of a large-scale
retail and residential complex and the development of computer
software.
46. In contrast to job order costing, which focuses on a specific job order,
project costing links many different job orders and processes by
transferring costs from one job or process to another, collecting and
summarizing costs in a variety of ways, and providing appropriate
internal controls.