UNIVERSITY OF NUEVA CACERES

City of Naga

COST ACCOUNTING AND CONTROL

LESSON 3. JOB ORDER COSTING

Cost Accounting refers to recording, classifying and reporting all cost aspects of company
performance during a particular period of time. It is therefore, a system that records,
summarizes, analyzes and interprets the details of the cost of materials, labor and overhead
necessary to produce and sell an article or a product. Cost accounting is usually considered as it
applies to manufacturing and service organizations as well.

System of Cost Accumulation

The basic objective of cost accounting is the determination or accumulation of a product’s cost
for inventory valuation and income determination. The following systems may be used in the
accumulating a product’s cost:

1. Actual (Historical) Cost System. Under this system, direct materials, direct labor and
factory overhead costs are determined as they occur simultaneously with the
manufacturing operation but the total of these costs in known only as the operation has
been completed. An actual cost system collects the actual amounts of direct materials,
direct labor, and factory overhead that are incurred for each product.

2. Standard (Predetermined) Cost System. Under this system, costs are determined in
advance from analysis and forecasts made before the actual production begins. In a
standard cost system, standard unit costs are computed for the direct materials, direct
labor and factory overhead – these amounts rather than actual costs are carried to
Finished Goods.

3. Normal Cost System. This system is a combination of the actual cost system and the
standard cost system. It accumulates only the actual amounts of direct materials and
direct labor costs. Factory overhead costs are accumulated on the basis of
predetermined overhead rate.

Cost Accumulation Procedures (Methods)

Job order and process costing are the two most widely used cost accumulation methods, and
they have several aspects in common. Although, the ultimate cost object in both of these
methods is the unit of product, the two methods differ fundamentally in their approach to cost
tracing. In job order costing, cost is traced to an individual batch, specific units, lot or contract.
In process costing, cost is traced to a department, operation or some other subdivision within
the factory as long as it involves a continuous flow rather than a series of separate jobs.

The most common cost accumulation methods or procedures are:

1. Job Order Costing
2. Process Costing

The third method, is a combination of job order and process costing:

3. Operation Costing/ Blended/ Hybrid Method

The fourth method was introduced because of Just-In-Time philosophy in production:

JOB ORDER COSTING

This method is used when:

1. Products are manufactured within a department or cost center are heterogenous or
dissimilar products;
2. Each job requiring different amounts of materials, labor and overhead.

Costs should be recorded separately for every job produced. Keeping of individual records is
possible only if the various inputs to a job can be easily identified. Detailed cost record must be
kept for each job and updated as work progresses. Job order costing is applicable to made-to-
order work in factories, manufacturers of expensive, one-of-a-kind items such as building
contractors, ship builders, and motion picture companies, workshops, repair shops, job
printers, construction engineers and service business such as medical, legal, architectural and
consulting firms.

Operation Costing/ Blended/ Hybrid Method

In some manufacturing companies, different units have significantly different materials costs,
but all units undergo identical conversion in large quantities. In these cases, direct materials
costs are accumulated using job order costing and conversion costs are accumulated using
process costing.

Job Order Costing Procedures

Job order costing procedures may be summarized as follows:

1. Job order costing applied to cost as follows:

a. Direct materials and direct labor costs are traced to a particular job.
b. Cost not directly traceable (overhead) are applied to individual job using a
predetermined overhead application rate.
 2. The overhead rate is a predetermined yearly rate using as base, labor hours, machine
hours or labor cost.
3. Practically, the difference between overhead applied and actual overhead is closed to
cost of goods sold at the end of the period.

Preparation of Cost of Goods Manufactured

Statement of Cost of Goods Manufactured refers to the cost of the jobs completed whether
they were started before or during the current accounting period. In the preparation of the
statement, candidate should know the presentation of the following cost elements:

1. Direct materials. These are materials which become an integral part of the finished
product.
2. Direct labor. This represents the labor which acts directly on the product and physically
transforms the product by machine.
3. Manufacturing overhead. This consists of all product costs other than direct materials
and direct labor costs.
4. Prime Costs. This is the sum of the direct materials and direct labor.
5. Conversion costs. This is the sum of the. Direct labor costs and manufacturing overhead.
6. Manufacturing costs. This is the sum of the direct materials, direct labor and
manufacturing overhead.
7. Underapplied or overapplied manufacturing overhead. This is the difference between
the actual overhead incurred and the applied (estimated) overhead.

The usual format of the statement is presented below:

Direct Materials Used:

Beginning Inventory xx
Purchases xx
Cost of Materials Available for Use xx
Ending Inventory xx xx
Direct labor xx
Applied manufacturing Overhead xx
Manufacturing Costs xx
Add: Beginning Work In Process xx
Cost of Goods Placed in Process xx
Less: Ending Work in Process xx
Cost of goods manufactured xx
The Cost of Goods Sold in a manufacturing company:

Cost of goods manufactured xx

Add: Beginning Finished Goods xx
Cost of Goods Available for Sale xx
Less: Ending Finished Goods xx
Cost of goods sold – normal xx
Underapplied (Over-applied) Overhead xx
Cost of Goods Sold - Actual

ACCOUNTS PECULIAR TO JOB ORDER COST SYSTEM:

General Ledger

MATERIALS
1. Beginning Balance 1. Cost of direct materials issued to production.
2. Purchases 2. Cost of indirect materials issued
3. Freight in (using direct charging) 3. Cost of materials returned to suppliers
4. Cost of excess materials returned from factory

Subsidiary Ledger
MATERIAL STOCK CARD
RECEIVED ISSUED BALANCE

General Ledger

WORK IN PROCESS
1. Beginning Balance 1. Cost of goods completed and transferred to FG
2. Direct materials issued to production 2. Cost of excess materials returned to storeroom
3. Direct labor charged to production
4. Factory overhead applied to production

Subsidiary Ledger

FINISHED GOODS – PRODUCT A

RECEIVED ISSUED BALANCE
Subsidiary Ledger
JOB ORDER COST SHEET
DIRECT MATERIALS DIRECT LABOR FACTORY OVERHEAD

General Ledger
FINISHED GOODS
1. Beginning Balance 1. Cost of Gods Sold - normal
2. Cost of goods completed
3. Cost of goods returned by customers

General Ledger
FACTORY OVERHEAD CONTROL
1. Cost of Indirect Materials used
2. Cost of indirect labor
3. Cost of other indirect expenses

FACTORY OVERHEAD APPLIED

1. Cost of overhead applied to production

COST OF GOODS SOLD

1. Cost of goods sold – normal 1. Adjustment for over-applied factory overhead
2. Adjustment for underapplied factory overhead

COST FLOW
Dr Cr
Accounting for Materials:
Upon Purchase (Direct Materials and Indirect Materials)
Materials (Stores Control) XX
Accounts Payable XX

Issued to production/ requisitioned/ materials used/ applied to production:

Work-in-Process (Direct Materials) XX
Factory Overhead Control or Actual FOC (Indirect Materials) XX
Materials (Stores Control) XX

Upon Payment:
Accounts Payable XX
Cash XX
 Dr Cr
Accounting for Labor
Labor incurrence: (Factory labor, direct and indirect labor, sales and admin salaries)

Payroll XX
Withholding Taxes Payable XX
SSS Premiums Payable XX
Philhealth Premiums Payable XX
Accrued Payroll XX

Labor Distribution/ Labor applied to production:

Work-in-Process – Direct Labor XX
Factory Overhead Control or Actual FOH (indirect labor) XX
Salaries Expenses - Selling XX
Salaries Expenses - General and Administrative XX
Payroll XX

Payment of Payroll:
Accrued Payroll XX
Cash XX

Wages are payments made on hourly, daily or piecework basis, whereas salaries are fixed payments for managerial
services. Other terms necessary for any discussion of labor costs are best defined by equations as follows:

Gross Earnings = Regular Wage + Overtime Premium

1. Regular Wage = Total Hours Worked (including overtime) * Regular Hourly Rate
2. Overtime Premium = Overtime hours worked x Extra hourly compensation for overtime

Other Additional Compensation chargeable to Factory Overhead Control:

1. Overtime Premium
2. Shift Premium
3. Bonus. Theoretically, a bonus is a direct cost of production. However, because the purpose of cost
accumulation is the establishment of a standard unit cost, bonuses is charged to FOH.
4. Vacation and Holiday Pay
5. Pension
6. Fringe costs. Vacation and pension plans are only two of the most common employee benefits. It may
also include:
a. Employer’s share of HDMF, SSS and Philheatlh Contribution.
7. Incentive Plans

Accounting for Factory Overhead:

Incurrence of FOH:
Factory Overhead Control or Actual FOH XX
Cash/ Accounts Payable/ Accumulated Depreciation, Prepaid Expenses) XX

FOH applied to Production:

Work-in-Process XX
Applied Factory Overhead (FOH Rate** X Activity) XX
 Disposition of Overapplied/ Underapplied OH (entries may vary depending of the practice of the company:
Applied FOH XX
Overhead* Applied FOH (CGS,/IS, WIP, FG) XX
Factory Overhead Control XX
 Debit if Underapplied FOH

Allocation of Service (Support) Department Costs:

Service department benefit the manufacture of products even though they are not directly
involved in converting raw materials into finished goods. For this reason, service department
costs must be allocated to producing departments, both in computing predetermined overhead
rates and in measuring actual overhead costs of producing departments.

Methods of Service Cost Allocations:

1. Direct Method. Under this method, the cost of each service department is allocated
directly to the producing departments.

2. Step-down Method. This method involves the allocation of service departments costs to
both service and producing departments. Costs of the most widely used service
department or the department with the highest total costs are first allocated to all other
departments. The costs of the nest most widely used service department are then
allocated. These costs will include those previously allocated from the first department.
These steps continue until all service department costs have been allocated. Once a
service department cost have been allocated, no further allocations are made to it from
other departments.

3. Reciprocal Method. This method allocates costs by explicitly including the mutual
services provided among all service departments.

Job Order Cost Sheet

The source document that provides virtually all financial information about a particular job is
the job order cost sheet. The set of job order cost sheets for all incomplete jobs composes the
WIP inventory subsidiary ledger. Total costs contained on the job order cost sheets for all
incomplete jobs should reconcile to the WIP inventory control account balance in the general
ledger.

A job order cost sheet includes a job number, a description of the job, customer identification,
various scheduling information, delivery instruction, and contract price as well as details
regarding actual costs for direct materials, direct labor, and applied overhead. The form also
might include budgeted cost information, especially if such information is used to estimate the
job’s selling price or to support a bid price. In bid pricing, budgeted and actual costs should be
compared at the end of a job to determine any deviations from estimates. In many companies,
job cost sheets exist only in electronic form.

NOTES ON SCRAP:

Scrap includes:
1. The fillings or excessive trimmings of materials after the manufacturing operations;
2. Defective materials that cannot be returned to vendor or not suitable for manufacturing
operations and;
3. Broken parts as a result of an employee error or machine breakdown that causes the
product in a poor-quality condition.

Furthermore, scrap should be treated as:

1. If the scrap has a salvage value, it should be collected and placed in storage and
available for sale to scrap dealers and anybody who are willing to buy;
2. If the scrap is a result of fillings, excessive trimmings or materials residue and the costs
of scrap cannot be determined, then, the scrap notwithstanding that they cannot be
eliminated in the production, a record of quality of scrap should be maintained. The
purpose is to keep track to periodically analyze to determine if some waster is due to
insufficient use of materials and if not eliminated, at least minimize.

Waste as distinguish to scrap material refers to any amount of raw materials left-over from a
production process or production cycle for which there is no further use. Waste is not usually
saleable at any price and must be discarded.

ACCOUNTING FOR SPOILAGE AND REWORK

Spoilage

These are units that do not meet the production standards. Spoilage maybe normal or
abnormal.
a. Cost of abnormal spoilage are not considered inventoriable costs and are written off as
costs of the period during which the abnormal spoilage is detected.
o If the spoilage is abnormal, the net loss is charged to an abnormal loss account.

b. Normal spoilage costs are inventoriable costs. When assigning costs, job-costing system
generally distinguish normal spoilage attributable to a specific job from normal spoilage
common to all jobs.
o Normal spoilage attributable to a specific job. When normal spoilage occurs
because of a customer’s specification of a particular job, that job bears the cost
of spoilage reduced by the disposal value of the spoilage.

o Normal spoilage common to all jobs. In some cases, spoilage may be due to
internal failure. The spoilage inherent in production will, of course, occur when a
 specific job is worked on. But the spoilage is not attributable to, and hence not
charged to the specific job.

NOTES ON SPOILED GOODS:

Spoiled goods or spoilage differ from scrap, in the manner that they are either partially or fully
completed unit. For a reason of being spoilage, they cannot be corrected ither because it is not
technically possible to correct them or it is not economical to correct them.

REWORK

Rework is units of production that are inspected, determined to be unacceptable, repairs and
sold as acceptable finished goods.
a. If the rework is normal:
 If rework is attributable to a specific job, the cost of rework is chargeable
to that job;
 If normal rework is common to all jobs, the costs of rework are charged
to manufacturing overhead and spread through overhead allocation, over
all jobs.

b. If the rework is abnormal, charged as a loss.

** END **