Cost Accounting

Foundations and Evolutions

Kinney, Prather, Raiborn

Chapter 4
Job Order Costing
 Learning Objectives (1 of 3)
• Contrast the job order and process costing
systems and their valuation methods
• Define what the term ‘job’ means
• Explain the purpose of the documents used
in a job order costing system
 Learning Objectives (2 of 3)
• List the journal entries used to accumulate
costs in a job order costing system
• Identify how technology impacts the
gathering and use of information in job
order costing systems
 Learning Objectives (3of 3)
• Explain how standard costs are used in a
job order costing system
• Describe how job order costing information
supports management decision making
• Explain how losses are treated in a job
order costing system
 Job Order or Process Costing
Job Order
• Small quantities
• Batches of
identifiable,
tailor-made
products
• User-specific
services
• Tracks costs by
job
 Job Order or Process Costing
Job Order Process
• Small quantities • Large quantities
• Batches of • Homogeneous
identifiable, goods
tailor-made
products • Tracks costs by
• User-specific batch of goods by
services department
• Tracks costs by
job
 Job Order Costing
• A job is a single unit or group of units
identifiable as being produced to distinct
customer specifications
• A job can be a
– Client
– Engagement
– Project
– Contract
 Costing Systems

Job order costing Process costing

COLA
 Product Costing
• Cost identification
• Cost measurement
• Product cost assignment
 Methods of Product Costing
• Cost Accumulation System defines
– cost object
– method of assigning costs to production
• Valuation Method specifies
– how product costs will be measured
 Six Possibilities
V COSTING SYSTEM
A
L M Job Order Process
U E • Actual • Actual
A T • Normal • Normal
T H • Standard • Standard
I O
O D
N
 Valuation Methods
• Actual • Standard
– Actual direct material – Standard direct material
– Actual direct labor – Standard direct labor
– Actual overhead – Standard overhead
• Normal
– Actual direct material
– Actual direct labor
The
– Predetermined overhead Difference
 Job Order Costing System
• Each job is a cost object
• Costs are accumulated for each job
• A job can consist of one or more units of
output
• There is a subsidiary ledger for each job
 Job Order Costing System
WIP Subsidiary Ledger
Job 1 Job 2 Job 3 WIP Control
100 200 500 = Job 1 100
Job 2 200
Job 3 500
Total 800

Job 1 + Job 2 + Job 3 = WIP Control

 Material Requisition Form
• Tracks who is responsible for materials
• Verifies flow of materials from warehouse
to department to job
 Material Requisition Form
• Tracks who is responsible for materials
• Verifies flow of materials from warehouse to
department to job
• Journal entry
Work in Process Inventory (direct material)
Manufacturing Overhead (indirect material)
Raw Material Inventory
 Materials Requisition Form
Date ___________________ No. ###
Job No. _________________ Department _______________
Authorized by ___________ Issued by _________________
Received by _____________ Inspected by _______________
Item Part Unit of Quantity Quantity Unit Total
No. No. Descrip. Measure Required Issued Cost Cost
 Job Order Cost Sheet
• All financial information about a job
– direct material (from material requisition)
– direct labor (from time sheets or labor tickets)
– applied overhead
– budgeted cost information
 Job Order Cost Sheet
• All financial information about a job
– direct material (from material requisition)
– direct labor (from time sheets or labor tickets)
– applied overhead
– budgeted cost information
• When job is complete, use job order cost
sheet to analyze actual costs to budgeted
costs
 Job Order Cost Sheet
Customer ____________ Job No. ###
Starting Date _________ Job Description ____________
Completion Date ______ Contract Price _____________
Materials Direct Labor Overhead Applied
Date Ref# Amount Date Ref # Amount Date Ref# Amount

Total Materials _________

Total Labor _________ Total Cost of Job
Total OH Applied _________ ========
 Employee Time Sheet
• Time worked on each job
 Employee Time Sheet
• Time worked on each job
• Journal entry
Work in Process Inventory (direct labor)
Manufacturing Overhead (indirect labor)
Salaries and Wages Payable
 Employee Time Sheet
Employee Name _______________
Employee No. _______________ For week ending
Department _______________ _______

Start Stop Total

Type of Work Job No. Time Time Day Hours

Employee Signature Supervisor’s Signature

 Manufacturing Overhead
Overhead Account
Actual Overhead Applied Overhead

• Journal Entry
Work in Process Inventory
Manufacturing Overhead (applied)
 Completion of a Job
• Move job cost sheet from WIP
subsidiary to Finished Goods subsidiary
 Completion of a Job
• Move job cost sheet from WIP
subsidiary to Finished Goods subsidiary
• Journal entry
Finished Goods Inventory
Work in Process Inventory
 Standard Cost System
• Actual cost
• Normal cost
• Standard cost
– Predetermined norms (or standards) for
materials, labor, and overhead
– Compare actual costs to standard costs -
difference is a variance
 Management Use of
Job Order Costing Systems
• Estimate future job costs
• Establish realistic bids and selling prices
• Develop budgets and standards
• Compare actual costs to estimated costs
• Determine which jobs are profitable
• Manage inventory
 Product and Material Losses
• Shrinkage
– Evaporation
– Leakage
– Oxidation
• Production errors
– Defects can be economically reworked
– Spoilage cannot be economically reworked
 Product and Material Losses
• Normal Loss – expected during production
• Abnormal Loss – exceeds that expected
during production
 Normal Loss
• Anticipated on all jobs
– Include cost when calculating predetermined
overhead application rate
– Include cost less the estimated disposal value
• Specific to a job
– Applied to the specific job
– Include cost less the estimated disposal value
 Abnormal Spoilage
• Period cost – includes cost of abnormal loss
less any disposal value
 Product and Material Losses
Normal Abnormal
Loss Loss

Loss for
most jobs In overhead Period cost
rate

Loss identified Charge to

with a Period cost
specific job
specific job
 Questions
• What is the difference between job order
and process costing systems?
• How do actual, normal, and standard
costing valuation methods differ?
• How is the job order cost sheet used?