Job Costing

Company X manufactures custom engines for professional drag racers. On January

1, the company receives an order for two engines – a Series 3000 engine (Job #1)
and a Series 6000 engine (Job #2). The company took a break for the holidays, so
no engines are currently being constructed.

During the month of January, the company uses $6,000 of parts and shop supplies
on the Series 3000 engine and $9,000 of materials on the Series 6000 engine. Six
employees work on each engine for a total of 100 labor hours on the Series 3000
engine and 140 labor hours on the Series 6000 engine at a rate of $12.00 an hour.
Company X allocates overhead to jobs at a rate of $20 per labor hour.

The Series 3000 engine is sold to the client for $13,000, while the Series 6000
engine is sold for $17,000. Both engines are sold for cash.
 Job Costing
 Job costing simply allocates cost items directly to each item being
produced.
 All costs are first recorded in Work-In-Process (WIP) Inventory (i.e., a
separate general ledger account).
 When the job is completed, those costs are moved to Finished Goods
Inventory (i.e., another general ledger account).
 When the product is sold, the costs are moved to the income statement
as Cost of Goods Sold.
 Job Costing
Let’s first allocate direct materials and direct labor. We need to separately
track both jobs.
 Job Costing
Next, we’ll allocate factory overhead. Briefly, the rate is an estimate
based on an expectation of total manufacturing activity for the period. As
overhead costs are incurred, they are accumulated in a control account
and then passed on to specific jobs based on the predetermined rate.
 Job Costing
At this point, $9,200 has been allocated to Job #1 and $13,480 has been
allocated to Job #2. Next, those costs are moved to Finished Goods
Inventory once the engines are completed:
 Job Costing
When the engines are sold, we make a final series of entries as follows:

Companies usually have many different jobs in various stages of

completion at any one time. At the end of a period, WIP Inventory and
Finished Goods Inventory are both reported on the balance sheet as
current assets.