IffatZehra - 2972 - 15876 - 1 - Chapter 2 Job Order Costing

Managerial Accounting
Eighth Edition
Weygandt ● Kimmel ● Kieso
Chapter 2
Job Order Costing
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Chapter Outline
Learning Objectives
LO 1 Describe cost systems and the flow of costs in a job
order system.
LO 2 Use a job cost sheet to assign costs to work in process.
LO 3 Demonstrate how to determine and use the
predetermined overhead rate.
LO 4 Record manufacturing and service jobs completed and
sold.
LO 5 Distinguish between under-and overapplied
manufacturing overhead.
Copyright ©2018 John Wiley & Sons, Inc. 2

Cost Accounting Systems
LEARNING OBJECTIVE 1
Describe cost systems and the flow of costs in a job order
system.
Cost Accounting
• Involves measuring, recording, and reporting product
costs
• These accounts are fully integrated into the general
ledger of a company.
• Important feature of cost accounting system is use of
perpetual inventory system.
• Perpetual inventory system provides immediate, up-to
-date information on cost of a product
LO 1 Copyright ©2018 John Wiley & Sons, Inc. 3
Costing Systems
• Two basic types of traditional product costing systems:
(1) a process order cost system and (2) a job order
cost system
• Can a company use both types of cost systems?
• Yes. It can eg. use process costing for standard products
and job order for customized products
• Objective of both cost accounting systems is to provide
unit cost information for product pricing, cost control,
inventory valuation and financial statement
presentation.

Process Cost System (1 of 2)
• Used when a large volume of similar products are
manufactured - (cereal, refining of petroleum,
production of ice cream)
• Production in continuous
• Costs are accumulated for a time period – (week or
month)
• Costs are assigned to departments or processes for a
specified period of time

Process Costing – Imp Points!
1. Large volume
2. Same products
3. Continuous production
4. Accumulates cost for a period of time
5. Cost is assigned to departments or processes.

Process Cost System (2 of 2)

Job Order Cost System (1 of 2)
• Costs are assigned to each job or batch
• Important feature: Each job or batch has its own
distinguishing characteristics
• Objective is to compute cost per job
• Measures costs for each job completed – not for set time
periods
• Egs: manufacturing airplanes/jets, production of
movies, printing a batch of 300 wedding cards, building
custom made houses,

Job Order Cost System (2 of 2)
Two jobs: Animated Film and Action Thriller
Each job has distinguishing characteristics and related

costs.
Job order Costing – Imp Points!
1. Each job is unique, custom built
2. Different jobs
3. Not like Continuous production
4. Cost is assigned to each job/batch of goods.
5. Objective is: compute cost/job not to calculate costs
for set time periods.

Job Order Cost Flow
1. Flow of costs (which costs?) in a job order cost
accounting parallels the physical flow of materials as
they are converted into finished goods.
2. Companies first accumulate Manufacturing costs
3. Then they assign these manufacturing costs to Work
in Process (WIP) Inventory account
4. When a job is completed, Cost of completed jobs is
transferred to Finished Goods Inventory account
5. When units are sold, cost is transferred to Cost of
Goods Sold account

Job Order Cost Flow
Basic overview of flow of costs in a manufacturing setting
for production of a fire truck.

Job Order Cost Flow
So what are the 2 steps in flow of Job Order Costing???
Step 1: Accumulating Manufacturing costs incurred
Step2: Assigning accumulated costs to work done.
How do you accumulate costs?

Debit: Manufacturing costs (DM/DL/MOH)
Credit: relevant payable accounts
(Refer to page 52 of book)
Accumulating Manufacturing Costs
(Entries from Book)
Raw Material Costs

Wallace purchases 2,000 lithium batteries (Stock No. AA2746) at $5
per unit ($10,000) and 800 electronic modules (Stock No. AA2850)
at $40 per unit ($32,000) for a total cost of $42,000 ($10,000 +
$32,000). This purchase increases Raw Materials Inventory as shown
Manufacturing Costs
Raw Materials Manufacturing
Inventory Factory Labor Overhead
Purchased raw materials (1) +$42,000
Balance $42,000

Accumulating Manufacturing
Costs
Factory Labor Costs
Consists of three costs:
1. Gross earnings of factory workers
2. Employer payroll taxes on these earnings
3. Fringe benefits (such as sick pay, pensions, and
vacation pay) incurred by the employer

Factory Labor Costs

Wallace incurs $32,000 of factory labor costs. This transaction
increases Factory Labor as shown.
Manufacturing Costs
Incurred factory labor (2) +$32,000
Balance $42,000 $32,000

Manufacturing Overhead Costs

• Many types of overhead costs
o Property taxes, depreciation, insurance, and repairs
related to the manufacturing process
• Costs unrelated to manufacturing are expensed
• Costs related to manufacturing process are accumulated
in Manufacturing Overhead account
o Manufacturing overhead subsequently assigned to work
in process

Using assumed data, Wallace Company incurs the following costs that
increase Manufacturing Overhead as shown.
Manufacturing Costs
Incurred factory labor (2) +$32,000
Factory utilities (3) +$4,800
Factory insurance (3) + 2,000
Factory repairs (3) + 2,600
Factory depreciation (3) + 3,000
Factory property taxes (3) + 1,400
Balance $42,000 $32,000 $13,800

Do It! 1: Manufacturing Costs
During the current month, Ringling Company incurs the
following manufacturing costs:
a. Raw material purchases of $4,200.
b. Factory labor of $18,000. Of that amount, $15,000 relates
to wages and $3,000 relates to payroll taxes.
c. Factory utilities of $2,200 are payable, prepaid factory
insurance of $1,800 has expired, and depreciation on the
factory building is $3,500.
Using the format shown in Illustration 2.6, record the
company’s manufacturing costs in its job order costing system.
Record the company’s manufacturing costs.
a. Raw material purchases of $4,200.
Manufacturing Costs
Raw Materials Inventory Factory Labor Manufacturing Overhead
a. +$4,200
b.
c.
c.
c.

b. Factory labor of $18,000. Of that amount, $15,000 relates to wages and
$3,000 relates to payroll taxes.
Manufacturing Costs
a. +$4,200
b. +$18,000
c.
c.
c.

c. Factory utilities of $2,200 are incurred, prepaid factory insurance of
$1,800 has expired, and depreciation on the factory building is $3,500.
Manufacturing Costs
a. +$4,200
b. +$18,000
c. +$2,200
c. 1,800
c. 3,500

Assigning Manufacturing Costs
Use a job cost sheet to assign costs to work in process.
Assigning manufacturing costs to work in process results

in the following entries.
1. Increases to Work in Process Inventory (debit)
2. Decreases to (credit)
o Raw Materials Inventory
o Factory Labor
o Manufacturing Overhead

Job Cost Sheet
• Essential accounting record in assigning costs to jobs is
a job cost sheet
• A job cost sheet is a form used to record costs
chargeable to specific jobs
• Companies keep a separate job cost sheet for each job
• Job cost sheet constitutes subsidiary ledger for work in
process inventory account
• Each increase or decrease to Work in Process Inventory
must be accompanied by a corresponding posting to
one or more job cost sheets

Raw Material Costs
• Companies assign raw materials costs to jobs when their
materials storeroom issues the materials in response to
requests.
• Requests for issuing raw materials are made on a pre-
numbered materials requisition slip.
• Materials requisition slip
o Written authorization for issuing raw materials
o Materials may be directly issued to use on a job - direct
materials (charged to Work in Process Inventory)
o May be considered indirect materials – charged to
Manufacturing Overhead
• Company can use FIFO/LIFO/Avco in costing the
requisitions to the individual job cost sheets.
Raw Material Costs

Raw Material Costs
Illustration: Wallace uses $24,000 of direct materials and $6,000
of indirect materials in January as shown.
Manufacturing Costs
Raw Materials Manufacturing Work In Process
Inventory Factory Labor Overhead Inventory
Balance $42,000 $32,000 $13,800
Direct materials − 24,000 + $24,000
(4)
Indirect − 6,000 + 6,000
materials (4)
Balance $12,000 $32,000 $19,800 $24,000

Raw Material Costs

Factory Labor Costs
• Companies assign factory labour costs to jobs on the
basis of time tickets
• Time tickets are prepared when work is performed
• Time tickets indicate:
o Employee
o Hours worked
o Account and job charged
o Total labor cost
• The data can be gathered through bar coding/scanning
devices when employee start/end work.
Factory Labor Costs

Raw Material Costs
Illustration: Wallace uses $24,000 of direct materials and $6,000
of indirect materials in January as shown.
Manufacturing Costs
Raw Materials Manufacturing Work In Process

Inventory Factory Labor Overhead Inventory
Balance $12,000 $32,000 $19,800 $24,000
Direct labor (5) −28,000 + $28,000
Indirect labor (5) − 4,000 + 4,000
Balance $12,000 $ 0 $23,800 $52,000

Factory Labor Costs

Do It! 2: Work in Process
Danielle Company is working on two job orders. The job
cost sheets show the following:
Direct materials—Job 120 $6,000; Job 121 $3,600
Direct labor—Job 120 $4,000; Job 121 $2,000
Using the format shown in illustration 2.12, record the
assignment of costs to Work in Process from the data on
the job cost sheets.

Do It! 2: Work in Process
Record the assignment of costs to Work in Process from
the data on the job cost sheets.
Direct materials—Job 120 $6,000; Job 121 $3,600
Direct labor—Job 120 $4,000; Job 121 $2,000
Manufacturing Costs
Raw Materials Factory Labor Manufacturing Work In Process
Inventory Overhead Inventory
Direct materials − $9,600 + $9,600
Direct labor −$6,000 + 6,000

Predetermined Overhead Rate
Demonstrate how to determine and use the

predetermined overhead rate.
• Companies charge the actual costs of direct materials and
direct labour to specific jobs.
• In contrast, manufacturing overhead relates to production
operations as a whole.
• Hence, overhead costs cannot be assigned to specific jobs on
the basis of actual costs incurred.
• Relates to production operations as a whole
• Companies assign MOH to work in process and to specific
jobs on an estimated basis through the use of a …
• Is based on relationship between estimated annual
overhead costs and expected annual operating activity.
• Expressed in terms of an activity base such as:
o Direct labor costs
o Direct labor hours
o Machine hours
o Any other measure that provides an equitable basis for
applying overhead costs to jobs

• It is established at beginning of year
• Small companies often use a single, company-wide
predetermined rate
• Large companies often use a different rate for each
department and each department may have a different
activity base
• Formula for computing the predetermined rate overhead
rate is:
Estimated Annual ÷ Estimated Annual = Predetermined
Overhead Costs Operating Activity Overhead Rate

Manufacturing overhead costs are assigned to Work in
Process during the period to get timely information about
the cost of a completed job.
Actual Activity Base Used ×


Illustration: Wallace Company uses direct labor cost as the
activity base. Assuming that the company expects annual
overhead costs to be $280,000 and direct labor costs for the
year to be $350,000, compute the overhead rate.
Estimated Annual ÷ Estimated Direct = Predetermined

Overhead Costs Labor Cost Overhead Rate
$280, 000 ÷ $350, 000 = 80%
This means that for every dollar of direct labor, Wallace will
assign 80 cents of manufacturing overhead to a job.

• The use of predetermined overhead rate enables the
company to determine the approximate total cost of each job
when it completes the job.
• Historically, companies used DL costs or DL hours as the
activity base. Reason was the relatively high correlation
between direct labour ad manufacturing overhead.
• Today more companies are using machine hours as the
activity base, due to increased reliance on automation in
manufacturing operations.
• A company may use more than one activity base.

Illustration: Wallace applies manufacturing overhead to work in
process when it assigns direct labor costs. Calculate the amount of
applied overhead assuming direct labor costs were $28,000.
$28,000 × 80% = $22,400
Manufacturing Costs
Raw Materials Factory Labor Manufacturing Work In Process
Inventory Overhead Inventory
Balance $12,000 $0 $23,800 $52,000
Assigned -22,400 +22,400
overhead (6)
Balance $12,000 $0 $ 1,400 $74,400


Predetermined Overhead Rate (7 of 7)
At the End of Each Month:
Balance in Work in Process Inventory should equal
sum of costs shown on job cost sheets of unfinished jobs.

Do It! 3: Predetermined Overhead
Rate
Stanley Company produces specialized safety devices. For the year,
manufacturing overhead costs are estimated to be $160,000.
Estimated machine usage is 40,000 hours. The company assigns
overhead based on machine hours. Job No. 302 used 2,000 machine
hours. Compute the predetermined overhead rate and determine the
amount of overhead to apply to Job No. 302.
• Predetermined overhead rate =
$160,000 ÷ 40,000 hours = $4.00 per machine hour
• Amount of overhead applied to Job No. 302 =

2,000 hours × $4.00 = $8,000
Assigning Costs to Finished Goods
Record manufacturing and service jobs completed and
sold.

When a job is completed, Wallace Company
summarizes the costs and completes the lower
portion of the applicable job cost sheet.


When a job is finished, Wallace transfers total cost to finished
goods inventory. Recording the finished job as shown. (See page
62 of book)
Manufacturing Costs
Raw Work In Finished
Materials Factory Manufacturing Process Goods Cost of
Inventory Labor Overhead Inventory Inventory Goods Sold
Balance $12,000 $0 $1,400 $74,400
Job 101 (7) −39,000 +$39,000
Balance $12,000 $0 $ 1,400 $39,000 $39,000

Assigning Costs to Finished
Goods
When a job is finished, Wallace transfers total cost to finished
goods inventory. Recording the finished job as shown.
Manufacturing Costs
Raw Work In Finished
Materials Factory Manufacturing Process Goods Cost of
Inventory Labor Overhead Inventory Inventory Goods Sold
Balance $12,000 $0 $1,400 $35,400 $39,000
Sale Job −39,000 +$39,000
101 (8)
Balance $12,000 $0 $ 1,400 $35,400 $0 $39,000

Assigning Costs to Cost of Goods Sold
• Companies recognize COGS only when sale occurs.
• What is entry the company makes when it sells a
‘completed’ job?
• Journalize: Sale on account of job which costs $39,000 and
it sold for $50,000.
• Increase in COGS and a decrease in Finished goods account

Summary of Job Order Cost Flows
• The cost flow can be categorized as any of the four types:
1. Accumulation (purchase RM, incur Dl, incur MOH)

2. Assignment to jobs (costs need to be assigned to specific
jobs*)
3. Completed Jobs (WIP inventory transferred to FG)
4. When goods are sold (FG inventory transferred to COGS)
(See page 64 of book)
*DM/DL/MOH assigned to WIP, InDM/InDL assigned to MOH.
Assignment to WIP on basis of predetermined OH rate, not actual OH
costs.
Flow of Documents
Job cost sheet summarizes the
Source Documents cost of jobs completed and not
completed at the end of the
accounting period.
Jobs completed are transferred to

finished goods to await sale.

Flow of Documents
Manufacturing Costs
Raw Materials Manuf. Work In Process Finished Goods
Inventory Factory Labor Overhead Inventory Inventory Cost of Goods Sold
(1) +$42,000
(2) +$32,000
(3) +$4,800
(3) +2,000
(3) +2,600
(3) +3,000
(3) +1,400
(4) -24,000 +$24,000
(4) -6,000 +6,000
(5) -28,000 +28,000
(5) -4,000 +4,000
(6) -22,400 +22,400
(7) -39,000 +$39,000
(8) -39,000 +$39,000
Balance $12,000 $ 0 $1,400 $35,400 $ 0 $39,000

Flow of Documents
Accumulation
1. Purchase raw materials
2. Incur factory labor
3. Incur manufacturing overhead
Assignment
4. Raw materials are used
5. Factory labor is used
6. Overhead is applied
7. Completed goods are recognized
8. Cost of goods sold is recognized

Job Order Costing Service Companies
While service companies do not have inventory,
techniques of job order costing are still useful.
Consider:
• Mayo Clinic (health care)
• PricewaterhouseCoopers (accounting)
• Goldman Sachs (investment banking)
These companies track the cost of jobs performed for
specific customers to evaluate profitability of medical
treatments, audits, or investment banking engagements.
Job Order Costing
Advantages
• More precise assignment of costs to projects than
process costing
• Provides more useful information for determining
profitability of particular projects and for estimating
costs when preparing bids on future jobs
Disadvantage
• Requires a significant amount of data entry

Do It! 4: Completion and Sale of Jobs
Onyx Corporation completed Job 109 and Job 112. Job 109 cost
$19,000 and Job 112 cost $27,000. Job 112 was sold on account for
$42,000. Using the format shown, record the completion of the two
jobs and the sale of Job 112 in the company’s job order cost system.
Work in Process Finished Goods Cost of Goods

Inventory Inventory Sold
Completed Job 109 −$19,000 +$19,000
Completed Job 112 −27,000 +27,000
Sold Job 112 −27,000 +$27,000

Cost of Goods Manufactured
Distinguish between under-and overapplied
manufacturing overhead.

Under- or Overapplied Manufacturing
Overhead
• A positive balance in manufacturing overhead means
that overhead is underapplied
• A negative balance in manufacturing overhead means
that overhead is overapplied
Any Year-end Balance in manufacturing overhead is
eliminated by adjusting cost of goods sold (COGS)
• Underapplied overhead increases COGS
• Overapplied overhead decreases COGS

Under- or Overapplied Overhead (1 of 2)
Since Wallace’s overhead is

underapplied, we adjust the
overhead account and cost of
goods sold as shown in
illustration 2.28.
Manufacturing
Overhead Cost of Goods Sold
Unadjusted balance $1,400 $39,000
Adjustment −1,400 1,400
Adjusted balance $ 0 $40,400

Under- or Overapplied Overhead (2 of
2)

Do It! 5: Applied Overhead
For Karr Company, the predetermined overhead rate is 140%
of direct labor cost. During the month, Karr incurred $90,000
of factory labor costs, of which $80,000 is direct labor and
$10,000 is indirect labor. Actual overhead incurred was
$119,000. Compute the amount of manufacturing overhead
applied during the month. Determine the amount of under- or
overapplied manufacturing overhead.
Manufacturing overhead (140% × $80,000) = $112,000
applied
Under- overapplied ($119,000 − $112,000) = $7,000

manufacturing overhead (Underapplied)
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Managerial Accounting

Weygandt ● Kimmel ● Kieso

Copyright ©2018 John Wiley & Sons, Inc. 2

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 4

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 5

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Each job has distinguishing characteristics and related

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LO 1 Copyright ©2018 John Wiley & Sons, Inc. 11

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Step 1: Accumulating Manufacturing costs incurred

Step2: Assigning accumulated costs to work done.

How do you accumulate costs?

Raw Material Costs

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Factory Labor Costs

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Manufacturing Overhead Costs

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Use a job cost sheet to assign costs to work in process.

Assigning manufacturing costs to work in process results

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Raw Materials Manufacturing Work In Process

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Demonstrate how to determine and use the

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Actual Activity Base Used ×

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Estimated Annual ÷ Estimated Direct = Predetermined

$280, 000 ÷ $350, 000 = 80%

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• Amount of overhead applied to Job No. 302 =

Assigning Costs to Finished Goods

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1. Accumulation (purchase RM, incur Dl, incur MOH)

Jobs completed are transferred to

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