Lecture: 4, 5

Chapter: 5
Job Order Costing
Product Costing:
Product costing is the process of assigning
manufacturing costs (i.e. direct material, direct labor
and Factory overhead to the products produced by
the company. Product costing system is necessary for
fixation of their products’ prices.
Two types of systems may be used in manufacturing
and service industries for determining the actual
product’s costs, but which system is to be used; it
depends on the types of products/ Industries.
These two systems are as under:
1. Job order Costing system
2. 2. Process Costing system
1. Job order costing system
Job-order costing is used in such situations when a
firm produces many different types of products,
jobs, or batches within a period simultaneously. In
a job-order costing system, actual direct materials
costs and actual direct labor costs are usually
traced and charged directly to jobs/products.
However, factory overhead is applied to jobs using
a predetermined factory overhead rate, as actual
factory overhead is indirect cost, therefore it is
almost impossible to trace or charged to
jobs/products.
Continued on next page
 Examples of manufacturing industries in which
job-order costing is used include Shipbuilding,
Air craft, Automobile, Furniture, Greeting
cards, Construction industries, etc.
 Examples of service industries in which job-order costing
is used include Construction firms, Hospitals,
Professional services such as law firms and accounting
firms, advertising agencies, Repair shops, Movie studios,
etc.
In a job order costing system, costs are traced to the each
job by allotting an order number to each job as soon as its
production starts and then the costs are accumulated
against this order number till the end. Total accumulated
costs of the job are divided by the number of units in the
job to arrive at an average cost per unit.
2. Process Costing system
A process costing is used in such situation when a
firm produces many units of a single product
within a period. In a process costing system total
manufacturing costs of a particular process are
divided by total number of units produced during
a given time period (month, quarter, year). The
unit cost that results is a broad, average figure.
The basic formula for computation of unit product
cost is as follows:
Unit product cost = Total manufacturing cost for the
period ÷ Total units produced
Examples of manufacturing industries in
which process costing is used include
Cement, Flour, Bricks, Beverage, Paper,
Refinery, Sugar, Oil and Ghee, etc.
Process costing is basically used in companies
that convert basic raw materials into
homogenous products (Liquid or Powder) or
identical products.
In process costing costs are accumulated
departmental/ process wise for the period.
► In this chapter however, we will discuss only job order
costing system.
1. Job order costing system
Following important tasks are done in job order
costing system:
Determination of factory overhead
applied rate

Job order cost sheet

Flow of costs and pass appropriate

journal entries
 Determination of factory overhead applied rate

Recall factory overhead is applied to jobs using a
predetermined factory overhead rate, as actual factory
overhead is indirect cost. An allocation base is selected that is
common to all of the company’s products and services. The
most widely bases in manufacturing industries are direct labor
hours, direct labor cost, machine-hours.
The predetermined factory overhead rate is computed by
dividing the total estimated factory overhead cost for the next
period by the estimated total amount of the selected allocation
base for the next period, as indicated above. Onward this
predetermined factory overhead is used to charge factory over
cost to jobs.
 
 Job order cost sheet
After being notified that the production order
has being issued, the accounting department
prepares a job order cost sheet. A job order
cost sheet is a form prepared for each job that
records the actual direct materials, actual
direct labor and applied factory overhead.
The format of Job order cost sheet may be the
following:

see on next page

 ABC Company
Job order cost sheet
Job order number: 210 Date started: 09/09/2017
Product: Sleeves of Alto Car Date finished: 15/09/2017
Direct material:

Dated Requisition # Amount/Rs
09/09/2017 110 3,100
15/09/2017 130 3,700
Total direct material cost 6,800
Direct labor:
Dated Time ticket # Total hours
09/12/2017 1112 150 3,750
15/09/2017 1126 160 4,320
Total direct labor cost 310 8,070
Factory overhead: {Total hours worked x Applied FOH Rate}

Total FOH cost: {310 hours* Rs20} 6,200

Total manufacturing cost Rs21,070

=======

÷ Number of units produced on this job 60 units

 
Manufacturing Cost per unit Rs351
 Flow of costs and pass appropriate journal entries and closing
entries at month end
The following accounting entries are necessarily required to run
successfully job order costing system. These are as under:
  1. Journal entries for actual Raw materials cost (direct and indirect
materials).
 2. Journal entries for actual labor cost (direct and indirect labor).
 3. Journal for actual factory overhead cost [Other than indirect material
and indirect labor
 4. Journal for applied factory overhead cost
 5. Journal entries for finished goods completed or cost of goods
manufactured.
 6. Journal entries for finished goods inventory sold.
 7. Closing entries for factory overhead over applied or under applied at
month end
1. Journal entries for actual Raw materials cost
(direct and indirect materials).
When raw material is purchased
Materials inventory ……………………… xx
Accounts payable …..………………… xx
To record purchase of materials on account
 
When direct and indirect material is issued to production
Work in process inventory ………… xx
Factory overhead ………………… xx

Materials inventory …………… xx

To record issuance of direct and indirect material issued to production)
2. Journal entries for actual labor
incurred/accrued (direct and indirect
labor).
 Work in process …………….. xx
Factory overhead …………… xx
Income taxes payable ……… xx
Wages payable xx
(To record direct and indirect labor cost)
3.Journal for actual factory overhead
[Other than indirect material and indirect
labor
 Factory
overhead control xx
A/C payable or Cash ……… xx
Accumulated depreciation ……. xx

(To record actual factory over head cost)

4.Journal for applied factory overhead cost
  Work in process ………… xx
Factory overhead control … xx
(To record applied Factory overhead cost)
5. Journal entries for finished goods
completed or cost of goods manufactured.
Finished goods ………… xx
Work in process ……… xx
(To record finished goods inventory
completed)
6.Journal entries for finished goods inventory
sold.
When cost of goods sold is recorded
Cost of goods sold ……. xx
Finished goods xx
(To record cost of goods sold)
 
When sale is recorded
Accounts Receivable or Cash …xx
Sale ………… xx
(To record sales)
7. Closing entries for factory overhead over applied or
under applied at month end
 Case #1: If factory overhead is under applied, i.e. Applied factory
overhead cost is less than actual factory overhead cost.
 Cost of goods sold ………………….. xx
Factory overhead head control ……… xx
To close factory overhead account at month

Case ≠ 2: If factory overhead is over applied, i.e. Applied factory

overhead cost is more than the actual factory overhead cost.
Factory overhead head control………. xx
Cost of goods sold …………… xx
To close factory overhead account at month
…………… ……………..
 Practice Questions from Book
Exercise # 3 , 4 and 5 Matz, A., Uzry, M.F., dan
Hammer. L.H., Cost Accounting - Planning and Control
Pg No. 105 , 106 and 107
Vol 7..
Any Questions?

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Thanks

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