Job Order Costing

CHAPTER 4

Upon completion of this chapter, you should be able to

Define job order costing system and identify the types of industries that
would be most to use this system.
Demonstrate the mechanics of a job order costing system.
Differentiate among the forms used in the purchase and issuance of materials
such as a purchase requisition, a purchase order, a receiving report, and a
materials requisition
Distinguish between the periodic and perpetual cost accumulation systems
used to account for materials issued to production and for ending materials
inventory.
Prepare a job order cost sheet

The job order cost procedure keeps the costs of various jobs or contracts
separate during their manufacture or construction. The method is applicable
to job order work in factories, workshop, and repair shops as well as to work
by builders, construction engineers, shipbuilders, and printers. The cost unit is
the job, the work order, or the contract; and the records will show the cost of
each. The method presupposes the possibility of physically identifying the
jobs produced and of charging each with its own cost.

A variation of the job order cost method is that of costing orders by lots. A lot
is the quantity of product that can be conveniently and economically be
produced and costed. For example, in the shoe manufacturing industry, a
contract is divided in to lots, each lot being from 100 to 250 pairs of one size
and style of shoe. The costs are then accumulated for each lot.

In job order costing, each job is an accounting unit to which materials, labor, and
factory overhead costs are assigned by means of job order numbers. The cost of each
order produced for a given customer or the cost of each lot to be placed in stock is
recorded on a summary sheet called job order cost sheet, or merely a cost sheet.
This mater sheet is designed to collect the costs of materials , labor and factory
overhead applicable to a specific job.
 Several jobs or orders may be going through a factory at the same time, each
cost sheet is given a job number which is placed on each material requisition
and labor time ticket used I connection with the job. These forms used for
materials and labor, numbered for the job to which they apply, are totalled
daily or weekly and entered on the cost sheets. The cost sheet eventually
becomes a summary of all the costs, including factory overhead, involved in
completing a job. the cost sheets are subsidiary records and are controlled by
the work in process account. Jobs performed on the basis of customer
specifications allow the computation of a profit or loss on each order. If jobs
constitute production of a specific quantity for inventory, job order costing
permits computation of a unit cost for inventory costing purposes.

MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING

1. JOB-ORDER COST SHEET

a. These records accumulate product costs of specific units or small batches of units
for both product costing and control purposes.

b. The file of job-order sheets for uncompleted jobs serves as a perpetual book
inventory and thr subsidiary ledger for Work in Process Control.

c. A separate cost sheet is prepared for each job.

2. MATERIALS STOCKCARD

a. These records are the perpetual book inventory of costs and quantities of
materials on hand.

b. The file of materials stock cards for unused materials is the subsidiary ledger for
Materials Control.

c. A separate stock card is prepared for each type of material on hand.

3. FINISHED GOODS STOCKCARD

a. These records are the perpetual book inventory of costs and quantities of
completed goods held for sale.

b. The file of finished goods stock cards for unsold goods is the subsidiary ledger of
Finished Goods Control.

4. FACTORY OVERHEAD CONTROL COST RECORD

a. These records accumulate detailed manufacturing overhead costs by department.

b. The file of these records for the accounting period is the subsidiary ledger for
Factory Overhead Control.

5. MATERIALS REQUISITION, TIME TICKET AND CLOCK CARD

a. As the source documents for charging costs to jobs and department.

b. To aid in fixing responsibility for control and usage of materials and labor.

MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING

1. JOB-ORDER COST SHEET

a. These records accumulate product costs of specific units or small batches of units
for both product costing and control purposes.
b. The file of job-order sheets for uncompleted jobs serves as a perpetual book
inventory and thr subsidiary ledger for Work in Process Control.

c. A separate cost sheet is prepared for each job.

Job cost sheet is a document used to record manufacturing costs and is prepared by
companies that use job-order costing system to compute and allocate costs to
products and services.

The information about manufacturing costs that is shown on job cost sheet usually
includes materials requisition number, cost of direct materials issued, time tickets,
direct labor hours, direct labor rate per hour and total cost, manufacturing overhead
rate per direct labor or machine hour and total cost etc.

EXAMPLE:

2. MATERIALS STOCKCARD

a. These records are the perpetual book inventory of costs and quantities of
materials on hand.

b. The file of materials stock cards for unused materials is the subsidiary ledger for
Materials Control.

c. A separate stock card is prepared for each type of material on hand.

Materials Ledger Card

A materials ledger card is a report used in a job order cost system to track and record
the number of units that are purchased and issued to the production line. In other
words, this is a file that keeps track of how many units of raw materials are ordered
from vendors, how many units are in storage, and how many have been transferred
to the production line.
EXAMPLE:

3. FINISHED GOODS STOCKCARD

a. These records are the perpetual book inventory of costs and quantities of
completed goods held for sale.

b. The file of finished goods stock cards for unsold goods is the subsidiary ledger of
Finished Goods Control.

Finished Goods Inventory

Finished goods inventory is the third group of inventory owned by a manufacturer

and consist of products that are ready for sale. You can think of this like merchandise
owned by a retailer. These goods are completely finished, made it through the
production process, and ready for consumers to buy.

EXAMPLE:

4. FACTORY OVERHEAD CONTROL COST RECORD

a. These records accumulate detailed manufacturing overhead costs by department.

b. The file of these records for the accounting period is the subsidiary ledger for
Factory Overhead Control.

Over or under-applied manufacturing overhead

The over or under-applied manufacturing overhead is defined as the difference

between manufacturing overhead cost applied to work in process and manufacturing
overhead cost actually incurred during a period.

5. MATERIALS REQUISITION, TIME TICKET AND CLOCK CARD

a. As the source documents for charging costs to jobs and department.

b. To aid in fixing responsibility for control and usage of materials and labor.
Materials Requisition

A materials requisition form is a source document that the production department

uses to request materials for manufacturing process.

A typical materials requisition form has the job number, date of request, material
description, quantity, and proper management signatures. Depending on the size of
the company, request forms are filled out weekly, daily, or even hourly.

Time Ticket

A time ticket or time card is the document used to record the amount of hours an
employee worked during a pay period. Time tickets come in all different shapes and
sizes. Traditional time tickets are physical cards that are stamped with starting and
ending times of employees work days. In modern payroll systems, employees can
sign into a computer system that enters the employee's time directly into the
accounting and payroll system. This eliminates the dual entry of traditional systems
while providing same level internal controls.

Clock Card

A clock card, also called a time card, is a source document that records the number
of hours each employee works during a pay period.

Clock cards are also used by manufacturers to track the labor costs of each
production process. Production managers can use cards, also called time tickets, to
record the amount of labor hours used in each step of production. This system will
lead to much more accurate labor costs and cost of goods sold.

EXAMPLE:

ACCOUNTING PROCEDURES FOR MATERIALS

 In manufacturing enterprises, the common practice is to record all materials
and supplies in one control account, Materials or Stores. Procedures that affect the
materials account involve the:

1. Purchase of materials and supplies.

2. Issuance of materials and supplies.

A. Direct Materials

B. Indirect Materials and Supplies

Recording the purchase of materials

The account debited when materials are purchased is Materials or Stores

(instead of Purchases for Periodic) and the account credited is Accounts Payable or
Vouchers Payable. As materials are purchased the amount is posted on the Material
control account and at the same time the purchased is also entered on an individual
materials ledger card/stock card (a separate is used for each material item) showing
quantity received, unit cost, and total amount.

The Entry to record the purchased of materials is:

Materials xxx

Accounts Payable xxx

An entry is made on the stock card under the Received section.

The entry to record the return of materials to vendor is:

Accounts Payable xxx

Materials xxx

An entry is made on the stock card under the Received section enclosed in
parenthesis to indicate reduction in quantity.

Recording the issuance of materials

When a job is started, the materials needed for job are issued based on the
materials requisitions prepared by the employees. A copy of the requisitions is given
to the storekeeper, which will serve as the basis for materials to be issued. The job
order number is shown on the materials to be issued. The job order number is shown
on the materials requisition together with the specifics on type and quantity of
materials requisition together with specifics on type and quantity of materials
required by each job. The quantity, unit cost, and total cost of each of the materials
are entered on the issued section of the stock card.

The entry to record the issuance of direct material is

Work in process xxx

Materials xxx

An entry is made on the stock card under the Issued section and also on the cost
sheet Materials.

The entry to record the issuance of indirect materials is:

Factory overhead control xxx

Materials xxx

An entry is made on the stock card under the Issued section and also on the
overhead analysis sheet.

Shown below is an illustration of a material stock card

Example of a material stock card

Shown below is an illustration of a material requisition slip.

Example of a material requisition form

The material control account may be summarized as follows:

The balance of the Materials account represents the Materials inventory at the end
of the period under consideration. The amount should be equal to the total of the
balances of all the material stock cards.

ACCOUNTING PROCEDURES FOR LABOR

The accounting procedures for labor may be divided into two distinct phases:

1. Collection of payroll data, computation of earnings, calculation of payroll taxes,

and payment of wages.

2. Distribution and allocation of labor costs to jobs, departments, and other cost
classifications.

In most factories, clock cards or time records are used to record the days or
hours worked by each employee. These clock cards or time records are used as the
basis in computing the gross earnings of employees who are paid hourly wages. In
addition to these clock cards time tickets are prepared for each worker to determine
the time spent for each job as basis in determining the amount to be charged to
direct labor cost and indirect labor cost. The time tickets for various jobs are sorted,
priced, and summarized, and the time ticket hours should be reconciled with the
clock card hours.

Shown below is an illustration of a job time ticket.

At regular intervals, usually daily or weekly, the labor time and labor cost for
each job are entered on the job order cost sheets. For each payroll period weekly,
every two weeks, or monthly the summary of employees earnings and the liability
for payment is journalized and posted to the general ledger.
The entry to record the distribution of payroll is

Work in process xxx

Factory Overhead Control xxx

Payroll xxx

An entry is made on the cost sheet under the labor section

The entry to record the payment of payroll is

Accrued Factory Payroll xxx

Cash xxx

The work in process account is used to charge the jobs with the direct labor
cost. Factory overhead control is charged for the indirect labor cost incurred. The tax
withheld is computed based on the table provided by the Bureau of Internal
Revenue. For the SSS Premiums and Phil Health Contributions. The table is provided
by the Social Security System.

The clearing account for the total wages due to the factory personnel is the
payroll account summarized as follows:
 The account used to accumulate the liability for payroll or factory overhead is
the Accrued Factory Payroll summarized as follows:

Accounting for Factory Overhead

There are two accounts used factory overhead control and factory overhead
applied. Factory overhead control is used to accumulate actual overhead incurred,
while factory overhead applied is used to accumulate estimated factory overhead
applied to production. For factory overhead applied to production, a predetermine
rate is used and this is computed using any of the following as a base:

Units of production

Direct material costs

Direct labor hours

Direct labor costs

Machine hours

As items in the factory overhead control account are incurred, the factory
overhead control account is debited. The applied factory overhead entered on the
job order cost sheet for each job is the basis for the following entry.

Work in process xxxxx

 Applied factory overhead xxxxx

As entry is made on the cost sheet factory overhead section

The controlling account for accumulating the indirect charges incurred in

production is:

Manufacturing overhead applied account used for accumulating the total

overhead charged to production during period.

Over/under applied overhead difference between the actual overhead

incurred and the applied overhead.

The closing of the factory overhead control account and the factory overhead applied
may be done at the end of the month or at the end of the year. If the closing is to be
done monthly, the following are the entries:

End of the month:

Factory overhead applied xx

Under/over applied overhead xx

Factory overhead control xx

End of the year:

Cost of goods sold xx

Under/over applied overhead xx

If the closing is to be done yearly, the entry will be at the end of the year only.

End of the year:

Factory overhead applied xx

Cost of goods sold xx

Factory overhead control xx

The variance is computed as follows:

Actual factory overhead xxx

Less: applied factory overhead xxx

Variance xxx

Work in process controlling account used to record the flow of the elements
of the cost through the factory during a given period.

The journal entry to record the cost of the jobs completed is:
 Finished goods xxxx

Work in process xxxx

When the finished goods are delivered to customers, the sales and the cost of goods
sold are recorded as follows:

Accounts Receivable xxxx

Sales xxxx

Cost of goods sold xxxx

Finished goods xxxx

If a job is delivered directly to customer, the entries to record the completion

of the job and the delivery to the customer may be merged into one as follows:

Cost of goods sold xxxx

Work in Process xxxx

Finished goods a controlling account used to record the flow of the cost of
goods completed and transferred to the finished goods storeroom during the period

Cost of goods sold an account used to accumulate the cost of finished goods
disposed through sale of customers.
Illustrative problem:

The northern Consolidated Company has the following balances as of January

1, 2014:

Materials P 4,900

Work In process 4,600

Finished goods 6,000

Accrued factory payroll 200

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