Chapter 2

JOB ORDER COSTING

Lorenze Ibañez
Oxanna Custodio
Grini Gunayan
Intro to Cost Accounting
Cost Accounting
> measure, record and report product /
service costs.
> Use corresponding data to make
decisions
What are examples of the Costs
associated in Manufacturing /
Service Business/es?
Types of Cost Accounting Systems
( Manufacturing Business )

> JOB ORDER COST SYSTEM

> PROCESS COST SYSTEM

20XX 20XX 20XX 20XX

 > Costing each quantity
Product made
Job Order Cost
> Per Job Basis
System
 Job Cost System

Personalized / Distinct / Specialized Bespoke

Customized By - Order Basis Materials Accounting
According to the needs / Only made when there is a To suit out-of-ordinary Tailor-made recording ,
wants of client request request of client controlling and Reporting
of cost
Companies
 > Costing each department
or process
Process Cost > making Huge quantities
System divided into segments
 Process Cost System

Continuous & Defined General / Uniform

Generalized Production Common Use Accounting
According to the mandate Producing products to suit Same or General use / Defined recording ,
of management broad market source of materials controlling and Reporting
of cost
companies
Key takeaways

Job order vs Process Costing

- Uniqueness of product.
- Size of job.
- Record keeping.
- Customer billing.
A Business can also employ both systems, called Hybrid Cost System aka Operation costing system.

Accounting Tools

https://www.accountingtools.com/articles/what-is-the-difference-between-job-costing-and-process-costi.html
In Focus:
Job Cost
System
In Focus:
Example: Washburn Guitars
Job 71: Jazz Series Job 72: American Series
 > Cost of any material that
Direct is an integral part of the
Materials Cost finished product
Materials
Materials
Materials
Materials
 Direct
Labor Cost
> Wages of employees that
converts materials into
finished products
Labor
Labor
 > Manufacturing Costs not
associated with Direct
Labor & Materials

> costs include

Factory - Indirect Materials
Overhead - Indirect Labor
- Factory power
- Factory Depreciation
EXAMPLES OF INDIRECT MATERIALS
EXAMPLES OF INDIRECT LABOR

SALARIES OF JANITORIAL
PRODUCTION SALARIES
SUPERVISOR (FACTORY)
OTHER EXAMPLES OF FACTORY OVERHEAD

● FACTORY UTILITIES

> Communication

> Light and Water

● FACTORY DEPRECIATION
● FACTORY RENT
● TAXES & LICENSES RELATED TO THE MANUFACTURING PRODUCTION
ALLOCATION OF FACTORY OVERHEAD
WHY ALLOCATE OVERHEAD COST?

● INVENTORY COSTING
● USEFUL FOR DECISION MAKING IN SETTING PRICES
● FOR EFFICIENT USE OF RESOURCES
● TO DEVELOP FINANCIAL STATEMENT
ALLOCATION OF FACTORY OVERHEAD
● COST ALLOCATION

> The process by which factory overhead or other

costs are assigned to a cost object, such as a job.

-The Factory Overhead costs are allocated to jobs

using a common measure related to each job. This
measure is called an activity base, allocation base or
activity driver.
 FORMULA:

Predetermined Factory
Overhead Rate (PFOR)

Factory Overhead Costs

 ILLUSTRATION:

Estimated Total factory Overhead Cost for the Year = $50,000

Activity base = 10,000 Direct Labor hours

Predetermined Factory
Overhead Rate (PFOR)
PFOR = $50,000 = $5.00 per direct labor hour
10,000hrs

Factory Overhead Costs

Factory Overhead Balance:
> Increased (debited) for the actual overhead cost
>Decreased (credited) for the applied overhead
Underapplied factory overhead
- Applied overhead < actual overhead
- Factory Overhead will have debit balance (positive)

Overapplied factory overhead

- Applied overhead > actual overhead
- Factory Overhead will have credit balance (negative)
Work in Process
- Inventory and reporting of products still in process in a
particular period

- We monitor costs incurred in the manufacturing that are

not yet completed such as:

- Direct Labor
- Direct Material
- Factory Overhead
WORK IN PROCESS

Work in Process,
ending balance
for the month of
December only
amounted to
$21,000.00 as
can be traced
from Job 72.
Finished Goods
- Reports data on cost for units manufactured,
units sold, and units on hand
WORK IN PROCESS

FINISHED GOODS LEDGER

Sales and Cost of Goods Sold

Cost of Goods Sold under Job Order Costing

-Can be determined directly from the Finished goods ledger/ Stock
Ledger since it uses Perpetual inventory system
Period Costs
- Expenses of the current period not related to
manufacturing process

Includes:
1. Selling expenses - from marketing to
delivering the product (ex. Sales Salaries of personnel)
2. Administrative expenses - incurred in
managing the company (ex. Office Salaries of personnel)
Summary of Cost Flows Legend Guitars
Problem Exercises
PR 2-5A, PR 2-5B, CP 1-4
PR 2-5A Flow of costs and income statement
Ginocera Inc. is a designer, manufacturer, and distributor of low-cost,
high-quality stainless steel kitchen knives. A new kitchen knife series called the
Kitchen Ninja was released for production in early 2016. In January, the
company spent $600,000 to develop a latenight advertising infomercial for the
new product. During 2016, the company spent $1,400,000 promoting the
product through these infomercials, and $800,00 in legal costs. The knives
were ready for manufacture on January 1, 2016.
PR 2-5A Flow of costs and income statement
Ginocera uses a job order cost system to accumulate costs associated with the
kitchen knives. The unit direct materials cost for the knife is:

● Hardened steel blanks (used for knife shaft and blade) $ 4.00
● Wood (for handle) $ 1.50
● Packaging $ 0.50

The production process is straightforward. First, the hardened steel blanks,

which are purchased directly from a raw material supplier, are stamped into a
single piece of metal that includes both the blade and the shaft. The stamping
machine requires one hour per 250 knives.
PR 2-5A Flow of costs and income statement
After the knife shafts are stamped, they are brought to an assembly area
where an employee attaches the handle to the shaft and packs the knife into a
decorative box. The direct labor cost is $0.50 per unit.

The knives are sold to stores. Each store is given promotional materials, such
as posters and aisle displays. Promotional materials cost $60 per store. In
addition, shipping costs average $0.20 per knife.
PR 2-5A Flow of costs and income statement
Total completed production was 1,200,000 units during the year. Other
information is as follows:

● Number of customers (stores) 60,000

● Number of knives sold 1,120,000
● Wholesale price (to store) per knife $16

Factory overhead cost is applied to jobs at the rate of $800 per stamping
machine hour after the knife blanks are stamped. There were additional
25,000 stamped knives, handles, and cases waiting to be assembled on
December 31, 2016.
PR 2-5A Flow of costs and income statement
Instructions:

1. Prepare an annual income statement for the Kitchen Ninja knife series,
including supporting calculations, from the information provided.
2. Determine the balances in the work in progress and finished goods
inventories for the Kitchen Ninja knife series on December 31, 2016.

PR 2-5 A solution
Supporting Calculations
Determine Product Cost per unit:
Direct Materials
Hardened Steel $4.00
Wood 1.50
Packaging 0.50
Direct materials cost per unit $6.00

Direct Labor per unit $0.50

Supporting Calculations
Determine Product Cost per unit:
Factory Overhead
Total Machine Hours used (1,225,000/250) 4,900 Hours
Multiply by: rate applied 800.00
Total Factory Overhead Applied $3,920,000.00
Divided by: Total units manufactured 1,225,000units
Factory Overhead Cost per unit $3.20

Total Product Cost per unit $9.70 per unit

PR 2-5A Flow of costs and income statement
2.)
Work in Process, December 31, 2016
(25,000 units x $9.20) $230,000

Finished Goods, December 31, 2016

(80,000 units x $9.70) $776,000
PR 2-5B Flow of costs and income statement
Technology Accessories Inc., is a designer, manufacturer, and distributor of
accessories for consumer electronic products. Early in 2016, the company
began production of a leather cover for tablet computers, called the iLeather.
The cover is made of stitched leather with a velvet interior and fits snuggly
around most tablet computers. In January, $750,000 was spent on developing
marketing and advertising materials. For the six months of 2016, the company
spent $1,400,000 promoting the iLeather. The product was ready for
manufacture on January 21, 2016.
PR 2-5B Flow of costs and income statement
Technology Accessories Inc. uses a job order cost system to accumulate costs
for the iLeather. Direct material unit costs for the iLeather are as follows:

● Leather $ 10.00
● Velvet $ 5.00
● Packaging $ 0.40

Total: $ 15.40
PR 2-5B Flow of costs and income statement
The actual production process for iLeather is fairly straightforward. First,
leather is brought to a cutting and stitching machine. The machine cuts the
leather and stitches an exterior edge into the product. The machine requires
one hour per 125 iLeathers.

After the iLeather is cut and stitched, it is brought to assembly, where

assemby personnel affix the velvet interior and pack the iLeather for shipping.
The direct labor cost for this work is $ 0.50 per unit.

The completed packages are then sold to retail outlets through a sales force.
The sales force is compensated by a 20% commission on the wholesale price
for all sales.
PR 2-5B Flow of costs and income statement
Total completed packages was 500,000 units during the year. Other
information is as follows:

● Number of iLeather units sold in 2016 460,000

● Wholesale price per unit $ 40

Factory overhead cost is applied to jobs at the rate of $1,250 per machine
hour. There were additional 22,000 cut and stitched iLeathers waiting to be
assembled on December 31, 2016.
PR 2-5B Flow of costs and income statement
Instructions:

1. Prepare an annual income statement for the iLeather product, including

supporting calculations, from the information provided.
2. Determine the balances in the finished and work in progress inventories
for the iLeather product on December 31, 2016.

PR 2-5B solution
Supporting Calculations
Determine Product Cost per unit:
Direct Materials
Leather $10.00
Velvet 5.00
Packaging 0.40
Direct materials cost per unit $15.40

Direct Labor per unit $0.50

Supporting Calculations
Determine Product Cost per unit:
Factory Overhead
Total Machine Hours used (522,000/125) 4,176 Hours
Multiply by: rate applied 1,250.00
Total Factory Overhead Applied $5,220,000.00
Divided by: Total units manufactured 522,000 units
Factory Overhead Cost per unit $10.00

Total Product Cost per unit $25.90 per unit

PR 2-5A Flow of costs and income statement
2.)
Work in Process, December 31, 2016
(22,000 units x $25.40) $558,800

Finished Goods, December 31, 2016

(40,000 units x $25.90) $1,036,000
CP 2-2 Job order decision making and rate deficiencies
RIRA Company makes attachments, such as backhoes and grader and
bulldozer blades, for construction equipment. The company uses a job order
cost system. Management is concerned about cost performance and
evaluates the job cost sheets to learn more about the cost effectiveness of the
operations. To facilitate a comparison, the cost sheet for Job 206 (50 backhoe
buckets completed in October) was compared with Job 228, which was for 75
backhoe buckets completed in December. The two job cost sheets follow:
CP 2-2 Job order decision making and rate deficiencies
CP 2-2 Job order decision making and rate deficiencies
CP 2-2 Job order decision making and rate deficiencies
Management is concerned with the increase in unit costs
over the months from October to December. To
understand what has occured, management interviewed
the purchasing manager and quality manager.
CP 2-2 Job order decision making and rate deficiencies
Purchasing Manager:

“Prices have been holding steady for our raw materials during the first half of the
year. I found a new supplier for our bulk steel that was willing to offer a better
price than we received in the past. I saw these lower steel prices and jumped at
them, knowing that a reduction in steel prices would have a very favorable impact
on our costs.”

Quality Manager:

“Something happened around mid-year. All of a sudden, we were experiencing

problems with respect to the quality of our steel. As a result, we’ve been having all
sorts of problems on the shop floor in our foundry and welding.”
CP 2-2 Job order decision making and rate deficiencies
Instructions:

1. Analyze the two job cost sheets and identify why the unit costs have
changed for the backhoe bucket. Complete the following schedule to help
you in your analysis:

2. How would you interpret what has happened in the light of your analysis
and the interviews?
CP 2-2 Job order decision making and rate deficiencies
Solutions:

1. Analyze the two job cost sheets and identify why the unit costs have
changed for the backhoe bucket. Complete the following schedule to help
you in your analysis:
CP 2-2 Job order decision making and rate deficiencies
Solutions:

1. Analyze the two job cost sheets and identify why the unit costs have
changed for the backhoe bucket. Complete the following schedule to help
you in your analysis:

% decrease in price of steel=9%

Thank you!