1ob Order Costing System:

After studying this chapter you should be able to:

O Distinguish between process costing and job order costing and identify companies
that would use each costing method.
O dentify the documents used in job order costing system.
O ompute predetermined overhead rates and explain why estimated overhead
costs (rather than actual overhead costs) are used in the costing process.
O &nderstand the flow of costs in a job order costing system and prepare
appropriate journal entries to record costs.
O pply overhead cost to work in process (W!) using a predetermined overhead
rate.
O !repare a schedule of cost of goods manufactured and cost of goods sold.
O !repare T-accounts to show the flow of costs in a job order costing system.
O xplain the implications of basing the predetermined overhead rate on activity at
capacity rather than on estimated activity for the period.

job order costing system is used in situations where many different products are
produced each period. For example clothing factory would typically made many different
types of jeans for both men and women during a month. In a ob order costing
system costs are traced to the jobs and then the costs of the job are divided by the
number of units in the job to arrive at an average cost per unit.
ob order costing system is also extensively used in service industries. Hospitals law
firms movie studios accounting firms advertising agencies and repair shops all use a
variety of job order costing system to accumulate costs for accounting and billing
purposes. The details here deal with a manufacturing firm the same concept and
procedures are used by many service organizations.
The record keeping and cost assignment problems are more complex in a job order
costing system when a company sells many different products and services than when it
has only a single product or service. Since the products are different the costs are
typically different. Consequently cost records must be maintained for each distinct
product or job. For example an attorney in a large criminal law practice would ordinarily
keep separate records of the costs of advising and defending each of her clients. And a
clothing factory would keep separate track of the costs of filling orders for particular
styles sizes and colors of jeans. A job order costing system requires more effort than a
process costing system. Companies classify manufacturing costs into three broad
categories:(1) direct materials (2) direct labor (3) manufacturing overhead. (See
manufacturing and non-manufacturing costs page) As we study the operation of a job
costing system we will see how each of these three types of costs is recorded and
accumulated.
1. easuring Direct aterials Cost in Job Order Costing System:
At the beginning of production process a document known as bill of materials is
used for standard products. "A bill of materials is a document that lists the type
and quantity of each item of materials needed to complete a unit of standard
product". Click here to read full article.
2. easuring Direct Labor Cost in Job Order Costing System:
Direct labor cost is handled in much the same way as direct materials cost.
irect labor consists of labor charges that are easily traced to a particular job.
Labor charges that cannot be easily traced directly to any job are treated as part
of manufacturing overhead. Click here to read full article.
3. 55lication of anufacturing Overhead:
anufacturing overhead must be included with direct labor on the job cost sheet
since manufacturing overhead is also a product cost. However assigning
manufacturing overhead to units of product can be a difficult task. Click here to
read full article.
4. Job Order Costing System - The Flow of Costs:
To understand the flow of costs in job order costing system we shall
consider a single month's activity for a company a producer of product A and
product B. Click here to read full article.
5. ulti5le Predetermined Overhead Rates:
hen a single predetermined overhead rate is used for entire factory it is called
plant wide overhead rate. This is fairly common practice - particularly in smaller
companies. Click here to read full article.
6. &nder-a55lied overhead and over-a55lied overhead calculation:
Since the predetermined overhead rate is established before a period begins and
is based entirely on estimated data the overhead cost applied to work in process
(IP) will generally differ from the amount of overhead cost actually incurred
during a period. Click here to read full article.
7. Dis5osition of any balance remaining in the manufacturing overhead
account at the end of a 5eriod:
hat disposition should be made of an under-applied overhead or over-applied
overhead balance remaining in the manufacturing overhead account at the end of
a period? Click here to read full article.
8. Predetermined Overhead Rate and Ca5acity:
Companies typically base their predetermined overhead rates on the estimated
or budgeted amount of allocation base for the upcoming period. This is the
method that is used in this chapter but it is practice that is recently come under
severe criticism. An example will be very helpful why. Click here to read full
article.
9. Recording Non - manufacturing Costs:
In addition to manufacturing costs companies also incur marketing and selling
costs. These costs should be treated as period expenses and charged directly to
the income statement and therefore should not go into the the manufacturing
overhead account. Click here to read full article.
10.Recording Cost of Goods anufactured and Sold:
hen a job has been completed the finished out put is transferred from the
production department to the finished goods warehouse. By this time the
accounting department will have charged the job with direct materials and direct
labor cost and manufacturing overhead will have been applied using the
predetermined overhead rate. Click here to read full article.
11.Job Order Costing in Services Com5anies:
ob order costing is also used in service organizations such as law firms movie
studios hospitals and repair shops as well as manufacturing companies. Click
here to read full article.
12.&se of Information Technology in Job Order Costing:
Bar code technology can be used to record labor time--reducing the drudgery
in that task and increasing accuracy. Bar codes also have many other uses. In a
company with a well-developed bar code system the manufacturing cycle begins
with the receipt of a customer's order in electronic form. Click here to read full
article.
13.dvantages and Disadvantages of Job Order Costing System:
ne of the primary advantages of job order costing system is that the
management team has ready access to all the costs incurred for each job being
completed. This allows the team to examine each cost incurred finding out why it
happened and determine how it can be controlled better in the future thereby
contributing to better ongoing levels of profitability. Click here to read full article.