JOB ORDER

COSTING
NOTES and
ILLUSTRATIVE
PROBLEMS

System of Cost Accumulation

Actual (Historical) Cost System. Under this system, direct materials, direct
labor, and factory overhead costs are determined as they occur
simultaneously with the manufacturing operation but the total of these costs
is known only as the operation has been completed. An actual cost system
collects the actual amounts of direct materials, direct labor, and factory
overhead that are incurred for each product.
Standard (Predetermined) Cost System. Under this system, costs are
determined in advance from analysis and forecasts made before the actual
production begins. In a standard cost system, standard unit costs are
computed for the direct materials, direct labor, and factory overhead;
these amounts rather than the actual costs are carried to Finished Goods.
Normal Cost System. This system is a combination of the actual cost
system and the standard cost system. It accumulates only the actual
amounts of direct materials and direct labor costs. Factory overhead
costs are accumulated on the basis of predetermined overhead rate.

Cost Accumulation Procedures (Methods)

1. Job Order Costing
2. Process Costing
3. Blended Method/Hybrid Method
4. Backflush Costing

Job Order Costing.

A. products are manufactured within a department or cost
center are heterogeneous or dissimilar products.
B. they are manufactured individually or in distinct lots
or batches.
C. Each job requiring different amounts of materials,
labor and overhead.

A job is a cost object that can be distinguished easily because:

(1) they are unique in some way
(2) separate documents are kept that record the costs of the jobs.

Job cost is determined in six steps:

1. Select an allocation base for computing the predetermined overhead
rate(s).
2. Estimate overhead for each overhead cost pool.
3. Calculate the predetermined overhead rate(s) by dividing the
estimated overhead by the estimated allocation base.
4. Record direct costs for each job as they are incurred.
5. Apply overhead using the predetermined rates as jobs are completed
or when the financial statements are prepared.
6. If there is over- or under-applied overhead, either write it off directly to
Cost of goods sold or allocate it.

ILLUSTRATION:
Black Polo, Inc. specializes in custom steel frames and uses job costing to account
for its operations. The following information is available as of May 1 for the workin-process inventory account.

Job#
304
306
Total
Polo costs
pays an

Direct
materials

Direct
labor

P3,000
4,000
P7,000

P1,800
2,100
P3,900

Manufactur
ing
overhead
P2,520
2,940
P5,460

Total
costs
P7,320
9,040
P16,360

Black
hourly rate of P15 for direct labor. The manufacturing overhead
costs are applied to jobs based on the direct labor hours. During the month of May,
Black Polo spends P5,800 for materials and P4,650 for manufacturing overhead.
The operations in May are summarized below.

Job#
304
306
307
308
Total

Material requisition
summary
P1,100
900
2,800
750
P5,550

Time card summary

(Hours)
40
30
110
25
205

Jobs 304, 306, and 307 are completed in May but only Jobs 304 and 307 are
delivered to customers.

Requirements:
1. Calculate the predetermined overhead rate used.
2. Calculate the Over / (under) applied overhead.
3. Calculate the ending balance of Work In process (assuming
that over / under applied overhead is insignificant or
immaterial.)
4. Calculate the Ending Balance of Finished Goods Inventory
Account. (assuming that over / under applied overhead is
insignificant or immaterial.)
5. Calculate the Cost of Goods Sold if over/ under applied
overhead is immaterial.
6. Prepare the necessary journal entries for May (assuming any
over- or under-applied manufacturing overhead is written off to
Cost of goods sold account monthly)

Materials inventory
5,800
Accounts payable
(Materials purchased)

5,800

Work-in-process inventory
5,550
Materials inventory
5,550
(Materials put into production)

Work-in-process inventory
Wages payable
(Direct labor incurred)

3,075
3,075

Manufacturing overhead control

4,650
Accounts payable, etc.
4,650
(Manufacturing overhead incurred)

Work-in-process inventory
4,305
Applied manufacturing overhead
4,305
(Manufacturing overhead applied)


Finished goods inventory
Work-in-process inventory

27,640
27,640

(Jobs 304, 306, and 307 completed)

Cost of goods sold

16,620
Finished goods inventory

16,620

(Jobs 304 and 307 delivered to customers)

Applied manufacturing overhead

Cost of goods sold
345

4,305

Manufacturing overhead control

4,650

(Under-applied manufacturing overhead written off

to Cost of goods sold)

Costs added during May

Direct
Direct
Manufacturing
Job#
BB
materials
labor
overhead
304
P7,320
P1,100
P600
P840
306
9,040
900
450
630
307
2,800
1,650
2,310
308
750
375
525
Total P16,360 P5,550
P3,075
P4,305

EB
P9,860
11,020
6,760
1,650
P29,290

FINISHED GOODS: Jobs 304, 306, and 307 completed

WORK IN PROCESS: Job 308 remaining
COST OF GOODS SOLD: Jobs 304 and 307 delivered to
customers

EXERCISE PROBLEM
YELLOW-KITTY CORPORATION manufactures one product and accounts
for costs using a job-order cost system. You have obtained the following
information for the year ended December 31, 2011 from the Corporations
books and records:
Total manufacturing cost added during 2011 was P1,000,000 based on
actual direct material, actual direct labor, and factory overhead applied
based on actual direct labor pesos.
Costs of goods manufactured was P970,000 also based on actual direct
material, actual direct labor, and applied factory overhead.
Factory overhead was applied to work-in-process at 75% of direct labor
pesos. Applied factory overhead for the year was 27% of the total
manufacturing cost.
Beginning work-in-process inventory, January 1, was 80% of ending
work
in
process
inventory,
December 31.

Requirements:
1. Calculate the amount of Factory overhead applied.
2. Calculate the amount of Direct Labor Costs.
3. Calculate the ending balance of the work in process.
4. Calculate the beginning balance of the work in process.
4. Calculate the amount of total manufacturing costs to
account for.

Prepare the necessary journal entries from the following

information for Carmella Company, which uses a perpetual
inventory system.
a. Purchased raw material on account, 56,700.
b. Requisitioned raw material for production as follows: direct material-80
percent of purchases; indirect material-15 percent of purchases.
c. Direct labor wages of 33,100 are accrued as are indirect labor wages of
12,500.
d. Overhead incurred and paid for is 66,900.
e. Overhead is applied to production based on 110 percent of direct labor cost.
f. Goods costing 97,600 were completed during the period.
g. Goods costing 51,320 were sold on account for 77,600.

a. Raw Material Inventory

A/P
b. WIP Inventory
MOH
Raw Material Inventory
c. WIP Inventory
MOH
Wages Payable
d. MOH
Cash
e. WIP Inventory
MOH
f. FG Inventory
WIP Inventory
g. CGS
FG Inventory
A/R
Sales

56,700
56,700
45,360
8,505
53,865
33,100
12,500
45,600
66,900
66,900
36,410
36,410
97,600
97,600
51,320
51,320
77,600
77,600

Wages are payments made an hourly, daily, or piecework basis, whereas

salaries are fixed payments for managerial services. Other terms
necessary for any discussion of labor costs are best defined by
equations, as follows:
Gross Earnings = Regular wage + Overtime Premium
Regular Wage = Total hours worked (including overtime) x Regular hourly
rate
Overtime Premium = Overtime hours worked x Extra hourly compensation
for overtime
Other Additional Compensation chargeable to Factory Overhead
Control:
Overtime premium and Shift premium or differential
Bonus, Vacation and Holiday Pay, Pensions and Incentive Plans
Fringe costs. Vacation and pension plans are only two of the most
common employee benefits. Other fringe costs are listed below:
Employers share in (not employees share):
Social Security System
PhilHealth Contribution

Scrap includes:
the filings or excessive trimmings of materials after the manufacturing
operations
defective materials that cannot be returned to vendor or not suitable
for manufacturing operations, and
broken parts as a result of an employee error or machine breakdowns
that causes the product in a poor quality condition
Scrap Sales are accounted for as:
A. Additional Revenue
B. Reduction to Cost of Goods Sold
C. Reduction to Factory Overhead Control
D. Reduction in Cost of Materials traceable to a job

Spoiled goods or spoilage differ from scrap, in the

manner that they are either partially or fully completed unit. For reason
of being spoilage, they cannot be corrected either because it is not
technically possible to correct them or it is not economical to correct
them.

Waste as distinguish to scrap materials refers to any amount

of raw materials left-over from a production process or production cycle for
which there is no further use. Waste is not usually saleable at any price
and must be discarded.

Spoilage loss
Charged to all production or Factory Overhead due to internal
failure brought by worn out machinery or employee error.
Charged to a particular job attributable to the exacting
specifications imposed by customers

Rework is the process of correcting defective goods in order to bring

them into a saleable condition.
Charged to all production or Factory Overhead due to internal
failure brought by worn out machinery or employee error.
Charged to a particular job attributable to the exacting
specifications imposed by customers

EXERCISE PROBLEM
Yellow-Arrow company manufactures picture frames and uses job order
costing system. The following cost relate to the current run:
Estimated Overhead(exclusive of spoilage) ------ P80,000
Spoilage (Estimated)-----------------------------------12,500
Sales Value of the Spoiled frames-------------------- 5,750
Labor hours--------------------------------------------------50,000
The actual cost of a spoiled frame is P 7. During the production,
150 frames are considered spoiled. Each spoiled frames can be
sold for P 4.
1. Assume that spoilage is part of all jobs, What is the predetermined
overhead rate using labor hours as the activity base?
2. Prepare the Journal Entry for the spoilage.
3. Assume that the spoilage relate to a specific job # 143, What is the
predetermined overhead rate using labor hours as activity base?
4. prepare the Journal Entry for the spoilage.

EXERCISE PROBLEM
Burblurry Cos Job 168 for the manufacture of 4,400 coats, which was
completed in September at unit costs presented below. Final Inspection of
Job 168 disclosed 400 spoiled coats which were sold to a jobber for
P12,000
Direct Materials-------------------------------- P40
Direct Labor ------------------------------------ 36
Factory Overhead (includes an allowance
for P 2 overhead) -------------------36
P112
1. If the spoilage loss is charged to all production , what would be the
unit cost of good coats produced on Job 168?
2. If the spoilage loss is attributable to exacting specifications, what
would be the unit cost of good coats produced on Job 168?

EXERCISE PROBLEM
Blackbike Cos incurred the following costs on Job 999 for the manufacture
of 400 motors during April:
Direct Materials-------------------------------- P1,320
Direct Labor ------------------------------------ 1,600
Factory Overhead (150% of DL) ----------2,400
P 5,320
Direct Costs of reworking 10 units:
Direct Materials---------------------P 200
Direct Labor ------------------------320
P 520
1. If the rework costs were attributable to internal failure or charged to
Factory overhead , what would be the unit cost of Job 999?
2. If the rework costs were attributable to exacting specifications of Job
999, what would be the unit cost of Job 999?

EXERCISE PROBLEM
Camille Co. manufactures electric drills to the exacting specifications of
various customers. During May 2012, Job 143 for the production of 2,200
drills was completed at the following costs per unit:
Direct Materials-------------------------------- P20
Direct Labor ------------------------------------ 16
Applied Factory Overhead (P 3 allowance)--- 24
P 60
Final inspection of Job 143 disclosed 100 defective units and 200 spoiled
units. The defective drills were reworked at total cost of P1,000, and the
spoiled drills were sold to a jobber for P 3,000.
What would be the unit cost of goods produced?

Carmella Mfg. Co. started 150 units in process on job order # 5. The prime
costs placed in process consisted of P30,000 for direct material in which
this amount is 62.5 percent of the said prime costs. The predetermined
overhead rate was used to charged factory overhead to production at
133.33 % of the direct labor cost. Upon completion of the job order, units
equal to 20 percent of good output were rejected for failing to meet the
strict quality control requirements.
The company sells rejected units as scrap at only 1/3 of its production cost,
and bills the customers at 150% of the production cost.
1. If the rejected units were due to machine breakdown, the billing price
of job order # 5 would be?
2. If the rejected units were due to customer specification, the billing
price of job order # 5 would be?

Silver Metal Products accumulates metal shavings from the shop floor and
sells them periodically to a nearby scrap dealer. Scrap sales, on account,
for the period just ended total P2,300.
Required: Indicate the journal entries when:
(1)The scrap sales are viewed as additional revenue.
(2)The scrap sales are viewed as a reduction of the cost of goods sold
during the period.
(3)The scrap sales are viewed as a reduction of factory overhead.
(4)The scrap sales are traceable to individual jobs and are viewed as a
reduction in the cost of materials used on the jobs.

(1) Accounts Receivable

2,300
Scrap Sales (or Other Income)

(2)Accounts Receivable
Cost of Goods Sold

2,300

2,300
2,300

(3)Accounts Receivable
2,300
Factory Overhead Control

2,300

(4) Accounts Receivable

2,300
Work in Process

2,300