JOB ORDER COSTING

There are two main cost accumulation systems:

 Job order costing

 Process costing
Job order costing is the product costing system used by entities that make relatively small
quantities of distinct batches of identifiable unique products (services).
Construction companies made to order cakes, ship builders, gown designers, and other
companies that produce heterogeneous or highly customized goods use job order costing job
order costing accumulates cost for every job the details for each job or lot can be traced to a job
order cost sheet.
The details for each job or lot can be traced to a subsidiary record known as Job Order Cost
Sheet.
Process costing is the product costing system used by entities that produce large quantities of
homogeneous goods companies that produce breakfast cereal detergent gasoline and other
mass-produced items use process costing
Process costing accumulates costs by processes or departments
Say that the production of a certain product requires three consecutive processes in three
consecutive departments the costs incurred in department a are assigned to the units produced
After processing in department a the units are passed on to department b
The costs incurred in department b are assigned to the units
Afterwards the units are passed on to department c where they are assigned additional costs
A manufacturing operation can be segregated into four main stages
At the procurement stage the purchase of raw materials and the incurrence of labor costs and
indirect charges within the factory are recorded in the raw materials payroll and factory
overhead control accounts.
At the production stage the costs applied to production are recorded as a debit to work in
process
Once production is complete the goods are moved to storage
The completion is recorded as a transfer from work in process to finished goods
Finally when the goods are sold the goods are removed from finished goods and cost of goods
sold is recognized
Let's have a sample illustration on the accounting procedures for job order costing in this
illustration the 40 000 work in process beginning balance pertains to job number 103 which was
started in a previous period but was not yet completed
The 30 000 finished goods beginning balance represents the total cost of job number 102 which
was completed in a previous period but for which no sale has been recognized yet
The purchase of materials on account is recorded as a debit to raw materials and a credit to
accounts payable
The cost of materials used are recorded based on the material requisition form the direct
materials are charged to each job as a debit to work in process and a credit to raw materials
That specific account titles are used for each job to reflect the subsidiary ledger of each job
The indirect materials on the other hand is first recorded as a debit to factory overhead control
and a credit to raw materials
Factory overhead is typically applied to work in process at the end of the period
The accrual of payroll is recorded as a debit to payroll and a credit to accrued payroll
Based on labor time tickets and employee timesheets direct labor costs are charged to each job
as a debit to work in process and a credit to payroll
The indirect labor on the other hand is first recorded as a debit to factory overhead control and a
credit to payroll
Based on the departmental factory overhead cost sheet other factory overhead charges are
recorded as a debit to factory overhead control and a credit to the respective accounts
In job order costing actual factory overhead costs are not usually applied to work in process
instead an applied factory overhead is computed usually as a percentage of direct labor cost
this procedure is referred to as normal costing.
Let's say that factory overhead is applied to work in process at 80 percent of direct labor cost
the journal entry includes a debit to the respective work in process accounts and a credit to
factory overhead control
Let's assume that jobs number 103 and 104 are completed during the period the total cost of
jobs number 103 and 104 can be found in the job order cost sheet the total cost for job number
103 is 54 300 and the total cost for job number 104 is 84 280.
The completion of these jobs is recorded as a debit to finished goods and a credit to their
respective rick and process accounts with a respective total cost
Jobs number 102 and 103 are sold on account at the 20 markup and cost
The cost of goods sold is recorded as a debit to cost of goods sold and a credit to finished
goods the sale is recorded as a debit to accounts receivable and a credit to sale observe that
the ending balance of work in process amounting to 79 000 is equal to the cost of job number
105 which is the only remaining job that has been started but not yet completed
The ending balance of finished goods amounting to 84 280 is equal to the total cost of job
number 104 which is the only remaining job that has been completed but not yet sold
Based on the illustration the schedule of cost of goods manufactured and the schedule of cost
of goods sold are prepared as follows the total manufacturing costs consist of the direct
materials direct labor and factory overhead applied to production amounting to one hundred ten
thousand ninety three thousand one hundred and seventy four thousand four hundred eighty
respectively observe that these amounts can be cross-referenced to the debits in the work in
process account recall that the total manufacturing cost is the total cost applied to production as
we can see here the cost of goods manufactured amounts to two hundred thirty eight thousand
five hundred eighty this amount can be found as a credit to the work in process account and a
debit to the finished goods account recall the cost of goods manufactured is the total cost of the
jobs completed during the period as shown in this illustration the cost of goods sold amounts to
184 300. This amount can be seen as a credit to finished goods and a debit to cost of goods
sold.