37

Introduction:
and must be communicated immediately to the
Paper is one of the most basic raw materials customer within 24hours from ordering.
on almost every product. It can be trimmed,
folded, printed or processed further to create After receiving the customer’s approval, the
anything useful from labels, scratchpads, production takes place. When the job is done,
stationeries, books, envelopes, notebooks and another independent cost accountant will
others. trace the actual cost of the job before delivery.
The accountant will make a report to the
Farook International Stationary, a Dubai management between the difference of the
based company with key positions controlled estimated cost made before and after the
by mostly Filipinos, is one of the leading production.
paper companies in Middle East. They have
more than a hundred products which is not Farook International ensures a high quality
only limited to various school supplies but standard on every finished product. However
also caters to customer based orders from competition from other manufacturers and the
wedding invitations, posters, children’s books increasing cost of raw materials challenges
and company give-aways. the company to review always the operation
One of the most critical end products they process. Improvements in this area is a key to
have is manuscript notebooks. They received have a lower production cost leading to lower
daily orders with various designs, sizes and selling price without sacrificing the quality of
other customization. When Farook every product.
International received such requests, every
detail will be discussed; from the quality,
weight and standard size of the paper to the
number of colors and the lines to appear on
the manuscript. The number of quires (group
of sheets) is important information as different
procedure will be taken for thicker notebooks.
Thorough discussion of the cover must also be
initiated not only on the design but also the
nature of its cover whether made of paper,
board, polyurethane or polypropylene as cost
differs and will have a material difference.

Out from these intricate details, a cost

accountant will then proceed to estimate the
accumulated cost from the raw materials to be
used, the manual labor hours, the
machineries, the number of days to finish the
job and other relevant expenses. Such cost
computation will be then submitted to the
higher management to set up a selling price

COST ACCOUNTING & CONTROL

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METHODS OF PRODUCT COSTING

Before products or services can be costed, you need to understand different theories or
concepts about costing as they are vital in many areas of planning, control, and decision-
making. This chapter will build your understanding about the various cost accumulation
systems used (job order or process costing) and the valuation methods used along with
such cost accumulation system applied (actual, normal, or standard costing). The main
focus of this chapter will be on Job Order Costing, a cost accounting system that
accumulates the costs of a product or service per individual job or customer’s order.

COST ACCUMULATION SYSTEMS

The principal cost accounting systems used by most manufacturing entities are job order
costing and process costing. Job order costing is used by entities that make relatively
small quantities or distinct batches of identifiable, unique products or services. A
customer’s order is often termed as job, batch, client, engagement, project, or contract.

Process costing is an alternative cost accounting system of accumulating costs per process
or segment used by entities that produce large quantities of homogeneous products such as
breakfast cereal, detergent, and gasoline where one unit of output cannot be readily
identified with specific input costs within a given period.

VALUATION METHODS

Actual Costing. This is a valuation method whereby production inputs are valued at their
actual cost, which is the actual amount paid for direct materials, direct labor and overhead
costs in determining the cost of Work in Process Inventory. All factory overhead costs
incurred (debit to Factory Overhead Control) would be applied to Work-in-Process (credit
Factory Overhead Control or credit Applied Factory Overhead).

The problem is that the total actual costs of overhead are not known until the end of the
period. It is not practical to wait until the end of the period to cost products, since cost is a
factor in setting prices. Furthermore, if monthly overhead costs are used, unit costs could
vary widely if actual costs fluctuate from month to month. Service businesses that have few
customers and/or low volume may use an actual cost system.

Normal Costing. This is a valuation method that uses actual direct material, actual direct
labor, and applied overhead (estimated using predetermined overhead rates) in determining
the cost of Work in Process Inventory. This workbook assumes the use of normal costing.
Estimated overhead costs are divided by estimated production for the year to determine an
application rate. This will smooth out monthly variations in overhead costs and allow a more
uniform product cost. If overhead is applied for a cost pool based on machine hours, then
the overhead rate would be applied to the actual machine hours used. (See more
information about overhead allocation in Chapter 5 of this workbook.)

Standard Costing. This is a valuation method wherein standards (predetermined

benchmarks) are developed for direct material and direct labor quantities and/or costs and
overhead is applied to production using a predetermined rate that is considered the
standard. Costs that would be incurred under efficient operating conditions which are
forecasted before production begins are called standard costs. In a standard cost system,
standard costs are developed for all inputs per unit of production. Input costs charged to
COST ACCOUNTING & CONTROL
 39

inventory are based on the number of inputs that should have been used to make a
product. For example, if overhead is applied on machine hours, it would be applied to the
number of hours that should have been used to make that unit, not the actual number of
machine hours used.

Standard costing can be used along with either job order costing or process costing. It
allows companies to quickly recognize variances from expected production costs and to
correct problems from excess usage and/or costs, a capability not found in actual cost
systems and provided only for overhead in normal cost systems (adapted: CMA/CFM Review
Manual 2010). The difference between the standard costs and actual costs incurred are
isolated in variance accounts and analyzed to determine responsibility for the variance.
These standards can be used to plan future activities and to value the various inventory
accounts and Cost of Goods Sold.

OVERVIEW OF JOB ORDER COSTING

Some of the manufacturing companies produce products that have similar features and are
subjected to continuous, unchanging flow throughout the manufacturing process like
beverages, perfumes, and electronic devices, hence process costing will be employed.
However, there are companies that produce heterogeneous, final products whose outputs
are in lesser number, so job order costing is used. The type of companies that use job
order costing shall include printing press, shipbuilding companies, aircraft manufacturing
firms, construction companies, consulting firms, and engineering firms.

In job order costing, it sees every job order as unique and may require different raw
materials or procedure to carry out a customer based final output. For example, the
procedure of processing 200 pages of a standard A4 size notebooks will be different from
the A7 size notebooks, as smaller ones require more manual labor in binding. Thus, if a
customer will order notebooks other than the standard size offered by the company, a
different cost computation will be made for that unique output. In process costing however,
the company only offers the standard size notebooks resulting to a more predictable cost
and similar production process.

Sometimes, a manufacturer produces customized products or products modified to suit the

customers’ preferences from a list of options provided. With customization allowed in job order
costing, the tracing and accumulating of production costs should be for each job. Each job
or customer’s order is made according to the customer’s specifications and the quoted price
is linked with its estimated cost of production. The details for each job or lot can be traced
to a subsidiary record known as Job Order Cost Sheet or simply called Cost Sheet. This
will show a summary of the manufacturing costs incurred for every job or customer’s order
particularly the costs of raw materials used, direct labor and factory overhead.

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POINTS TO PONDER !
In a job order cost system, costs are accumulated individually by job.

 A job is a single unit or group of like units identifiable as being produced to

distinct customer specifications. Each job is treated as a unique cost object.

 Costs of different jobs are maintained in separate subsidiary ledger accounts

and are not added together or commingled in those ledger accounts

 Direct material, direct labor, and overhead costs are accumulated for each job.

 The normal costing method of valuation is used since actual direct material and
direct labor costs are fairly easy to identify and are associated with a particular
job.

 Overhead costs are not usually traceable to specific jobs and must be allocated
to production.

The output of a given job can be a single unit or multiple similar or dissimilar units.

 The total accumulated cost per job is averaged over the number of units
produced to determine an average unit cost if all the units within the batch are
similar.

 No per unit cost can be determined if the output consists of dissimilar units for
which individual cost information has not been accumulated.

OPERATING WORKFLOW

To understand fully how job order costing works and accumulate costs, you have to identify
first the operating workflow of every manufacturing firm. A company is segregated into four
(4) main stages, the 4 P’s – Procurement, Production, Storage and Selling.

Procurement is the first stage where all the needed materials, labor force, machineries and
other indirect costs are purchased and determined. The 2 nd stage, which is Production, is
where the conversion of raw materials into finished products will take place. These will
involve various departments depending on the process in making the product. The third
stage is Storage, where the finished products are stored in the warehouse awaiting delivery

COST ACCOUNTING & CONTROL

 41

to the customer. And finally, Selling, where the finished products are completely delivered
and the company declared sales in the process.

Remembering these four (4) basic stages of manufacturing, will guide you in understanding
the next topic covering cost accumulation, journal entries and preparation of financial
statements under job order costing.
ACCOUNTING WORKFLOW

After illustrating the operating workflow of every manufacturing company, we will now
consider the accountant’s point of view through the use of T-account analysis. Shown below
is Exhibit 2.1 which will correlate the operational workflow to the accounting workflow.

PROCUREMENT PRODUCTION STORAGE SEL ING

EXHIBIT 2.1 Operating and Accounting Workflow

Under the first stage, Procurement, any purchases of materials and incurrence of labor and
indirect charges within the factory shall be charged to Raw Materials, Factory Payroll and
Factory Overhead Control accounts, respectively.

As these costs of materials, labor and overhead are applied to production for the month, a
debit to Work in Process account shall be made. The cost of the completed job will be
recorded as a debit to Finished Goods and credit to Work in Process account. Upon the sale
of the completed job, two (2) entries will be made. First is the entry to record the sale
(either cash sales or credit sales) at an amount billed by the manufacturer or seller to the
customer. Second entry on the date of sale is to record the cost of the completed job sold
involving a debit to Cost of Goods Sold (CGS) at its cost and credit to Finished Goods
account. At the end of an accounting period, the Cost of Goods Sold (CGS) account will
ultimately be transferred or closed to the Income Summary account.

JOURNAL ENTRIES AND T-ACCOUNTS

Let us use throughout this chapter, what is illustrated in Exhibit 2.1 for Reiborn Envelope
International, a company that produces envelopes in accordance with the client’s
specifications.

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 42

Reiborn Envelope International processed envelopes in various sizes, colors, designs and
packages. Additional product features such as company logo watermarks, perforation and
security characteristics are also offered. It uses job order costing and provides a 20%
markup based on cost. In November 2019, the company received three (3) customers’
order and Reiborn identified each order as Job #103, Job#104 and Job#105.

ACCOUNTING FOR MATERIALS

Purchase of Materials
On November 6, the company received a shipment of purchased materials
amounting to P220,000. The company will record this transaction as:

Materials -------------- 220,000 EXHIBIT 2.2

Accounts Payable ------ 220,000 Material Purchased and Used
Purchase of materials on account

There are some companies which Procurement Production

separates the recording of direct
materials and supplies on the date of Raw Materials Work in Process
purchase. However it is acceptable to
use the account Materials in recording ( a)220,000 (b) 190,000 (b) 110,000
the purchase of either direct (raw)
material or indirect materials (or Factory Overhead Control
factory supplies). Such classification (b) 80,000
of materials is needed only at the
time of requisition and not at the time Job #105
P 32,200
of purchase. Exhibit 2.2 shows how Job #104
Source Documents: P 32,800
Job #103
the journal entry for (a) will be Material Requisitions, sorted by numbers P 45,000
reflected in the workflow.

(a)Material Used

Before the release of materials from the warehouse to the production area, material
requisition form must be filled up by the requesting department. A material requisition
form is a source document that indicates the type and quantities of materials to be used in
the production department or used in the performance of service. These are prenumbered
documents which are produced in multiple copies to be given out to different departments.

The total cost of materials released to the production area as reflected in the material
requisition form issued for the month was P190,000 of which P80,000 was for the issuance
of indirect materials. The issuance of direct materials totaling P110,000 is distributed to the
three (3) jobs as follows:Job#103 – P45,000; Job#104; P32,800; Job#105 – P32,200. To
account for the said transaction, all Direct Materials will be charged directly to Work in

COST ACCOUNTING & CONTROL

 43

Process account and Indirect Materials will be charged to the Factory Overhead Control
account. The journal entry will be:

WIP Inventory ----------------------------------------- P 110,000

Materials ---------------------------------------------------- P 110,000
Issued direct materials to Job 103,104 & 105.

Factory Overhead Control ------------------------------ P 80,000

Materials ----------------------------------- 80,000
Issued indirect materials

If material is issued to a non-factory requisitioning department or office, then charge it to

Marketing or Administrative Expense account. Refer to Exhibit 2.2 for the workflow.

INVENTORY SYSTEM

Periodic System. This is a system that adjusts the inventory accounts at the end of a
period (generally a year) using data determined from a physical count of inventory items on
hand. (i.e. counting the materials and finished goods left). By subtracting these numbers
from total materials available or total finished goods available for the year, an estimate of
materials used or cost of goods sold is derived.

Perpetual System. Under this system, the inventory accounts are directly adjusted for
each acquisition of materials, material requisitions, and transfer of the cost of an item sold
from Finished Goods Inventory to Cost of Goods Sold as these events actually occur. It
provides the most up-to-date information and, now that computerized systems are highly
sophisticated and widely available, is the one mostly used in practice. A periodic count of
inventories is still undertaken. However, the resulting information is used to determine
inventory shrinkage levels and to check on the accuracy of the accounting system.

INVENTORY COSTING METHODS

Most firms purchase materials or spare parts on an ongoing basis and keeps finished goods
inventory. Usually, these purchases are not made at a uniform price and several factors
need to be considered in the production of finished goods. It becomes essential therefore, to
ascertain the cost of goods sold, as well as the cost of goods on hand and the cost of goods
already started in process but has not yet been completed. It must be noted that
manufacturing companies maintains three inventory accounts: Materials Inventory, Work-
in-Process Inventory, and Finished Goods Inventory.

Some firms find it advantageous to keep a record of the cost of individual inventory items.
These situations involve inventory units with a high peso value and relatively few sales. Car
manufacturers and dealerships are good illustrations. When negotiating with a customer
over the selling price of a given car, for example, the cost of that particular car is important
information for the dealer. Thus, these firms are motivated to keep a record of each car’s
cost. Moreover, a dealer’s inventory consists of perhaps no more than 100 cars, and the
dealer makes only a few sales per day. Such activity levels do not present a significant
record-keeping challenge. The specific identification method maintains accounting
records showing the cost of each inventory item.

For most businesses, however, the number of inventory units and the volume of purchases
and sales are so large that the specific identification method would be very costly to
COST ACCOUNTING & CONTROL
 44

implement. A manufacturer of canned goods, for example, may sell 1,000 boxes of canned
items in one day. This requires firms to use a cost flow assumption.

Consider the following summary of finished goods inventory productions of Abre Lata
Company:
# of Units x Unit Cost = Total Cost
Beginning inventory 30 P4 P120
Produced on February 18 10 5 50
Produced on June 8 20 6 120
Produced on October 22 20 8 160
Totals 80 P450

Assume that 48 units were sold during the year and 32 units remain on hand at year-end.
To prepare the financial statements, the cost of the ending inventory and the cost of goods
sold must be determined.

Average Cost. The average-cost method calculates the weighted-average cost of an

inventory item on hand during the period and applies this cost to the units sold and to the
ending inventory. The average cost is calculated by dividing the cost of goods available for
sale by the number of units available for sale. The cost of goods available for sale equals
the cost of the beginning finished goods inventory plus the cost of goods manufactured
during a period. It reflects the total cost of goods that were on hand at any time during
the period and that were available for sale:

Average cost = Cost of goods available for sale

Number of units available for sale
= 450/80
= 5.625

To calculate the cost of the units that have been sold, multiply the average cost by 48 which
is the number of units sold:

Cost of Goods Sold = 48 x P5.625 = P 270

To calculate the finished goods ending inventory balance, simply multiply the average cost
by the units left on hand at the end of the period (or the units unsold)

Finished Goods, End = 32 x P5.625 = P 180

The computation as shown above is more commonly known as the simple average
approach. More often than not, companies who are adheres to the perpetual inventory
system computes the new weighted average every time a new purchase is being made. In
this scenario, the moving average method would prove to be more useful in computing
for the new weighted average cost every time a purchase or production is completed.

To illustrate moving average method, consider the following set of facts: Andres Company
uses the moving-average method to determine the cost of its inventory. During January
2018, Andres recorded the following information pertaining to its inventory:
Unit Total
Units_ Cost __Cost__
Balance on 1/1/18 40,000 P5 P200,000

COST ACCOUNTING & CONTROL

 45

Sold on 1/17/18 35,000

Finished on 1/28/18 20,000 8 160,000
The moving-average method assumes the company has perpetual records. A new weighted-
average cost is computed after each purchase/finished production and issues are priced at the
latest weighted average cost.
Units__ Unit Cost Total Cost
Balance 1/1/19 40,000 P5.00 P200,000
Sold 1/17/19 (35,000) 5.00 (175,000)
Balance 1/17/19 5,000 5.00 25,000
Finished 1/28/19 20,000 8.00 160,000
Balance 1/31/19 25,000 7.40 185,000

In this example, the next units sold would be priced at P7.40, the new weighted average
cost. The new price of P7.40 is computed by dividing P185,000 by 25,000.

Once the cost of goods sold and the ending finished goods inventory has been solved, you
can now apply the formula given below either to check or work back on some other missing
figures:

Beginning Finished Goods

+ Cost of Goods Manufactured
- Ending Finished Goods
= Cost of Goods Sold

First-In, First-Out. Another commonly used inventory method is the First-In, First-Out
(FIFO) method. This method assumes that inventory costs move on a first-in, first-out
basis. This implies that the cost of the beginning inventory and the cost of production made
early in the period are the first to flow out of the firm and comprise the cost of goods sold.

In our illustration (ABRE LATA Co.) , the cost of goods sold under the FIFO method is based
on the cost of the 48 units that were acquired first.

# of Units x Unit Cost = Total Cost

Beginning inventory 30 P4 P120
Produced on February 18 10 5 50
Produced on June 8 8 6 48
CGS 48 P218

Because the cost of goods sold under the FIFO method is based on the cost of the earliest
production, ending inventory must consist of the costs from the most recent production
(those made closest to the period’s end). Based on the inventory and purchase data given
in the last illustration, ending inventory consists of the costs associated with the 32 units
produced closest to the end of the year. This includes the 20 units produced on October 22
and 12 of the units purchased on June 8. Only 12 of the 20 units produced on June 8 are
included because the ending inventory consists of 32 units.

# of Units x Unit Cost = Total Cost

June 8 12 P6 P 72
COST ACCOUNTING & CONTROL
 46

October 22 20 8 160
Ending Inventory 32 P232

ACCOUNTING FOR LABOR EXHIBIT 2.3

Labor Incurrence and Distribution

(b)Factory Labor Incurred

Procurement Production
The salaries and wages for the
month amounted to P128,500
which was accrued and to be given Payroll Work in Process
to factory employees. The general ( c)128,500 (d) 128,500 (b) 110,000
journal entry is: (d) 93,100

Payroll --------------------128,500 Factory Overhead Control

Accrued Payroll -------------- (b)80,000
128,500 (d) 35,400
Payroll for the month Job #105
Source Document: P 26,000
Labor Time Tickets,sorted by Job Number Job #104
For every payroll period, all the P 28,600
Job #103
liabilities related to payroll P 38,500

transaction will be temporarily

credited. Other liabilities may include Withholding taxes payable, SSS/GSIS Contributions
Payable, Pag-IBIG Contributions Payable, Philhealth Contributions Payable and such other
payroll deductions. This will be discussed further in the next succeeding chapters.

(c) Distribution of Factory Labor

There are two commonly used source documents in accounting for labor costs under job
order costing system: a time (or clock) card and a labor job ticket. Companies use time
cards as the basis for the computation of payroll and can either be manual, electronic or
computerized form. However, at the end of the period, labor costs will be computed based
on the number of hours worked by either direct or indirect factory worker. The time card is
inserted in a time clock by employees every time they arrive, go to and return from lunch,
take breaks or leave the work or office premises. This will mechanically show a record of
time spent for work each day by an employee and provides as the basis or as a reference
COST ACCOUNTING & CONTROL
 47

for computing and recording of payroll. The labor job tickets are prepared daily by an
employee indicating the job he has worked on and the number of hours worked. The wage
rate (obtained from the payroll office) shall be multiplied by the number of hours worked to
compute the total labor cost. The labor cost and hours worked on various jobs as reflected
in the labor job tickets should be equal to the data found in the time card. At periodic
intervals, time cards are summarized to record the payroll and the labor job tickets are also
summarized to determine the amount to be charged to Work in Process account. To carry
out this task, another document known as labor time tickets or employee time sheets
is used. This separates the direct and indirect labor costs chargeable to a particular job.

Most companies nowadays are using computerized employee time sheets and even use the
bar code in their day to day operations. If the company is using manual recording, the time
sheets must be noted and collected by the supervisor at the start and at the end of the
period but this must be reviewed to ensure the correctness of the information reflected
therein.

Reiborn Envelope International determines at the end of the month that P35,400 of the total
payroll are indirect labor while the balance were summarized as follows: Job#103 –
P38,500, Job#104 - 28,600, Job# 105 – P26,000.The journal entry to record these
transaction:
WIP Inventory -------------------------------------------- P 93,100
Payroll ----------------------------------------------------------P 93,100
Direct labor costs incurred for Job 103, 104 and 105

Factory Overhead Control -----------------------------P 35,400

Payroll ------------------------------------------------------- P 35,400
Indirect labor costs incurred for the month .

Factory labor costs should be properly segregated into direct labor and indirect labor costs.
Direct labor costs will be charged to Work in Process account while indirect labor costs will
be charged to Factory Overhead Control account, respectively. If there are payroll
pertaining to non-factory or office employees other than those working in the factory, it will
be charged and debited to Marketing or Administrative Expense. Please refer to Exhibit 2.3
for the workflow.
ACCOUNTING FOR OVERHEAD

(d)Actual Factory Overhead Incurred Exhibit 2.4

Applied Factory Overhead

Aside from the debit to Factory

Overhead Control account for Indirect Procurement Production
material (b) and indirect labor (d)
incurred for the month, as reflected in Factory Overhead Control Work in Process
Exhibit 2.4; other actual overhead ( b) 80,000 (f) 74,480 (b) 110,000
cost may be incurred. Examples are (d) 35,400 (d) 93,100
depreciation of the factory machine (e)44,600 (f) 74,480

COST ACCOUNTING & CONTROL

 48

used, rental, utilities, repairs, security

and the like.

There is one source document for computing factory overhead costs in a job order costing
system: a departmental factory overhead cost sheet (otherwise known as departmental
expense analysis sheet) maintained by each department. This is the subsidiary record or
the subsidiary ledger showing the breakdown of the controlling account Factory Overhead
Control (FOC). Reconciliation of the General Ledger and subsidiary ledgers should be done
at regular intervals. The factory overhead costs may be recorded for the plant or factory in
total and then distributed to production departments for application to various jobs.

Reiborn Envelope International incurred other factory overhead cost summarized as follows:
Factory building and machinery depreciation - P18,400; Utilities – P10,300; Repairs and
Maintenance – P8,200 were paid in cash; and other various accounts of P7,700. Journal
entry for this transaction will be:

Factory Overhead Control ---------------------------------- 44,600

Accumulated Depreciation ------------------------------ 18,400
Utilities Payable ------------------------------ 10,300
Cash ------------------------------ 8,200
Various or Sundry Accounts ------------------------------ 7,700
Actual factory overhead incurred for the month

(e)Applied Factory Overhead

Tracing the actual prime cost to a particular job is easier as reliable document, Material
requisition form and time tickets were used to account for the proper cost however
determining the amount of overhead to a particular job is challenging and more difficult.
Some of the overhead are fixed regardless the amount of production like depreciation and
rent. Utilities expense however is dependent and can vary from every job. There are also
overhead expenses which can benefit other job but not on some jobs. Thus the reported
actual cost of factory overhead may not be reflective of the cost of a specific job being
costed. With this limitation, actual costing system is discouraged in job order costing.

To solve this dilemma, the accounting system designed a method of estimating overhead
cost which is more reliable and accurate called the overhead allocation base. All the cost
incurred by all jobs will be allocated in proportion to a certain activity – like direct labor
usage, machine usage, material usage and others. This base will be used by every job to
measure its overhead cost and it is called applied overhead. Under job order costing, the
valuation method to be used must be normal costing (actual direct material, actual direct
labor and applied factory overhead).

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 49

At the end of an accounting period, the estimated applied factory overhead will be
compared to the actual overhead incurred and the difference will be identified as either
Overapplied or Underapplied Overhead. Overapplied overhead is the excess of Applied
Overhead over the Actual Overhead while Underapplied Overhead is the excess of Actual
Overhead over the Applied Overhead. In depth discussion about factory overhead will be
taken up in Chapter 5.

In recording the actual overhead incurred for the period, Factory Overhead Control account
will be debited. The amount of overhead applied to production for the period will be
recorded by a debit to Work in process account and credit to Applied Factory Overhead
account at estimated amount of indirect factory costs.

Reiborn Envelope International determines that all jobs will have an applied factory
overhead of 80% of direct labor cost. The Applied Factory Overhead account shall be as
follows: Job #103 – P30,800 (P38,500x80%); Job#104- P22,880 (P28,600x80%); Job#105
– P20,800 (P26,000x80%). The journal entries will be:

WIP --------------------------------------------------------P74,480
Applied Factory Overhead -----------------------------------P74,480
Overhead applied to Job 103, 104 and 105.

At the end of an accounting period, the balance of Applied Factory Overhead account in the
general ledger will be transferred to Factory Overhead Control (FOC) account. The closing
entry will be:
Applied Factory Overhead --------------------------------P74,480
Factory Overhead Control --------------------------------------P74,480
To close the applied factory overhead account

ACCOUNTING FOR JOB COMPLETED AND SOLD

During the month, Job#103 and Job#104 were completed and transferred to storage area.
All the costs relevant to Job#103 and Job#104 must be traced and be debited to Finished
Goods Inventory and close the Work in Process account as shown below:

(g) Finished Goods Inventory -----------------------------P 198,580

WIP Inventory --------------------------------------------- P 198,580
Completed Job#103 and Job#104

Exhibit 2.5
Jobs Completed and Sold

Production Storage Selling

Work in Process Finished Goods Cost of Goods Sold

( b)110,000 (g) 198,580 (g) 198,580 (h) 114,300 (h) 114,300
COST ACCOUNTING(d) 93,100& CONTROL
(f) 74,480
 50

At the end of the month, Job#103 has been shipped and delivered to its customer and the
company provides a 20% markup on cost. The journal entries on the date of sale will be:

(h) Cost of Goods Sold ----------------------------------------- 114,300

Finished Goods Inventory ------------------------------- 114,300
Cost of Job#103 sold

(i) Accounts Receivable ----------------------------------------- 137,160

Sales -------------------------------- 137,160
Job#103 sold on account

FORMS AND DOCUMENTS USED

Material Requisitions

A material requisition form is a source document that indicates the type and quantities of
materials to be placed into production or used in performing a service (see Exhibit 2.6).
That will be used as the basis for the release or issuance of materials (direct or indirect
materials) from the warehouse to the requisitioner or requisitioning department.

Materials that are directly used and EXHIBIT 2.6

Material Requisition Form
identified with a particular job are charged
to Work in Process Inventory account,
while indirect materials are charged to
Factory Overhead Control (FOC) account
as shown in the following journal entry:

Work in Process Inventory XXX

Factory Overhead Control XXX
Materials XXX

Completed material requisition forms will

provide an audit trail to verify the flow of
materials from the warehouse to the
department/s involved indicating also the
job where the issued materials are

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charged. They are usually prenumbered just like any source documents and issued in
multiple copies so that the warehouse clerk and the requisitioning department can file their
own copy for verification and control purposes.

Employee Time Sheets

An employee time sheet is a source EXHIBIT 2.7

document that indicates for each employee the Employee Time Sheets
jobs assigned to him to be worked on and the
time spent on each job. Work assigned at the
work station is accompanied by a tag or bar
code specifying the job number. The time that
the work is started and stopped are recorded
on the time sheet and is reviewed by a
supervisor for accuracy.

Large businesses often use time keeping

software instead of manual time sheets.
Employees just swipe their ID cards and job
cards through an electronic scanner as they
change from one job to another. Information
about employee’s labor rate is required in
transferring employee time sheet information to the job order cost sheet. Time sheet
information is also used for payroll preparation.

The journal entry to record the distribution of factory payroll will be as follows:

Work in Process Inventory (for direct labor cost) XXX

Factory Overhead Control (for indirect labor cost) XXX
Payroll XXX

If total actual labor costs differ significantly from the original estimate, the manager
responsible for labor cost control will have to explain the difference.

Job Order Cost Sheet Exhibit 2.8

Job Order Cost Sheet
The Job Order Cost Sheet (JOCS) is
a source document that summarizes
the amount of DM used, DL and OH
applied to each job processed.
Posting to the JOCS may be done
either on a daily or weekly basis.
They are designed to provide the
needed information by management.
Some may include cost to make and
sell as well as the selling price in

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order to estimate the profit identified with each job. Other forms may provide only the
basic cost information such as direct
materials used, direct labor and applied overhead charged to an individual job. These forms
may also vary depending on whether a firm is departmentalized or not. The file of all job
order cost sheets will serve as the subsidiary ledger for the controlling account Work in
Process Inventory in the company’s general ledger. An amount debited in the JOCS would
mean that Work in Process account increases or is debited in the journal entry while an
amount credited in the JOCS or shown in parenthesis would mean that Work in Process
account decreases or is credited in the journal entry.

Direct material information is taken from the material requisition forms, while direct labor
information is taken from employee’s time sheets or his labor time tickets. Overhead is
applied to production using a predetermined overhead rate.

FINANCIAL STATEMENT PREPARATION

At the end of the accounting period, the financial reports prepared for a manufacturing
company are those typical reports required for a certain company – the statement of cost of
goods manufactured, the income statement and the statement of financial position.

We will be using the T-accounts of Reiborn Envelope International to produce the financial
statements, however additional information will be needed to fully illustrate these reports.
Beginning balances of Reiborn Company shows Raw Materials – P50,000; Work in process –
P40,000 and Finished Goods Inventory – P30,000. These are the updated T-accounts with
beginning balances.

Procurement Production Storage Selling

Materials
Beg 50,000 (b) 190,000
(a) 220,000
End 80,000 Selling
Payroll Work in Process Finished Goods Cost of Goods Sold

(c ) 128,500 (d) 128,500 Beg 40,000 (g) 198,580**** Beg 30,000 (h) 114,300 (h) 114,300
(b) 110,000* (g) 198,580
(d) 93,100** End 114,280
Manufacturing Overhead (f) 74,480***
(b) 80,000 (f) 74,480 End 119,000
(d) 35,400
(e) 44,600

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Reiborn Envelope International

Statement of Cost of Goods Manufactured
For the month ended November 30, 2019

Direct Materials Used or Consumed:

Materials Inventory, November 1 P 50,000
Materials Purchases 220,000
Materials Available for Use P 270,000
Less: Materials Inventory, November 30 P 80,000
Indirect Materials Used 80,000 160,000
Direct Materials Used P 110,000*
Direct Labor 93,100**
Applied Manufacturing Overhead 74,480***
Total Manufacturing Cost or Total Production Cost P 277,580
Add: Work in Process Inventory, November 1 40,000
Cost of Goods Placed Into Process or CGPIP P 317,580
Less: Work in Process Inventory, November 30 (119,000)
Cost of Goods Manufactured P 198,580****

Reiborn Envelope International

Income Statement
For the Month Ended November 30, 2019

Sales P 137,160
Less Cost of Goods Sold:
Finished Goods Inventory, November 1 P 30,000
Add: Cost of Goods Manufactured 198,580
Total Goods Available for Sale or TGAS P228,580
Less: Finished Goods Inventory, November 30 (114,280) (114,300)
Gross Profit or Gross Margin P 22,860
Less: Operating Expenses or OpEx (12,000)
Net Income before Tax P 10,860
========
Job Order Costing in Service Industries

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Service firms and nonprofit organizations also engaged in production. However, the
difference between manufacturing and service industries is that service is consumed as it is
produced whereas manufactured products can be stored in the form of inventory.

Like the accumulation of costs in manufacturing companies, the service industries also
define product costs as the combination of three (3) elements; Direct material, Direct Labor
and Factory Overhead. Imagine a service industry like the Janitorial Services, the direct
materials used will be the various chemicals and cleaning supplies, however the costs of
materials are not that significant compared to manufacturing companies. The large portion
of cost for service industries are the direct service hours imputed in every job. Because the
bulk of the product costs rely heavily on direct labor, the computation of the applied
overhead will also be based on direct labor hours or direct labor costs.

Job Order Costing and Technology

The trend in job order costing is to automate the data collection and data entry functions.
Automating the recordkeeping functions relieves production employees of that burden.

In many companies, intranets are being created to manage the information pertaining to
jobs. An intranet is a mechanism for sharing information and delivering data from
corporate databases to the local-area network (LAN) desktops. Intranets use Web
technology and are restricted networks that can enhance communication and distribute
information.

TERMINOLOGIES

Actual Cost System. A valuation method that uses actual cost for direct material, direct
labor and factory overhead.

Applied Factory Overhead. The amount of estimated overhead that has been assigned to
Work in Process inventory as a result of productive activity.

Employee time sheet: A source document that indicates the jobs on which each employee
worked and the direct labor time consumed

Job: A single unit or group of units identifiable as being produced to distinct customer
specifications

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Job order cost sheet: A source document that provides virtually all the financial
information about a particular job; the set of all job order cost sheets for uncompleted jobs
composes the Work in Process Inventory subsidiary ledger

Job order costing system: A system of product costing used by companies that make
relatively small quantities of distinct batches of identifiable, tailor-made products that
conform to specifications designated by the purchaser; the focus of recordkeeping is on
individual jobs

Material requisition form: A source document that indicates the types and quantities of
material to be placed into production or used in performing a service; it causes materials
and its cost to be released from the Raw Material Inventory warehouse and sent to Work in
Process Inventory

Normal Cost System: A valuation method that uses actual cost of direct material and
direct labor in conjunction with a predetermined overhead rate or rates in determining the
cost of work in process.

Overhead Allocation Base: a measure of activity or volume such as labor hours, machine
hours or volume of production to apportion overhead to products and services

Process costing systems: Systems used by companies that make large quantities of
homogeneous goods such as breakfast cereal, candy bars, detergent, gasoline, and bricks;
given the mass manufacturing process, one unit of output cannot be readily identified with
specific input costs within a given period – making the use of either a weighted average or
FIFO cost flow assumption necessary; it accumulates costs by cost component in each
production department and assigns costs to units using equivalent units of production

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In RETROSPECT…
These are the pro-forma entries in Job-Order Costing:

 Material Cost is charged to production:

Work in Process Inventory—Job Order # ------------------------- xxx

Factory Overhead Control (indirect material) -------------------- xxx
Materials ------------------------------------------------------ xxx
Issued direct and indirect materials to Job #

 Labor Cost is charged to production:

Work in Process Inventory—Job Order # ------------------------- xxx

Factory Overhead Control (indirect labor) ----------------------- xxx
Payroll ------------------------------------------------------------------ xxx
Direct and indirect labor costs charged to Job Order #___

 Actual overhead costs are recorded as incurred:

Factory Overhead Control ---------------------------------- xxx

Accumulated Depreciation -----------------------------------------------xxx
Prepaid Insurance-------------------------------------------------------- xxx
Utilities Payable ---------------------------------------------------------xxx
Cash -------------------------------------------------------- xxx
Various or Sundry Accounts ---------------------------------------------xxx
Actual overhead costs incurred for the month

 Overhead is charged (or applied) to production:

Work in Process Inventory—Job Order # ---------------------------xxx

Applied Factory Overhead or Factory Overhead Control ---------------xxx
Overhead applied to production in September

 Job is completed and transferred from the last Production Department to storeroom:

Finished Goods Inventory -------------------------------------------xxx

Work in Process Inventory—Job Order # -----------------------------xxx
To transfer completed Job # to FG Inventory

 Job is delivered and billed to the customer:

Accounts Receivable ------------------------------------------------xxx

Sales ------------------------------------------------------------------xxx
Sale of Job Order #__ on account

Cost of Goods Sold --------------------------------------------xxx

Finished Goods Inventory ------------------------------------------------xxx
Cost of Job Order #__ sold to customer A

The completed job order cost sheet can be used by managers in all departments to determine how
well costs were controlled.

COST ACCOUNTING & CONTROL