Cost Accounting and Control #5 | Job Order Costing

Basic Concepts
 Product costing systems are used to assign production or performance costs to products or services for internal and
external financial reporting purposes.
 Firms that produce heterogeneous and custom outputs need a job order costing system that can track product costs to
the product or customer level.
 Firms that produce homogeneous outputs in batch or continuous production processes can use process costing to
compute an “average” product cost.

Methods of Product Costing

 Before product cost can be computed, a determination must be made about the cost accumulation system (job order or
process costing) and the valuation method to be used (actual, normal, or standard costing).
 There are six possible combinations of cost systems and valuation methods.

Cost Accumulation Systems

 A job order costing system is the product costing system used by entities that make relatively small quantities or distinct
batches of identifiable, unique products (services). The word “job” is synonymous with client, engagement, project, or
contract.
 A process costing system is the product costing system used by entities that produce large quantities of homogeneous
goods 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
 An actual cost system is a valuation method that uses actual direct material, direct labor, and overhead costs in
determining the cost of Work in Process Inventory. Service businesses that have few customers and/or low volume may
use an actual cost system.
 A normal cost system 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.
 In a standard cost system, 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. These standards can be used to plan future activities and to value the various inventory accounts and Cost
of Goods Sold. A standard cost system 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.

Characteristics of Job Order Costing System

 In a job order costing system, product costing is concerned with: cost identification; cost measurement; and product
cost assignment.
 Costs are accumulated individually by job.
o A job is a single unit or group of like units identifiable as being produced to distinct customer specifications.
o Each job is treated as a unique cost object.
o The output of a given job can be a single unit or multiple similar or dissimilar units.
 The total accumulated job cost may be averaged over the number of units produced to determine a
per-unit cost provided 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.
 Costs of different jobs are maintained in separate subsidiary ledger accounts and are not added together or commingled
in those ledger accounts.
o Direct material, direct labor, and overhead costs are accumulated for each job.
o The normal costing method of valuation is used since actual direct material and direct labor costs are fairly easy
to identify and associate with a particular job but overhead costs are not usually traceable to specific jobs and
must therefore be allocated to production.
 The job order costing system provides information important to managing profitability and setting prices for outputs.
Custom manufacturers typically price their goods using two methods:
o Cost-plus contract is a contract in which the customer agrees to reimburse the producer for the direct costs and
some indirect costs of the job plus a specified profit margin over cost; and
o Competitive bidding is a technique where companies must accurately estimate the costs of making the unique
products associated with each contract. The company will incur losses when actual costs exceed the bid price
and will have profit when actual costs are less than the bid price.
 The trend in job order costing is to automate the data collection and data entry functions.
o 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.

Primary Documents in Job Order Costing System

 A job can be categorized by the stage of existence in its production life cycle as follows:
o Contracted for but not yet started;
o In process; and
o Completed
 Job order costing is used by companies making products according to user specifications and may require unique raw
materials which may not be acquired until a job is under contract and it is known that production will occur
 The job order cost sheet is a source document that provides virtually all the financial information about a particular
job.
o The set of all job order cost sheets for uncompleted jobs composes the Work in Process Inventory subsidiary
ledger and thus the total costs contained in all the job cost sheets for uncompleted jobs should reconcile to the
Work in Process Inventory control account balance in the general ledger.
 Cost Accounting and Control #5 | Job Order Costing

o Direct material information is gathered from the material requisition forms, while direct labor information is found
on employee time sheets or employee labor tickets. Overhead is applied to production using predetermined
overhead rates.

 Materials Requisitions
o A material requisition form is a source document that indicates the types and quantities of materials to be placed
into production or used in performing a service.
 A material requisition form causes materials and their costs to be released from the Raw Materials
Inventory warehouse.
 Completed material requisition forms provide the ability to verify the flow of materials from the
warehouse to the department and job that received the materials. They are usually pre-numbered and
come in multi-copy sets so that completed copies can be maintained in the warehouse, in the production
department, and with each job.

 Employee Time Sheets

o An employee time sheet is a source document that indicates for each employee the jobs worked on during the
day and the amount of hired labor time consumed.
o Work arriving at the employee station is accompanied by a tag or bar code specifying the job number.
o The time work is started and stopped are recorded on the time sheet as the day progresses and is reviewed by
supervisors for accuracy.
o 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.
o Knowledge of employee labor rates is required in transferring employee time sheet information to the job order
cost sheet.
o Time sheet information is also used for payroll preparation.
o Time sheets may also be used for the following purposes:
 If total actual labor costs differ significantly from the original estimate, the manager responsible for labor
cost control will have to explain the difference.
 The number of hours worked on a cost plus contract may also be audited by the buyer as with
government contracts or other buyers.
 Time sheets provide information on overtime hours so that the company can comply with the Fair Labor
Standards Act which requires non-management employees be paid timeand-one-half when they work
more than 40 hours in a week.
 Overhead
o Actual overhead incurred during production is charged (debited) to a Manufacturing Overhead Control account.
o If actual costing is used (meaning that actual overhead is applied to jobs) the cost accountant must wait until
the end of the period to divide actual overhead cost incurred in each designated cost pool by a related measure
of activity or cost driver. Then actual overhead is applied to jobs by multiplying the actual overhead rate by the
actual measure of activity associated with each job.
o In a normal costing system, overhead is applied to job order cost sheets by using one or more annualized
predetermined overhead application rate(s).
 Overhead is assigned to jobs by multiplying the predetermined overhead rate by the actual measure of
the activity base associated with each job.
 Overhead is applied at the end of the period or at completion of production, whichever is earlier.
 Overhead must be applied at the end of each period so that the Work in Process Inventory account
contains costs for direct material, direct labor, and overhead associated with jobs still in process.

 Completion of Production
o When production of a job is complete, its job cost sheet is removed from the Work in Process Inventory
subsidiary ledger and transferred to the Finished Goods Inventory file where it will now serve as a subsidiary
ledger for that account.
o Job cost sheets for sold jobs are kept in a company’s permanent files, providing management with a historical
summary about total costs and, if appropriate, the cost per finished unit for a given job.
 The cost per unit may be helpful for planning and control purposes as well as for bidding on future
contracts.

 Uses and Importance of Job Order Costing

o Managers are interested in controlling costs of each department as well as for each job.
 Actual costs are periodically compared to budgets so managers can respond to significant variances.
 The primary difference in job order costing for a service organization and a manufacturing firm is that
a service organization may use an insignificant amount of direct material on each job, so that direct
material may be accounted for as part of overhead rather than being accounted for separately.
o Job order costing is beneficial to managers in planning, controlling, decision making, and evaluating
performance.
 Managers can effectively estimate future job costs and establish realistic bids and selling prices if they
know the costs of individual jobs.
 Budgets and standards can be used to provide information against which actual costs can be compared
at reasonable time intervals for control and performance evaluation purposes.
o Job order costing can help determine which jobs are really profitable and can assist managers in monitoring
costs.
 Job costing helped the company identify which jobs were responsible for disproportionately large costs.
Consequently, the firm began concentrating its efforts on smaller clients who were located closer to the
primary office, causing a significant increase in profits.
 A small business owner who had previously just “guesstimated” costs used job order costing to exercise
better cost control, to generate better inventory valuations for his financial statements, and better
information to make day-to-day operating decisions.
 Cost Accounting and Control #5 | Job Order Costing

Illustration #1
Marinja Company uses job order costing. The following data summarize the operations related to production for May:

a. Materials purchased on account, P 320,000.

b. Materials requisitioned, P 292,100, of which P 8,600 was for general factory use.
c. Factory labor used, P 487,500 of which P 33,000 was indirect.
d. Other costs incurred on account for factory overhead, P 610,000; selling expenses, P 142,000; and administrative
expenses, P 105,000.
e. Prepaid expenses expired for factory overhead were P 22,000; for selling expenses, P 5,000; and for administrative
expenses, P 4,000.
f. Depreciation of office building was P 29,000; of office equipment, P 6,500; and of factory equipment, P 68,000.
g. Factory overhead costs applied to jobs, P 712,000.
h. Jobs completed, P 1,426,000.
i. Cost of goods sold, P 1,378,000.

Required: Journalize the entries to record the summarized operations.

Illustration #2
Ottoson Fencing Inc. uses job order costing. The following data summarize the operations related to production for
December, the first month of operations:

a. Materials purchased on account, P 50,000.

b. Materials requisitioned and factory labor used:

Job Materials Factory Labor

301 P 1,850 P 2,500
302 P 3,150 P 7,220
303 P 2,200 P 5,350
304 P 1,900 P 2,300
305 P 4,230 P 6,225
306 P 1,770 P 2,900
For general factory use P 1,200 P 5,000

c. Factory overhead costs incurred on account, P 1,800.

d. Depreciation of machinery and equipment, P 2,700.
e. The factory overhead rate is P 40 per machine hour. Machine hours used:

Job Machine Hours

301 30
302 60
303 41
304 63
305 70
306 36
Total 300

f. Jobs completed: 301, 302, 303, and 305.

g. Jobs were shipped and customers were billed as follows: Job 301, P 9,000; Job 302, P 16,150; Job 303, P 12,800.

Required:
1. Journalize the entries to record the summarized operations.
2. Post the appropriate entries to T accounts for Work in Process and Finished Goods, using the identifying letters as
transaction codes. Insert memo account balances as of the end of the month.
3. Prepare a schedule of unfinished jobs to support the balance in the work in process account.
4. Prepare a schedule of completed jobs on hand to support the balance in the finished goods account.
 Cost Accounting and Control #5 | Job Order Costing

Illustration #3
James Co. uses a job order costing system and has the following information for the first week of June 2021.

1. Direct labor and direct materials used:

Job No. Direct Materials Direct Labor Hours

498 P1,500 116
506 960 16
507 415 18
508 345 42
509 652 24
511 308 10
512 835 30
Total P5,015 256

2. The direct labor wage rate is P 4.00 per hour.

3. The overhead rate is P5.00per direct labor hour.
4. Actual overhead cost for the week, P 1,480.
5. Jobs completed: Nos. 498, 506, and 509.
6. The factory had no work in process at the beginning of the week.

Required:
a. Prepare a summary that will show the total cost assigned to each job.
b. Compute the amount of overhead over-under applied during the week.
c. Calculate the cost of work in process at the end of the week.

Illustration #4
The Watson Tools Corporation, which commenced operations on August 1, employs a job order costing system. Overhead
is charged at a normal rate of P 2.50 per direct labor hour. The actual operations for the month of August are summarized
as follows:

a. Purchases of raw materials, 25,000 pieces @ P 1.20/piece.

b. Material and labor costs charged to production:

Job No. Units Material Direct Labor Cost Direct Labor Hours
101 10,000 P4,000 P6,000 3,000
102 8,800 P3,600 P5,400 2,700
103 16,000 P7,000 P9,000 4,500
104 8,000 P3,200 P4,800 2,400
105 20,000 P8,000 P3,600 1,800

c. Actual overhead costs incurred:

Variable P 18,500
Fixed P 15,000

d. Completed jobs: 101, 102, 103 and 104.

e. Sales – P 105,000. All units produced on Jobs 101, 102 and 103 were sold.

Required: Compute the following balances on August 31:

1. Material inventory
2. Work in process inventory
3. Finished goods inventory
4. Cost of goods sold
5. Under-over applied overhead
 Cost Accounting and Control #5 | Job Order Costing

Illustration #5
You are asked to bring the following incomplete accounts of Ticker Printing Inc. up to date through January 31,
20X1. Consider the data that appear in the T-accounts as well as the additional information given in items (a) through (i).
Ticker’s job order costing system has two direct cost categories (direct materials and direct manufacturing labor) and one
indirect cost pool (manufacturing overhead, which is allocated using direct manufacturing labors costs).

Materials Inventory Wages Payable

12/31/20X0 1/31/20X1
Balance: 15,000 Balance: 3,000

Work in Process Inventory Overhead Control

January 20X1 Charges
57,000

Finished Goods Inventory Cost of Goods Sold

12/31/20X0
Balance: 20,000

Additional Information:
a. Manufacturing department overhead is allocated using a budgeted rate set every December. Management
forecasts next year’s overhead and next year’s direct manufacturing labor costs. The budget for 20X1 is
P 400,000 of direct manufacturing labor and P 600,000 of manufacturing overhead.
b. The only job unfinished on January 31, 20X1 is No. 419, on which direct manufacturing labor costs are P 2,000
(125 direct manufacturing labor hours) and direct material costs are P 8,000.
c. Total material placed into production during January is P 90,000.
d. Cost of goods completed during January is P 180,000.
e. Material inventory as of January 31, 20X1 is P 20,000.
f. Finished goods inventory as of January 31, 20X1 is P 15,000.
g. All plant workers earn the same wage rate. Direct manufacturing labor hours for January totals 2,500. Other labor
and supervision totals P 10,000.
h. The gross plant payroll on January paydays totals P 52,000. Ignore withholdings. All personnel are paid on a weekly
basis.
i. All “actual” manufacturing department overhead incurred during January has already been posted.

Required: Compute the following:

1. Material purchased during January
2. Cost of Goods Sold during January
3. Direct Manufacturing Labor Costs incurred during January
4. Manufacturing Overhead Allocated during January
5. Balance, Wages Payable Control, December 31, 20X0
6. Balance, Work in Process Inventory Control, January 31, 20X1
7. Balance, Work in Process Inventory Control, December 31, 20X0
8. Balance, Finished Goods Inventory Control, January 31, 20X1
9. Manufacturing Overhead under-applied or over-applied for January

Appendix: Accounting for Losses, Scraps and Reworks

General
 The production processes may result in losses of materials or partially completed products.
 Evaporation, leakage, or oxidation are inherent in the manufacturing process; such reductions are called shrinkage.
o Eliminating shrinkage may be difficult, impossible, or simply not cost beneficial.
 Production process errors (either by humans or machines) can cause a loss of units.
o Defects are units lost through rejection at inspection for failure to meet appropriate quality standards or
designated product specifications but which can be economically reworked and later sold.
o Spoilage occurs when units are lost through rejection at inspection for failure to meet appropriate quality
standards or designated product specifications and such units cannot be economically reworked.
 Cost Accounting and Control #5 | Job Order Costing

Scrap Accounting on Job Order Costing

 At the time of sale:
o Immaterial or value of the scrap is low
 Scrap revenue is treated as other revenue = Dr. AR/Cash, Cr. Revenue (Credit to Revenue)
o Material or value of the scrap is significant
 If charged to specific job = Dr. AR, Cr. WIP (Credit to WIP)
 If charged to all jobs/production = Dr. AR, Cr. FOH (Credit FOH)
 At the time of production
o Charged to specific job = Dr. Scrap Inventory, Cr. WIP
o Charged to all jobs/production = Dr. Scrap Inventory, Cr. FOH

Illustration A
Tan Lumber Industry accumulates sawdust and that scrap from job has net sales value of P 5,000.

Required: Journalize the transaction if:

1. The scrap is sold quickly after it is produced.
a. Charged to specific job
b. Charged to all jobs
2. The scrap are restored back to warehouse and delay sales until price is attractive.
a. Charged to specific job
b. Charged to all jobs

Illustration B
A machine shop manufactures a stainless steel part that is used in an assembled product. Materials charged to a particular
job amounted to P600. At the point of final inspection, it was discovered that the materials used was inferior to the
specifications required by the engineering department; therefore, all units had to be scrapped.

Required: Record the entries required for scrap under each of the following conditions:
1. The revenue received for scrap is to be treated as reduction in manufacturing cost but cannot be identified with a
specific job. The value of the stainless steel scrap is stable and estimated to be P125 for this job. The scrap is sold
two months later for cash at the estimated value of P125.
2. Revenue received for scrap is to be treated as reduction in manufacturing cost but cannot be identified with a
specific job. A firm price is not determinable for the scrap until it is sold. It is eventually sold for P75 cash.
3. The production job is a special job, and the P85 received on account for the scrap is to be treated as a reduction in
manufacturing cost. (A firm price is not determinable for the scrap until it is sold)
4. Only P40 cash was received for the scrap when it was sold in the following fiscal period. (A firm price is not
determinable for the scrap until it is sold, and the amount to be received for the scrap is to be treated as other
income.)

Spoiled Goods Accounting on Job Order Costing

 Normal Spoilage – it is expected, inherent and usual in the production of products. The accounting for normal spoilage
are:
o Charged to Specific Job = due to exacting specification of the job, or some action made by customers to
change the job specification.
o Charged to All Production = due to internal failure, such as employee error or worn of machine.

 Abnormal Spoilage – it is not expected, unusual, and not inherent to happen under an efficient operating condition.
The unrecovered cost of abnormal spoilage is treated as a loss (expense) of the accounting period in which the detection
of spoiled units occurs.

Illustration C
Assume that Job 101 calls for the production of 200 painted office tables. These tables were put into production and cost
accumulated to date are as follows:

Assume that 10 tables are spoiled. These spoiled tables may be sold as second hand at its net disposal value of P 3,000
each (a loss of P 2,280/table)

Required: Journalize the following transaction if:

a. When spoiled goods occurred because of some actions made by customers to change the specifications of the job.
b. When spoiled goods occurred due to internal failure such as employee’s error or worn-out machinery.
 Cost Accounting and Control #5 | Job Order Costing

Illustration D
Venus Inc., manufactures tennis clothing. During the month, the company cut and assembled 8,000 skirts. One hundred of
the skirts did not meet specifications and were considered "seconds". Seconds are sold for P9.95 per skirt, whereas first-
quality skirts sell for P39.95. During the month, Work in Process was charged P 108,000: P 36,000 for materials, P 48,000
for labor and P 24,000 for factory overhead.

Required: Record the entries to first charge production costs for the period and to then record the loss due to spoiled work,
under each of the following conditions:
a. The loss due to spoiled work is spread over all jobs in the department.
b. The loss due to spoiled work is charged to the specific job because it is a special order.

Accounting for Rework in Job Order Costing

 Normal Rework – it is expected, inherent and usual in the production of products. The accounting for normal spoilage
are:
o Charged to Specific Jobs = due to exacting specification of the job or some action made by customers to
change the job specification. The rework cost is debited to WIP.
o Charged to All Production = due to internal failure, such as employee error or worn out machines. The rework
cost is debited to Factory Overhead.

 Abnormal Rework – it is not expected, unusual, and not inherent to happen under an efficient operating condition. The
abnormal defective unit rework costs is treated as loss (expense) of the accounting period in which the restoration
occurs.

Illustration E
To illustrate we will consider the information given in previous examples. The manufacturing cost of the 10 tables are:

Assume that the 10 spoiled tables are reworked. The additional cost of reworking the tables equal to P 9,500 (comprising
P 2,000 direct materials, P 3,000 direct labor, and P 4,500 manufacturing overhead).

Required: Journalize the following transaction if:

a. The rework is charged to specific jobs
b. The rework is charged to all production

Illustration F
David Mfg. Company manufactures an integrated transistor circuit board for repeat customers but also accepts special
orders for the same product. Job. No. MS1 incurred the following unit costs for 1,000 circuits boards manufactured:

Materials - P6.00
Labor - P3.00
Factory overhead - P2.00
Total cost per unit - P11.00

When the completed products were tested, 50 circuit boards were found to be defective. The costs per unit of correcting
the defects follow:
Materials - P3.00
Labor - P2.00
Factory overhead - P1.00

Required: Record the journal entry for the costs to correct the defective work:
a. If the cost of the defective work is charged to production.
b. If the cost of the defective work is charged to specific job.
 Cost Accounting and Control #5 | Job Order Costing

Illustration G
Textual Deviance is a manufacturer of writing products for aspiring indie authors.

Winston Smith, the plant manager of Textual Deviance, obtains the following information for Job #10 in August 2021. A total
cost of 46 units were started, and 6 spoiled units were detected and rejected at final inspection, yielding 40 good units. The
spoiled units were considered to be normal spoilage. Costs assigned prior to the inspection point are P 1,100 per unit. The
current disposal price of the spoiled units is P 235 per unit. When the spoilage is detected, the spoiled goods are inventoried
at P 235 per unit.

Required: Prepare the journal entries to record the normal spoilage, assuming the following:
a. The spoilage is related to specific job.
b. The spoilage is common to all jobs.
c. The spoilage is considered to be abnormal spoilage.

Illustration H
Using the previous example, assume that the 6 spoiled units of Textual Deviance Machine Shop’s Job #10 can be reworked
for a total cost of P 1,800. A total cost of P 6,600 associated with these units has already been assigned to Job #10 before
rework.

Required: Prepare the journal entries for rework, assuming the following:
a. The rework is related to a specific job.
b. The rework is common to all jobs.
c. The rework is considered to be abnormal.

Illustration I
Using the same problem previously, assume that Job #10 of Textual Deviance generates normal scrap with a total sales
value of P700 (it is assumed that the scrap returned to the storeroom is sold quickly).

Required: Prepare the journal entries for the recognition of scrap, assuming the following:
a. The value of scrap is immaterial and scrap is recognized at the time of sale.
b. The value of scrap is material, is related to a specific job, and is recognized at the time of sale.
c. The value of scrap is material, is common to all jobs, and is recognized at the time of sale.
d. The value of scrap is material (special order), and scrap is recognized as inventory at the time of production and is
recognized at its net realizable value.