Job Costing

Costing Systems

• Job-Costing: system accounting for distinct cost objects

called Jobs. Each job may be different from the next, and
consumes different resources
Wedding announcements, aircraft, advertising

• Process-Costing: system accounting for mass production of

identical or similar products
Oil refining, orange juice,
 Seven-step Job Costing
1. Identify the Job that is the Chosen Cost Object
2. Identify the Direct Costs of the Job
3. Select the Cost-Allocation base(s) to use for allocating Indirect Costs to the Job
4. Match Indirect Costs to their respective Cost-Allocation base(s)
5. Calculate an Overhead Allocation Rate:
Actual OH Costs ÷ Actual OH Allocation Base
6. Allocate Overhead Costs to the Job:
OH Allocation Rate x Actual Base Activity For the Job
7. Compute Total Job Costs by adding all direct and indirect costs together
Flow of Costs Illustrated
 Job Order Cost Flow
The flow of costs (direct materials, direct labor, and manufacturing
overhead) in job order cost accounting parallels the physical flow of
the materials as they are converted into finished goods.
As jobs are worked on, manufacturing costs are assigned to the Work
in Process Inventory account. When a job is completed, the cost of
the job is transferred to Finished Goods Inventory. When the goods
are sold, their cost is transferred to Cost of Goods Sold.
Flow of Costs in Job Order Cost
Accounting
Manufacturing Work in Process Finished Goods
Cost of Goods Sold
Costs Inventory Inventory

Materials

Labor Assigned to Completed Sold

Overhead
 Job Order Cost Flow
There are 2 major steps in the flow of costs:
◦ accumulating the manufacturing costs incurred and
◦ assigning the accumulated costs to the work done.

Manufacturing costs incurred are accumulated in entries by debits to Raw Materials

Inventory, Factory Labor, and Manufacturing Overhead.
The remaining entries pertain to the assignment of manufacturing costs incurred.
 Job Order Cost Accounting System
Flow of Costs

Raw Materials Inventory Work in Process Inventory Finished Goods Inventory

8
(1) 42,000 (4) 30,000 4 (4) 24,000 (7) 39,000 7 (7) 39,000 (8) 39,000
Bal. 12,000 (5) 28,000
(6) 22,400
Bal. 35,400

Factory Labor Cost of Goods Sold

(2) 32,000 (5) 32,000 5 (8) 39,000

Key to Entries:
Manufacturing Overhead
Accumulation Assignment
(3) 13,800 (6) 22,400 6
1. Purchase raw materials 4. Raw materials are used
(4) 6,000 2. Incur factory labor 5. Factory labor is used
(5) 4,000 3. Incur manufacuring 6. Overhead is applied
overhead 7. Completed goods are
Bal. 1,400 recognized
8. Cost of goods sold is
recognized
Accumulating Manufacturing Costs
In a job order cost system, manufacturing costs are recorded in
the period in which they are incurred.
No effort is made at this point to associate the cost of materials
with specific jobs or orders.
Materials Inventory Card
Raw Materials Inventory is a control account. The subsidiary
ledger consists of individual records for each item of raw
materials in the form of
◦ mechanically or manually prepared accounts (or cards) or
◦ computer data files.
The inventory card for Stock No. AA2746 following the purchase is
shown below.

Item: Handles Part No: AA2746

Receipts Issues Balance
Date Units Cost Total Units Cost Total Units Cost Total
1/4 2,000 $5 $10,000 2,000 $5 $10,000
Accumulating Manufacturing Costs
In a manufacturing company, the cost of factory labor consists of
◦ gross earnings of factory workers,
◦ employer payroll taxes on such earnings, and
◦ fringe benefits incurred by the employer.
Accumulating Manufacturing Costs
The accumulation of overhead costs may be recognized daily, as in
the case of machinery repairs and the use of indirect materials
and indirect labor.
Overhead costs may also be recorded periodically through
adjusting entries, as in the case of property taxes, depreciation,
and insurance.
Job Cost Sheet
A job cost sheet is a form used to record the costs chargeable
to a specific job and to determine the total and unit cost of the
completed job. Postings to job cost sheets are made daily.

Job Cost Sheet

Job No. _________________________________ Quantity ________________________________
Item ___________________________________ Date Requested __________________________
For ____________________________________ Date Completed __________________________

Direct Direct Manufacturing

Date Materials Labor Overhead

Cost of completed job

Direct materials $
Direct labor
Manufacturing overhead
Total cost $
Unit cost (total dollars ÷ quantity) $
Job Cost Sheet
A separate job cost sheet is kept for each job. Job cost sheets constitute the subsidiary ledger
for the Work in Process Inventory account.
Each entry to Work in Process Inventory must be accompanied by a corresponding posting to
one or more job cost sheets.
 Assigning Manufacturing Costs to Work in
Process

Raw materials costs are assigned to jobs when

the materials are issued by the storeroom.
Materials Requisition Slip
The authorization for issuing raw materials is made on a pre-
numbered materials requisition slip signed by an authorized
employee such as a department supervisor. The requisition
should indicate the quantity and type of materials (direct or
indirect) withdrawn and the account to be charged.

Wallace Manufacturing Company

Materials Requisition Slip

Deliver to: Assembly Department Req. No. R247

Charge to: Work in Process – Job No. 101 Date 1/6/96

Quantity Description Stock No. Cost Per Unit Total

200 Handles AA2746 $5.00 $1,000

Requested by: Received by:

Approved by: Costed by:

Materials Requisition Slip
The requisition is prepared in duplicate.
◦ A copy is retained in the storeroom as evidence of the
materials released.
◦ The original is sent to accounting, where the cost per unit
and total cost of the materials used are determined.
Assigning Manufacturing Costs to Work in
Process

Factory Labor costs are assigned to jobs when

the work is performed by the employees.
Time Ticket
Labor costs are assigned to jobs on the basis of time tickets. The
time ticket should indicate the employee, the hours worked, the
account and job to be charged, and the total labor cost.

Wallace Manufacturing Company

Time Ticket

Date: 1/6/99
Employee John Nash Employee No. 124
Charge to: Work in Process Job No. 101

Time Hourly Total

Start Stop Total Hours Rate Cost
0800 1200 4 10.00 40.00

Approved by
Bob Kadler Costed by
M.Cher
 Assigning Manufacturing Costs to Work in
Process

Manufacturing Overhead costs are

assigned to work in process and
to specific jobs on an estimated
basis through the use of a
predetermined overhead rate.
Predetermined
Overhead Rate
The predetermined overhead rate is established at the
beginning of the year and is based on the relationship
between estimated annual overhead costs and expected
annual operating activity, expressed in terms of a common
activity base.
The activity base may be stated in terms of direct labor
costs, direct labor hours, machine hours, or any other
measure that will provide an equitable basis for applying
overhead costs to jobs.
Predetermined
Overhead Rate
The formula to compute a predetermined overhead rate is shown below.

Estimated Annual
Overhead Costs ÷ Expected Annual
Operating Activity = Predetermined
Overhead Rate

A predetermined overhead rate is used to assign costs because overhead costs

are not incurred uniformly each month, and not all actual overhead invoices
are received at the end of the month. Therefore, using a predetermined
overhead rate enables a cost to be determined for the job immediately.
Using Predetermined Overhead Rates
Work in Process

is
Activity Base Predetermined
X Overhead Rate assigned
to
Job 1 Job 2 Job 3
Assigning Manufacturing Costs to Finished
Goods

When a job is finished, an entry is

made to transfer its total cost
from Work in Process Inventory to
Finished Goods Inventory.
Completed Job Cost Sheet
When a job is
completed, the
manufacturing Job Cost Sheet
Job No. _______________101_______________ Quantity _________________1,000__________
costs are Item ___________Magnetic Sensors_________ Date Requested ________February 5________
summarized and For ____________Tanner Company_________ Date Completed ________January 31________

the lower portion Date

Direct
Materials
Direct
Labor
Manufacturing
Overhead
of the applicable 1/8 $ 1,000
1/10 $ 9,000 $ 7,200
job cost sheet is 1/12 7,000
1/26 4,000
completed. 1/31 6,000 4,800
$ 12,000 $ 15,000 $ 12,000
If Job No. 101 is Cost of completed job
completed on Direct materials $ 12,000
Direct labor 15,000
January 31, the Manufacturing overhead 12,000
job cost sheet will Total cost
Unit cost ($39,000 ÷ 1,000)
$
$
39,000
39.00
be as shown to
the right.
 Problem
The following direct costs were incurred on job no.239 of XYL Co. Ltd.
Materials Rs.6010
Wages: Dept. A – 60 hours @ Rs.30 per hr.
B – 40 hours @ Rs.20 per hr.
C – 20 hours @ Rs.50 per hr.
Overhead for these three dept. were estimated as follows:
Variable overheads: Dept. A - Rs.15000 for 1500 labour hours
B - Rs.4000 for 200 labour hours
C - Rs.12000 for 300 labour hours
Fixed overheads: estimated at Rs. 40000 for 2000 normal working hours.
Calculate the cost of Job No.-239 and calculate the price to give profit of
25% on selling price.
Two-Stage Cost Allocation
When a company uses departmental overhead rates, the assignment of the
manufacturing overhead costs to production jobs is accomplished in two stages.
This is known as Two-Stage Cost Allocation.
First stages- All the manufacturing overhead cost are assigned to production
departments.
Second stage-The overhead cost assigned to production departments are
applied to the production jobs that pass through the department.
Stage One
All the manufacturing overhead cost are assigned to production departments
Two different types of allocation process:
◦ Cost distribution/Cost allocation- All the manufacturing overhead cost are assigned to
departmental overhead centres which includes production departments and service
departments.
◦ Service department cost allocation- All the service department cost are reassigned to
production departments on the basis of the relative proportion of each service department’s
output that is used by the various production departments.
Stage Two
The overhead cost assigned to production departments are applied to the
production jobs that pass through the department. This process is called as
overhead application/absorption.
This absorption is done on the basis of each department’s predetermined
overhead rate.
Product Costing used in service industry
and non-profit organisations
Job costing is used in the service and non-profit organisations.
In these type of organisation, the production is referred as
cases-Hospitals, law firms, consulting firms
Programs/missions-government agencies.
 STATEMENT OF COST OR COST SHEET
Particulars Total Cost Cost Per Unit
Rs. Rs.
Direct Material
Direct Labour
Direct Expenses
Prime Cost
Add: Works overheads
Works cost/Factory cost
Add: Administration overheads
Cost of production
Add: Selling and distribution overheads
Cost of sales
Add: Profit
Sales
 Treatment of stock of raw materials, work-in-progress
and finished goods while preparing a Cost Sheet:

Stock of raw material - If the figures of opening stock of raw

materials, purchases of raw materials and closing stock of raw
materials are given, then the figure of raw material consumed
(direct material) can be calculated as below:
Rs.
Opening stock of raw materials .......................
Add: Purchases of raw materials .......................
Less: Closing Stock of raw materials.......................
Raw materials consumed XXX
Work-in-Progress - Work-in-progress represents those units
on which some work has been done but which are not yet
complete. It is valued at works cost or prime cost basis, but
the former is preferred when work-in-progress is valued at
works or factory cost then opening and closing stock will be
adjusted as below:
Rs.
Prime Cost
Add: Factory overheads .......................
Add: Opening work-in-progress .......................
Less: Closing work-in-progress .......................
Works cost XXX
Finished goods - When the opening and closing
figures of finished goods are given, the same may be
adjusted before calculating cost of goods sold as
under:
Rs.
Cost of production .......................
Add: Opening stock of finished goods .......................
Less: Closing stock of finished goods .......................
Cost of goods sold XXX
 A manufacturing firm uses the job costing system which is also used for assisting in
estimating the price for new jobs. The following has been collected for Job A100 and
B200 for the purpose of quoting the price to a customer.
A100 B200
Material Rs.7600 Rs. 11,400
Labour hours:
Machining department 60 hrs 30 hrs
Assembly department 20 hrs 40 hrs
Finishing department 10 hrs 20 hrs
Rates of pay for direct labour:
Machining department Rs. 49.40 per hour
Assembly department Rs. 34.20 per hour
Finishing department Rs. 45.60 per hour
Machine hour required in each department:
Machining department 100 hrs 80 hrs
Assembly department 10 hrs 10 hrs
Factory overheads are recovered on the following basis:
Machining department Rs. 57 per machine hour
Assembly department Rs. 95 per direct labour hour
Finishing department Rs. 76 per direct labour hour
20% of the factory cost is added for general administrative and further 10% of the total cost is added for profit.
You are required to calculate the prices to be quoted for the job.