Job order and process costing system

Job order Costing System

Costs are accumulated by job in a job-order costing
system. Once a job is completed, the unit cost is
determined by dividing the total manufacturing
cost by the number of units produced. We assume
that costs are applied based on normal costing.
Some Examples: cabinet makers, home builders,
dental & medical services.
 Cont…
The job-order cost sheet accumulates each job’ s
manufacturing costs. Each job-order cost sheet has
a job-order number that identifies the new job.
The cost sheet corresponds to a record in the
work-in-process inventory file. All the job sheets
together form a subsidiary work-in-process
inventory ledger. A job-order costing system must
be able to identify the quantity of direct materials,
direct labor and applied manufacturing overhead.
 Cont…
Materials Requisitions
Direct materials cost is assigned to each job through
the use of a materials requisition form. The form
includes the description, quantity and unit cost of
materials issued to each job. The form provides
essential information for assigning direct materials
costs to jobs, and also helps maintain proper control
over a firm’s inventory of direct materials.
 Cont…
• Job Time Tickets
Direct labor cost is assigned to each job through the use of a
job time ticket. The form includes the name, wage rate and
hours worked on each job. These forms are only used for
direct labor.
Overhead Application
• Jobs are assigned overhead costs with a predetermined
overhead rate. Typically, direct labor hours are used as the
measure to calculate overhead. Some, another driver, such
as machine hours, are used. In that case the actual amount
of that driver must be collected and posted to the job cost
sheets.
 Cont…

• Accounting for Overhead

• Overhead costs, also called "overhead expenses" or
"operating expenses", are expenses associated with
running a business that can’t be linked to creating or
producing a product or service. They are the expenses
the business incurs to stay in business, regardless of its
success level.

• Overhead costs represent all of the costs on the

 Cont…
company’s income statement except for those that are
directly related to manufacturing or selling a product, or
providing a service.
Applied Overhead Flows into Work-in-Process inventory
through use of the predetermined overhead
rate.Multiply the actual driver units used by the
predetermined overhead rate to get Applied
Manufacturing Overhead.
 Cont…

Work-in-Process is debited and credited to Overhead

Control.i.e WIP--------XX
Overhead control-------xx
Actual Overhead Actual overhead is debited to the
Overhead Control account as it is incurred. i.e
actual overhead………..xx
overhead control …….xx
 Cont..
• Unit Cost Calculation
Once a job is completed, the total
manufacturing cost is calculated by totaling
direct materials, direct labor and applied
overhead. Then the grand total can be divided
by number of units to produce a unit cost. i.e
Unit cost= DMC+DLC+AOH/Total units
produced
 Cont…
• Accounting for Finished Goods Inventory.
Total job cost is Direct materials, direct labor,
and applied manufacturing overhead are totaled
for completed jobs. The cost of a completed job is
credited to Work-in process and debited to
Finished Goods Inventory. Schedule of cost of
goods manufactured is schedule summarizing the
cost flows through the production activity is
prepared. Finished goods inventory is carried at
normal cost.
 Cont…
• Accounting for Cost of Goods Sold
When the job is shipped to the customer, the cost of the finished
job becomes a cost of goods sold. The cost of a completed job is
credited to finished goods inventory and debited to Cost of Goods
Sold.
Overhead variances
Cost of goods sold before adjustment includes the cost of the
finished jobs that have been sold only.
There is usually an immaterial overhead variance which must be
closed to the cost of goods sold account.
After that adjustment takes place, the result is called the adjusted
cost of goods sold.
 Cont..
• ABC Company uses job-order costing system it
applies overhead costs on the basis of direct
labor hours. For the current year the company
estimates that it will work 20000 direct labor hrs
and 650,000 of manufacturing over head. The
following transaction took place during the year.
• A.300,000 of raw material were purchased on
account .
• Rm were issued in to production 90,000 DM and
40000 IDM
 Cont..
• C. labor costs incurred 40,000 DL ,130,000IDL
sales commission 50,000, administrative
salaries 100,000br.
• D. utility cost for the factory were 60,000Br
• E. depreciation record was 300,000 ( 70%
related to factory ,30% related to
administrative office )
• F. MOH was applied to production actual direct
labor hour incurred were 22,000Br.
 Cont…
• G. units costing 300,000Br were completed and
transferred to finished goods inventory.
• H. good with cost of 150,000Br were sold on
account for 200,000Br
• i. closed the under/over applied for the year
• NOTE
predetermined overhead rate= estimated OH cost/
estimated allocation base
Actual OH cost = predetermined overhead rate*actual
allocation base.
Over or under applied OH = EMOH-AMOH
 Process costing system
• A process costing system is characterized by a large
number of homogeneous products passing through a
series of processes
• Each process is responsible for one or more operations
that bring a product one step closer to completion .
• A process is a series of activities that are linked to
perform a specific objective .
• In each process, materials, labor and overhead inputs
may be needed and upon completion of that process are
transferred to another process until complete, when
they are transferred to finished goods.
 Cont…
• The production report is the document that
summarizes the manufacturing activity that takes place
in a process department for a given period of time .
• A cost transferred from a prior process to a subsequent
process.These are a type of direct material
• Unit Information
1. Units to account for
2. Units accounted for
• Cost Information
1. Costs to account for
2. Costs accounted for
 Cont…
• Process Costing with No Beginning or Ending Work-
In-Process Inventories
• Process Costing with Ending WorkIn-Process
Inventories
• Process Costing with beginning Work-InProcess
Inventories
a. Process Costing with Ending WorkIn-Process
Inventories
Units to account for:
BWIP+SU( started Units)
Units accounted for = Units completed +EWIP
Equivalent unit= EWIP*% completed +units completed
 Con’t….
• Units to Account For = Units Accounted For
Started + BWIP = Completed + EWIP
• Started & Completed = Completed – BWIP
• Started = Started & Completed + EWIP