Chapter 5 – Job-Order Costing

Learning Objectives:
 To define and distinguish the two primary cost accumulation systems;
 To understand the characteristics of a job order costing system
 To identify some of the most commonly used documents in a job order cost system;
 To illustrate how costs are accumulated and accounted for in a job order cost system;
 To exemplify how job order cost system is used in management decision making;
 To classify losses in the context of production, and demonstrate how is it accounted for in a job
order cost system

I. Cost Accumulation System and Cost Valuation System

___________________________________ (1) – it specifies the cost object and how costs are assigned to it. There
are two primary cost accumulation systems: Job Order and Process Cost System

Three step process in Cost Accumulation System:

1. Cost identification
2. Cost measurement
3. Product cost assignment

___________________________________ (2) – it specifies how product costs are measured. There are three main
cost valuation methods: Actual, Normal, and Standard.

Actual Cost System: Actual DM + Actual DL + Actual OH (assigned at the end of the period)
Normal Cost System: Actual DM + Actual DL + Applied OH (assigned during production/performance using a POH
rate)
Standard Cost System: Standard DM + Standard DL + Standard OH (assigned during production/performance using
POH rate x standard input)

II. Job Order Versus Process Cost System

Cost System Cost Object Nature of Product/Service

Job Order Specific jobs/client/work Low-Volume, Heterogeneous,
order/project Customized
Process Process/Units of output High-Volume, Homogeneous,
(Equivalent units of production) Standardized

- Cost accumulation systems can adopt any cost valuation methods, hence, there can be six (6) possible
combinations of the system, and the valuation method used.
- In a job order cost system, a general WIP Inventory account is maintained that is composed of several sub-
ledger WIP Inventory accounts for each specific jobs or work orders.

Common Pricing Methods in Job Order:

1. ________________________________ (3)
- the actual expenditures for the project (both direct and indirect) is covered, plus an acceptable/desired profit
margin.
- It is usually denoted in terms such as “mark up on cost.” It ensures that the producer is reimbursed of the total
expenditures for the project.
- However, this is highly subject to cost manipulation in the sense that costs can be shifted to projects with high
mark-up rates to generate larger profits.

2. ________________________________ (4)
- an auction style kind of pricing where contractors are required to submit their bids for a specific project, and
the client will select among the different bids submitted (usually the lowest bid price).
- This forces the supplier/contractor to work “within the budget”, otherwise, it will entail losses for them if
expenditures went beyond than what is budgeted or estimated.
 - However, this arrangement gives opportunities for the supplier/contractor to use cheaper, substandard inputs
so as to incur lower costs, thereby increasing their take home profits.

III. Job Order: Process and Documents

Three stages of production

1. Contracted, but not yet started
2. In Process – materials are issued to production, laborers start to work on jobs, overhead is accumulated, then
assigned
3. Completed –from WIP Inventory, costs are transferred either to FG Inventory, or directly to Cost of Sales

Commonly Used Documents in Job Order Cost System:

1. _________________________________ (5) – provides almost all information about a particular job. The most
crucial information includes:
a. Job number; e. Delivery Instructions
b. Job description; f. Contract Price
c. Customer identification; g. Product/Service Cost Components
d. Scheduling Information;

2. __________________________________ (6) – a document that authorizes raw materials (direct and/or

indirect) to be issued to production. It is used to determine the cost of materials used in production.
3. __________________________________ (7) – a record that shows the number of hours employees worked
on a specific day or on a specific job. It is used to determine the cost of labor incurred in the production.

IV. Benefits of Job Order Cost System to Managerial Efforts

1. Better monitoring of costs during production;
2. Better inventory valuations for FS purposes;
3. Better monitoring of inputs to avoid stock out and operational problems;
4. Proper stewardship for materials usage;
5. Better monitoring of progress of production;
6. Help on future estimation of costs and pricing policies.

V. Accounting for Losses in Job Order Cost System

____________________________ (8) - refers to the natural deterioration of inputs in a manufacturing setting such as
evaporation, leakage, or oxidation.

Two Kinds of Shrinkages

___________________ (9) – are units that are either partially or fully completed, but did not conform to quality
standards. Defective units can sometimes be economically reworked.

____________________ (10) – are units that cannot be economically reworked.

Summary for accounting treatment of losses.

Type of Loss Definition General Treatment Special Treatment based on Traceability
Normal Loss Losses that are within Inventoriable Cost Generally Specific to a Job
the acceptable Anticipated on all – estimated
bounds of the Jobs – the estimated rework cost, net
operation rework cost, net of of disposal value
disposal value, is not included in
should be included in the POH rate
the manufacturing determination.
overhead for POH Actual rework
rate. cost is debited to
Actual rework cost is the specific job’s
debited to MOH WIP Inventory.
Control
 Abnormal Loss Losses that are Period Cost N/A N/A
outside the
acceptable bounds of
the operation

Practice Exercises

Problem A.

Kardel Company has accepted a special job from Sniper. The company employs job-order costing system. For the
current period, the following cost information was presented to you by Kardel Company:

Direct Materials Purchases P700,000

Direct Materials issued to production P500,000
Direct Labor Hours worked 10,000 hours
Manufacturing Overhead Rate 75% of the direct labor cost.

For Sniper’s order, 30% of the direct materials usage was allotted for it, and a total of 2,000 hours were worked for
that job. Direct labor rate was P100/hour. The job was completed during the current period, and billed to Sniper at
cost plus 25% markup.

1. What is the prime cost incurred for Sniper’s order?

2. How much is the conversion cost for Sniper’s order?
3. What is the total cost of doing Sniper’s order?

Problem B.

Lina Company is engaged in manufacturing customized bags for its customers. During the month of April, two
customized orders, Phoenix and Icarus, was accepted by Lina. The following information was presented pertaining to
the two jobs during the month:

Phoenix Icarus Total

Direct materials used 40% 60% 240,000
Direct Labor (P120/hour) 2,500 hours 1,500 hours 4,000 hours
Manufacturing Overhead P60/direct labor hour P80/direct labor hour -
Units produced 240 bags 120 bags 360 bags

Both orders were completed and delivered to the customers on April.

4. How much is the total conversion cost incurred for the month of April?
5. How much is the total cost incurred for Phoenix?
6. How much is the cost of goods manufactured for Icarus?
7. What is the cost per bag for Phoenix?
8. If Icarus is billed with a mark-up on cost of 40%, what is the selling price per unit for Icarus?

Problem C.

Luna Mfg. Co. is adopting a job-order cost system of cost accumulation. The following information was presented to
you for the month of April.

a. Beginning inventory accounts were as follows:

Direct Materials Inventory P50,000

Work-in-Process Inventory P20,000
Finished Goods Inventory P35,000

b. The Work-In-Process Inventory account above was for Job-A1, which was started on March, and was half-
completed as at the beginning of April. Direct material cost for this figure amounted to P10,000, Direct labor
 cost was P7,500, and the remaining portion was for manufacturing overhead. Overhead is applied based on
direct labor cost.
c. For the current month, the company started jobs B2 and C3. Purchases for direct materials was made for
P100,000, and total labor cost for April was those actually incurred for jobs A1-C3. The following specific costs
were incurred for jobs A1, B2, and C3 during April:
Job A1 Job B2 Job C3
Direct Materials 10,000 35,000 32,000
Direct Labor 7,500 15,000 18,000

d. Both jobs A1 and B2 were completed during April. Job C3 was expected to be completed during May.

9. How much is the Direct Materials Inventory as at the end of April?

10. How much is the Cost of Goods Completed for the period?
11. How much is the Work-in-Process Inventory by the end of April?

Problem D.

Voljin Specialty Products Inc. has presented to you the below information pertaining to its operations during the 1st
quarter of 2017:

Beginning Work-in-Process Inventory P60,000

Direct Materials requisitioned to production for the period P120,000
Direct Labor Cost for the period P200,000
Conversion Cost for the period P300,000
Cost of Goods Available for Sale P400,000
Cost of Goods Sold P350,000

The beginning work in process inventory was for Job XA, which was started on the last quarter of 2016. Seventy-five
(75%) of the current costs was to finish Job XA, while the balance was for Job NF, which was incomplete as at the end
of the 1st quarter. All of the finished goods inventory was for Job XA, since no units have been finished yet for Job NF
or any other job.

12. How much is the total cost to account for during the 1 st quarter of 2017?
13. How much is the ending Work-In-Process Inventory as at the end of the 1st quarter 2017?
14. How much must have been the Finished Goods Inventory at the beginning of 2017?

Problem E.

Sven Company has started and completed working on Job S24. The following costs were incurred for the said job:

Direct Materials P325,000

Direct Labor P175,000
Overhead Cost P200,000
Total units 14,000

15. How much is the cost per each unit completed in Job S24?
16. If the client is billed at P75/unit, how much would be Sven’s total gross margin on this job?
17. If Sven priced this job using cost-plus pricing, with a mark-up of 30% based on sales, how much would
have been the gross margin per unit for Job S24?

Problem F.

Drow Inc. is manufacturing concern business. In making its customized jobs, it has two departments, the Assembly and
the Finishing department, where in the former, all materials are added and some conversion was carried out, while on
the latter, much of the conversion takes place. During the month of April, the company started on working on Jobs X1
and X2. The pertinent information was presented to you below:
 Assembly Finishing Total
Budgeted Overhead 30,000 150,000 180,000
Direct Labor Hours 200 1,200 1,400
Machine Hours 50 250 300

The company applies its overhead using departmental overhead rates. For Assembly, overhead is applied on the basis
of direct labor hours, while for Finishing department, overhead is applied using machine hours.

Relevant information regarding jobs X1 and X2 includes the following:

Job X1 Job X2
Direct Materials Used 50,000 60,000
Direct Labor hours used:
in Assembly (@P80/hour) 100 100
in Finishing (@P120/hour) 500 700
Machine Hours used:
in Assembly 30 20
in Finishing 145 105

Both jobs were incomplete as at the end of April.

18. What are the departmental overhead rates for Assembly and Finishing?
19. How much is the direct labor cost incurred for Job X1?
20. How much is the overhead cost applied to Job X2?
21. How much is the total cost transferred to finished goods during April?
22. How much is the total production cost for Job X2?

Problem G.

Lanaya Company has two jobs currently in process, Job Templar and Job Assassin. Total cost put into process for Job
Templar was P210,000, while for Job Assassin, beginning inventory cost was P150,000. It was noted that of the
P210,000 accumulated cost for Templar, P60,000 was pertaining to the direct labor cost incurred for the period, and
the direct materials issued to that job for the current period was half as much of the current conversion cost for Job
Templar. Overhead is applied at 120% of the labor cost. The beginning inventory cost for Assassin represents 1/3 of
the total cost of the finished job, so for the period, additional costs were incurred for the said job to complete it. Job
Templar was still incomplete by the end of the period.

23. How much must have been the Work-In-Process Inventory at the beginning of the period?
24. How much is the total current production cost for Lanaya Company?

Problem H.

Riki Company is engaged in manufacturing of special chemical solutions for its customers. Normally, it budgets its
overhead costs at P600,000, applied using 30,000 machine hours. However, its operations manager stated that
shrinkages normally occurs during processing, and estimated cost to rework was P30,000. Disposal value of defective
units is estimated to be at P10,000.

25. Assuming spoilage is generally anticipated on all jobs, how much is the predetermined overhead rate
of Riki Company?
26. If spoilage are specifically traceable to jobs worked, how much is the applied overhead cost during
the period if 20,000 machine hours was utilized?

Problem J.

Slark Company is engaged in making artsy planners, which are highly customized. Fishy Inc. engaged the services of
Slark Company to produce 500 units of a marine-themed planner, on a cost-plus basis contract, with a mark-up on cost
of 40%. Defects are negligible, and if ever, job-specific. The following information was presented to you for your
analysis.
 Budgeted Overhead (exclusive of estimated rework cost) for the period P300,000
Estimated rework cost P15,000
Estimated disposal value of defects P7,500
Total budgeted production 10,000 units
Direct Materials used for Fishy’s order P50,000
Direct Labor Cost worked for Fishy’s order P30,000

Overhead is applied based on the number of units produced. There were 50 defective planners for Fishy’s job, but
these were reworked for a total cost of P5,000.

27. What is the overhead rate for Slark Company?

28. What is the cost per planner pertaining to Fishy’s order?

Problem H.

Invoker Company adopts the job order cost system in manufacturing its custom made toys. A specific order to
manufacture 1,000 bears that closely resembles Mr. Bean’s Teddy was received, and the per unit cost information are
as follows:
Direct material P600
Direct labor P360
Manufacturing overhead P240

Based on experience, total estimated rework cost is P3,300,000, and defective units are often sold to some orphanages
for P200 per unit. On an average, Invoker produces 15,000 units.

In manufacturing the above order, there were 40 units that went defective, and hence must be reworked. However, due
to some constraints, only half was reworked, and the other half was sold as defectives. Total prime cost for the rework
is P15,000 while overhead is applied on a per unit basis.

29. What is the cost per good unit, assuming that the manufacturing overhead rate includes an allowance
for rework net of disposal value?
30. What is cost per good unit, if defects are specific to jobs? (Recompute for the new manufacturing
overhead rate)