JOB ORDER

COSTING
PATRICK LOUIE E. REYES,
CTT, MICB, RCA, CPA

Glass blowing, an industry which uses job order costing.

Normal cost system
As promised, Normal costing will be discussed
exhaustively in this lesson, like how the girls in the cover
slide are exhausted from blowing…glass. 🌬

Normal cost system: An alternative to an actual cost

system that combines actual direct material and direct
labor costs with overhead that is assigned using a
predetermined rate or rates.
Normal cost system
Normal cost system: An alternative to an actual cost
system that combines actual direct material and direct
labor costs with overhead that is assigned using a pre-
determined rate or rates.

Pre-determined OH rate: charge per unit of activity that

is used to allocate/apply OH cost from the OH Control
account to Work in process for the period’s production
or services; also called OH application rate.
 👀
The Standard Cost System shall be discussed in detail
in the last lesson of the semester.
Actual vs. Normal
Actual Cost System Normal Cost System
Overhead: applied
from the Overhead
Direct Control account
Overhead: Material and (where all
Uses actual Direct Labor: Overhead costs
cost are pooled) to
Uses actual Product Cost,
cost using Pre-
determined
Overhead rates
Basis of Allocation of OH
•As with any other cost, it must be allocated to products
manufactured using a logical basis. Some of the bases
of overhead allocation include:
• Overhead allocation can be based on volume, or based on
activity.
• Volume-based allocation of Overhead shall be discussed in
the following slides, while Activity-based allocation of Costs
(in general, not only Overhead costs) shall be discussed in
detail in Lesson #9.
Volume-based allocation of OH
•This basis of OH allocation relies heavily on the
assumption that each product uses the same amounts
of, say, electricity such that if product A uses 2
kilowatt-hours (kWh) and product B uses 3 kWh, then
normally, product B must cost more, ceteris paribus.
•OH can be allocated based on volume using two more
specific bases:
• Number of units produced
• Number of direct labor hours used
Pre-determined OH rate
•Both number of units produced and number of direct
labor hours used will need an application rate, called
the Pre-determined overhead rate.
•It improves the timeliness of information, since it
facilitates the assignment of overhead during a period.
Pre-determined OH rate
•adjusts for variations in actual overhead costs that are
unrelated to fluctuations in activity.
Example: Let’s assume that a
factory is airconditioned so that April ☀️ January ☃️
the laborers will be comfortable
working. Electricity for this Electricity cost 12,000 1,200
purpose may cost more in April Units produced 3,000 3,000
💦 because the aircon units will
be operating at maximum power Electricity Cost 4.00 0.40
compared to January ❄️ where per unit
the aircon units might even be produced
turned off for the entire month.
Pre-determined OH rate
•overcomes the problem of fluctuations in activity
levels that have no impact on fixed overhead costs
• Even if total manufacturing November 💀 June 🎓
overhead were the same for
each period, changes in activity Utility cost 12,000 12,000
levels between periods would Candles 6,000 1,500
cause a per unit change in fixed produced
overhead cost.
Utility Cost per 2.00 8.00
• Overhead cost differences candle
could create major variations in produced
unit cost. By establishing a uniform annual pre-determined OH rate for all units
produced during the year, the above problem is overcome.
Pre-determined OH rate
•allows managers to be more aware of individual
product or product line profitability as well as the
profitability of business with a particular customer or
vendor.
• Assume that a sandwich seller purchases bread from Bread Pit for Php 5/slice, and meat from Mekeni
Rogers at Php 10/slice. If the seller makes sandwich using 2 slices of bread and 2 slices of meat, the total
material cost is Php 30 per sandwich. Labor is charged at Php 5 per sandwich produced. Assume further that
he sells the sandwiches for Php 70 each (double the cost), and that a customer is entitled to purchase of only
one sandwich (no to panic/bulk buying hehe) per transaction.
• If the seller pre-determines telephone calls to be costing Php 1 per minute, and he often spends 30 minutes
(per dissatisfied customer) on the phone with Mekeni Rogers because of customer complaints or shipping
problems, then the manager would be better off buying meat from another supplier because DM = 30; DL =
5; OH = 30, for a total of 65. Selling price of Php 70 minus Php 65 cost would yield only Php 5 per sandwich.
Pre-determined OH rate
Formula (based on number of units produced):
Total budgeted OH cost at a specific activity level
Volume of specified activity level

Example: if a production manager plans to produce 12,000 units of a certain product for year
2020, and budgeted overhead cost for 2020 is 14,400, then the pre-determined OH rate
would be Php 1.20 per unit produced. Thus, if for January 2020, 1,500 units were produced,
then overhead shall be applied at 1,500 units x Php 1.20 per unit = Php 1,800.
Pre-determined OH rate
Formula (based on direct labor):

Total budgeted overhead costs or Total budgeted overhead costs

Total budgeted direct labor costs Total budgeted direct labor hours
Using the formula above will yield an OH rate that is in Using the formula above will yield an OH rate that is the same as
terms of percentage. when the basis is the number of units planned for production.

Example: If for the year 2020, budgeted OH cost is Php Example: If for the year 2020, budgeted OH cost is Php 200,000
150,000 and budgeted direct labor cost is Php 75,000, and it is expected that 8,000 DLH will be used. Overhead,
then overhead is to be applied at a rate of 200% or therefore is to be applied at a rate of Php 25/DLH, such that if
twice the labor cost, such that if for the month of for the month of January 2020, 200 DLH were used, overhead
January 2020, direct labor cost is Php 3,200, then cost for the same month is Php 5,000.
overhead cost for the same month is Php 6,400.
Over- or underapplied OH
•At year-end, total actual overhead will differ from total
applied overhead. The difference is called
underapplied or overapplied overhead.
•Underapplied overhead: overhead applied to WIPI is
less than the actual overhead incurred.
•Overapplied overhead: overhead applied to WIPI is
more than actual overhead incurred.
•Underapplied or overapplied overhead must be closed
at year-end.
Disposition of over- or underapplied OH
•If amount is immaterial, close over- or underapplied
OH to Cost of goods sold. Journal entries for over- and
underapplied OH, respectively:

•If amount is material, it should be prorated among the

accounts in which applied overhead resides:
• Work in Process Inventory
• Finished Goods Inventory
• Cost of Goods Sold.
Disposition of over- or underapplied OH
Illustration of material over- or underapplied OH to be
disposed:

Actual OH = Php 220,000; Applied OH = Php 260,000

Difference: Php 40,000 overapplied OH

Balances:
WIPI = Php 45,640; FGI = Php 78,240; COGS = Php 528,120
Total: Php 652,000
Disposition of over- or underapplied OH
WIPI: 45,640 ÷ 652,000 = 7%
FGI: 78,240 ÷ 652,000 = 12%
COGS: 528,120 ÷ 652,000 = 81%

Prorate: Journal Entry:

WIPI: Php 40,000 x 7% = 2,800
FGI: Php 40,000 x 12% = 4,800
COGS: Php 40,000 x 81% = 32,400
Cost accumulation systems
•Job order costing system: used by companies that
make relatively small quantities of distinct products or
perform unique services that conform to specifications
designated by the purchaser.
•Note: Job = client, engagement, project, contract.
•Process costing system: used by companies that make
large quantities of homogeneous goods. This will be
discussed in detail in Lesson #6.
Job order costing
• Costs are accumulated by job, which is a single unit or
multiple similar or dissimilar units that has or have been
produced to distinct customer specifications
• Each job is treated as a unique cost entity or cost object:
Black Job Lavender Job Orange Job White Job
Direct Material xx Direct Material xx Direct Material xx Direct Material xx
Direct Labor xx Direct Labor xx Direct Labor xx Direct Labor xx
Overhead applied xx Overhead applied xx Overhead applied xx Overhead applied xx
Total cost xx Total cost xx Total cost xx Total cost xx

• Because of the uniqueness of the jobs, costs of different

jobs are maintained in separate subsidiary ledger accounts.
Some documents used in Job orders
Job order cost sheet
• the source document that provides virtually all financial
information about a particular job.
• includes a job number/job ID, a description of the job,
customer identification, various scheduling information,
delivery instructions, and contract price as well as details
regarding actual costs for direct material, direct labor,
and applied overhead
Some documents used in Job orders
Job order cost sheet
• The set of job order cost sheets
for all incomplete jobs
composes the WIP Inventory
subsidiary ledger. Total costs
contained on the job order cost
sheets for all incomplete jobs
should reconcile to the WIP
Inventory control account These are not job cost sheets. These are ledgers. The above figure only illustrates

balance in the general ledger the fact that all costs accumulated for all incomplete jobs as shown in each
subsidiary ledger must reconcile to the WIP in the general ledger.
Some documents
used in Job orders
Job order cost sheet

This is an example
of a job cost sheet.
Some documents used in Job orders
Materials requisition form
• Prepared so that raw materials will be purchased, or
released from storage area to the production area.
• indicates the types and quantities of material to be issued
to production or used to perform a job.
• If direct material is issued to production, the particular
job enters the production cycle. At this point, cost
information begins to be accumulated on the job order
cost sheet.
 Some documents used in Job orders

This is an example of a
materials requisition form.
Some documents used in Job orders
Employee time sheet
• indicates the jobs
on which each
employee worked
and the direct
labor time
consumed.
Job order costing
•When a job is completed, its total cost is removed
from Work in Process Inventory and transferred to
Finished Goods Inventory.
•Job order cost sheets for completed jobs are removed
from the WIP Inventory subsidiary ledger and become
the subsidiary ledger for the Finished Goods Inventory
control account.
•When a job is sold, its cost is transferred from Finished
Goods Inventory to Cost of Goods Sold.
Job order costing

Job Order Costing Documents and Cost

Flows
Accounting for Job order costing
•Libing Things is a funeral parlor operating in
Tuguegarao City. A young man named Magnifico
contracted the services of Libing Things to provide a
metal casket for his ailing grandmother who suffers
from diabetes and pancreatic cancer.
•After negotiation, Magnifico and Libing Things agreed
to a contract price of Php 141,000. The contract is
dated March 15, 2020. The production manager
scheduled the job to begin on April 1, 2020.
Accounting for Job order costing
•The job is expected to be completed on December 31,
2020.
•The job is assigned the code MC404 for identification
purposes.

To illustrate the cost flow for this specific job,

transactions and their corresponding journal entries
shall be shown.
Accounting for Job order costing
1. During April 2020, material requisition forms nos. L40–L55
indicated that metals costing Php 21,680 were issued from
the warehouse to the Production Area. Of this amount, Php
19,500 was used directly for job MC404 and Php 2,080 were
used on other jobs. The remaining Php 100 issued in April
were indirect.

Journal Entry:
Accounting for Job order costing
2. Based on April time sheets and payroll summaries, total
labor cost was Php 38,396. Job MC404 required Php
27,608 of direct labor cost combining the two biweekly pay
periods in April. The remaining jobs in process required Php
5,788 of direct labor cost, and indirect labor cost for the
month totaled Php 5,000.

Journal Entry:
Accounting for Job order costing
3. Libing Things incurred overhead costs in addition to indirect material
and indirect labor during the month of April. Factory building and
equipment depreciation of Php 10,000 was recorded. Insurance on the
factory building was prepaid and one month (Php 800) of that insurance
had expired. A Php 7,600 bill for factory utility costs was received and
would be paid in May. Repair and maintenance costs of Php 2,000 were
paid in cash. Additional miscellaneous overhead costs of Php 3,200 were
incurred.
Journal Entry:
Accounting for Job order costing
4. Overhead is applied at Libing Things as follows: Php
48/DLH, and Php 120/MH. In April, employees committed
260 hours of direct labor to Job MC404, and 65 machine
hours were consumed on the same job. Other jobs worked in
April received total applied overhead of Php 3,600.
Journal Entry:
Notice that the Php 23,600 actual amount of April overhead is not equal to the Php 23,880 of overhead
applied to Work in process. This 280-peso difference is the overapplied overhead for the month, which must
be closed at year-end to Cost of goods sold if immaterial, or allocated to WIPI, FGI, and COGS if material.
Accounting for losses
Losses in production
•shrinkage – inherent in the manufacturing process
(e.g. evaporation, leakage, oxidation, etc)
•defects – failure to meet quality standards or
product specifications; can be economically
reworked and sold.
•spoilage – failure to meet quality standards or
product specifications; cannot be reworked.
Accounting for losses
•Normal loss: loss that falls within a tolerance level that
is expected during production.
•Abnormal loss: loss that exceeds the tolerance level.
For example, if a company sets its quality goal as 99% of
goods produced, the company expects a normal loss of 1%.
Any loss in excess of the set expectation level is considered
abnormal.
Note: What is considered normal loss is subject to
management policies.
Accounting for losses
In a job order situation, the accounting treatment for
lost units depends on two issues:
• Is a loss generally incurred for most jobs or is it
specifically identified with a particular job?
• Who suffers the loss?
• Is the loss considered normal or abnormal?
Accounting for losses
Issue #1: Is a loss generally incurred for most jobs or is
it specifically identified with a particular job?
• If incurred for most or all jobs: The business entity suffers
the loss. Therefore,
If defective – The total cost of the job remains the same
since rework costs are charged to overhead control.
If spoiled – The total manufacturing cost of spoiled units is
removed from WIPI, the loss is charged to overhead control.
Accounting for losses
Issue #1: Is a loss generally incurred for most jobs or is
it specifically identified with a particular job?
• If specific to a particular job: The customer suffers the
loss. Therefore,
If defective – The rework cost is charged to work in process.
If spoiled – The net realizable value of the spoiled units is
removed from WIPI, the loss remains in WIPI.
Accounting for losses
Issue #2: Is the loss considered normal or abnormal?
• If normal: the loss is charged to overhead control.
• If abnormal: part of other expenses; a period cost.

A loss per unit must be computed first:

original cost per unit – scrap value per unit = loss per
unit

If silent, assume all losses to be normal.

Sample problem
For the year ended December Because of its rushing of jobs,
31, 2020, Tailor Swift, a 100 units did not meet
clothes producer known for specifications. Rework costs
rush jobs, incurred the are as follows:
following costs for Job #13, DM – Php 100,000
producing 500 units:
DL – 200,000
DM – Php 500,000
DL – 400,000
OH – 100,000
Sample problem
Required:
1. Cost per unit of Job #13 if the defect is a result of
the customer’s fault.
2. Cost per unit of Job #13 if the defect is a result of
the business entity’s fault.
Analysis: Answer to issues
Issue 1: For the first requirement, it’s the customer’s
fault, therefore the loss is charged to the specific job.
For the second requirement, it’s the business entity’s
fault, therefore the loss is charged to all jobs.
Issue 2: Since the problem is silent as to whether there
is an abnormal loss, we assume that there is none.
 Solution
Requirement 1: To record original manufacturing costs:

Original cost 1,000,000

Rework cost
DM 100,000
To record rework costs:
DL 200,000
OH* 50,000
Total Cost 1,350,000
#of units 500 To transfer to finished goods inventory:

Cost per unit 2,700

*OH rate is 25% of direct labor
 Solution
Requirement 2: To record original manufacturing costs:

Original cost 1,000,000

#of units 500 To record rework costs**:
Cost per unit 2,000

To transfer to finished goods inventory:

**The debit to MOH control is for actual overhead; the credit to MOH control is for
applied overhead to Job #13. The debit and credit to MOH control can be offset.
Abnormal spoilage
• The cost of all abnormal losses (net of any disposal value)
should be written off as a period cost.
Example:
Job #123 has produced 20 defective units which cost Php
100 each to produce. These units can be sold for a total of
Php 10 each. Of the remaining cost, one-fourth is
attributable to abnormal spoilage.
Journal entry: