JOB

ORDER
COSTING
Chapter 4
 Cost Systems Overview
• Cost systems measure, record, and report product
costs.
• Job order costing provides product costs for each
quantity of product that is manufactured.
• Each quantity of product that is manufactured is
called a job.
• Job order costing is often used by companies that
manufacture custom products for customers or batches
of similar products.
• Examples: apparel manufacturer, guitar
manufacturer
 Job Order Costing

Customized Special-order One-of-a-kind

Process Costing and Hybrid Costing
01 02
PROCESS COSTING HYBRID COSTING
Process costing provides product costs Hybrid costing, also called
for each manufacturing department or operations costing, has
process. elements of both job order
costing and process costing.
Process costing is often used by
companies that manufacture units of a Hybrid costing is often used by
product that are indistinguishable from companies that manufacture
classes of products that are
each other and are manufactured using unique from one another but
a continuous production process. share a variety of common
components.
 Job Order Costing for
Manufacturing Businesses
Job order costing records and summarizes
manufacturing costs by jobs.
While jobs are still in production, they
are part of Work in Process Inventory.
When jobs are completed, they become
part of Finished Goods Inventory.
When the finished goods are sold to
customers, their costs become part of
Cost of Goods Sold.
Flow of manufacturing costs
Inventory ledger
accounts
 Materials Journal Entries
The storeroom releases materials for use in manufacturing when a
materials requisition is received.
For direct materials, the quantities and amounts from the materials
requisitions are posted to job cost sheets.
A summary of the materials requisitions is used as a basis for the journal
entry recording the materials used for the month.
 Factory Labor
When employees report for work, they
may use electronic badges, clock cards, or
in-and-out cards to clock in.
When employees work on an individual
job, they use time tickets to record the
amount of time they have worked on a
specific job.
A summary of the time tickets is used as
the basis for the journal entry recording
direct labor for the month.
Labor Information and Cost Flows
 Factory Overhead

Factory overhead includes

all manufacturing costs
except direct materials and
direct labor
 Factory Overhead
Factory overhead costs come
from a variety of sources:

Indirect labor comes from

the salaries of production
Indirect materials come from a supervisors and the wages
Factory power comes from
summary of materials requisitions. of other employees such as utility bills.
Indirect materials are any janitors. Indirect labor is
materials needed to make a any labor needed to make a Factory depreciation comes
product, but that are not directly from Accounting Department
product, but that is not computations of depreciation.
traced to the product. directly traced to the
product
Test your knowledge
For a manufacturer, which of the following would be
considered an indirect material?
a. Fabric used to make sofas in a furniture factory
b. Glue used to bind books at a print shop
c. Plastic bottles filled with shampoo at a hair care
production facility
d. Boxes used to package crackers at a food processing
company

Clue:
Indirect materials are those needed to make a product that cannot
be directly or easily traced to the product. They can also include
liquids that are difficult to pinpoint exactly how much is used for
each unit.
Journal Entry to Record Factory Overhead
 Allocating Factory Overhead and
Predetermined Factory Overhead
Rate
Factory overhead is different from direct labor and direct
materials in that it is indirectly related to the jobs. That is,
factory overhead costs cannot be identified with or traced
to specific jobs. For this reason, factory overhead costs
are allocated to jobs.
The process by which factory overhead or other costs are
assigned to a cost object, such as a job, is called cost
allocation.
 Cost allocation
• The factory overhead costs
are allocated to jobs using a
common measure related to
each job.
• This measure is called an
activity base, allocation
base, or activity driver.
• Three common activity bases
used to allocate factory
overhead costs are direct
labor hours, direct labor
cost, and machine hours.
 Predetermined Factory
Overhead Rate
Factory overhead costs are normally allocated
or applied to jobs using a predetermined
factory overhead rate.

Estimated Total Factory Overhead Costs

Predetermined Factory Overhead Rate =
Estimated Activity Base
The predetermined overhead rate Predetermined
is computed using estimated
amounts at the beginning of the Factory Overhead
period Rate (POR)

If a company waited until all overhead

costs were known at the end of the
period, the allocated factory overhead
would be accurate, but not timely.
Applying Factory Overhead to Jobs
Applying Factory Overhead

The journal entry to apply factory overhead:

Debit Work in Process
Credit Factory Overhead
 Factory Overhead account
Actual overhead costs incurred is
debited to Factory overhead account,
while the applied overhead is
credited to factory overhead account

• If the applied overhead is less than the actual overhead incurred,

the debit balance is called underapplied factory overhead or
underabsorbed factory overhead.
• If the applied overhead is more than the actual overhead
incurred, the credit balance is called overapplied factory
overhead or overabsorbed factory overhead
 Disposal of Factory Overhead Balance

During the year, the balance Any balance in the factory If the balance of Factory
in the factory overhead overhead account should Overhead at the end of the
not be carried over to the year is relatively small, it
account is carried forward next year because it is disposed of by
and reported as a deferred applies only to operation transferring it to the cost
debit or credit on the monthly of the current year. of goods sold account.
(interim) balance sheets
 Disposal of Factory Overhead Balance
If the factory overhead is underapplied

If the factory overhead is overapplied:

 Job Cost Sheets and the
Work in Process Controlling Account
 Work in Process
• During the period, the work in process is increased
(debited) for:
• Direct materials
• Direct labor cost
• Applied factory overhead cost
• When the job was completed, the product costs (direct
materials, direct labor, and factory overhead) are
totaled. This total is divided by the number of units
produced to determine the cost per unit.
Finished goods, Sales and Cost of The finished goods account is a
Goods Sold controlling account for the subsidiary
finished goods ledger or stock
ledger.
Each account in the finished goods
ledger contains cost data for the units
manufactured, units sold, and units on
hand.

Entries to record the sale and related cost

of goods sold are as follows:
Dr COGS Cr FG
Dr Receivables Cr Sales

CREDITS: This presentation template was created by Slidesgo, including icons by Flaticon and infographics & images by Freepik
 Subsidiary Ledger Balances
and Income Statement
The balances of Materials, Work in Process, and Finished Goods are supported
by their subsidiary ledgers:
:
 Job Order Costing for Service Businesses
• Job order costing may be used by a service business.
• A service business using job order costing normally renders a
service that is unique to each customer with related costs that
vary significantly with each customer.
• Examples of service businesses that would use job order
costing include attorneys, hospitals, advertising agencies,
event planners, and car repair shops.
 Flow of Costs in a Service Business
Using Job Order Costing
The primary product costs for a When a job is completed and the client is
service business are direct labor and billed, the costs are transferred to a cost of
overhead costs. Any materials or services account.
supplies are insignificant and are
Cost of Services is similar to the cost of goods
included as part of overhead costs.
sold account for a merchandising business or
Like a manufacturing business, the manufacturing business.
direct labor and overhead costs of
A finished goods account and related finished
rendering services to clients are
goods ledger are not necessary.
accumulated in a work in process
account. This is because the revenues for the services are
recorded upon completion.
Analysis for Decision Making: Analyzing Job Costs

• Job order costing accumulates and records product costs by jobs.

• The resulting total and unit product costs can be compared to similar jobs
over time, and/or compared to expected costs.
• Job order costing can be used by managers for evaluating and controlling
costs.
• The job cost sheets can be analyzed for possible reasons for the increased
materials cost (example)
 Analysis for Decision Making: Analyzing Job Costs
• If the materials price did not change the increased
materials cost must be related to the materials used.
Possible reasons:
• A new employee was not properly trained, causing
excess waste and scrap.
• The wood came from a new supplier and was of
poor quality, causing waste.
• The cutting tools needed repair and were not
properly maintained.
• The instructions for the job were incorrect and the
wood had to be recut.