Chapter 4

Job Order Costing

Cost AccountingFoundations and Evolutions

Kinney, Prather, Raiborn

Learning Objectives (1 of 3)

• Contrast the job order and process costing systems and their valuation methods

• Define what the term ‘job’ means

• Explain the purpose of the documents used in a job order costing system

Learning Objectives (2 of 3)

• List the journal entries used to accumulate costs in a job order costing system

• Identify how technology impacts the gathering and use of information in job order costing systems

Learning Objectives (3of 3)

• Explain how standard costs are used in a job order costing system

• Describe how job order costing information supports management decision making

• Explain how losses are treated in a job order costing system

Job Order or Process CostingJob Order

• Small quantities• Batches of

identifiable, tailor-made products

• User-specific services

• Tracks costs by job

Job Order or Process CostingJob Order

• Small quantities• Batches of

identifiable, tailor-made products

• User-specific services

• Tracks costs by job

Process

• Large quantities

• Homogeneous goods

• Tracks costs by batch of goods by department

Job Order Costing

• A job is a single unit or group of units identifiable as being produced to distinct customer specifications

• A job can be a– Client– Engagement– Project – Contract

Costing Systems

Job order costing Process costing

COLA

Product Costing

• Cost identification

• Cost measurement

• Product cost assignment

Methods of Product Costing

• Cost Accumulation System defines

– cost object – method of assigning costs to production

• Valuation Method specifies

– how product costs will be measured

Six Possibilities

Job Order• Actual• Normal• Standard

Process • Actual• Normal• Standard

VAL MU EA TT HI OO DN

COSTING SYSTEM

Valuation Methods

• Actual– Actual direct material

– Actual direct labor

– Actual overhead

• Normal– Actual direct material

– Actual direct labor

– Predetermined overhead

• Standard– Standard direct material

– Standard direct labor

– Standard overhead

The Difference

Job Order Costing System

• Each job is a cost object

• Costs are accumulated for each job

• A job can consist of one or more units of output

• There is a subsidiary ledger for each job

Job Order Costing System

WIP ControlJob 2Job 1 Job 3

Job 1 + Job 2 + Job 3 = WIP Control

WIP Subsidiary Ledger

= Job 1 100Job 2 200Job 3 500Total 800

100 200 500

Material Requisition Form

• Tracks who is responsible for materials

• Verifies flow of materials from warehouse to department to job

Material Requisition Form

• Tracks who is responsible for materials• Verifies flow of materials from warehouse to

department to job• Journal entry

Work in Process Inventory (direct material)

Manufacturing Overhead (indirect material)

Raw Material Inventory

Materials Requisition Form

Date ___________________ No. ###

Job No. _________________

Authorized by ___________

Department _______________Issued by _________________Inspected by _______________

Item Part Unit of Quantity Quantity Unit Total

No. No. Descrip. Measure Required Issued Cost Cost

Received by _____________

Job Order Cost Sheet

• All financial information about a job– direct material (from material requisition)– direct labor (from time sheets or labor tickets)– applied overhead– budgeted cost information

Job Order Cost Sheet

• All financial information about a job– direct material (from material requisition)– direct labor (from time sheets or labor tickets)– applied overhead– budgeted cost information

• When job is complete, use job order cost sheet to analyze actual costs to budgeted costs

Job Order Cost Sheet

Customer ____________ Job No. ###

Starting Date _________ Job Description ____________

Completion Date ______ Contract Price _____________ MaterialsDate Ref# Amount

Direct LaborDate Ref # Amount

Overhead AppliedDate Ref# Amount

Total Materials _________

Total Labor _________ Total Cost of Job

Total OH Applied _________ ========

Employee Time Sheet

• Time worked on each job

Employee Time Sheet

• Time worked on each job• Journal entry

Work in Process Inventory (direct labor)

Manufacturing Overhead (indirect labor)

Salaries and Wages Payable

Employee Time Sheet

Employee Name _______________

Employee No. _______________

Department _______________

For week ending

_______

Start Stop Total Type of Work Job No. Time Time Day Hours

Employee Signature Supervisor’s Signature

Manufacturing Overhead

Overhead Account

Actual Overhead Applied Overhead

• Journal EntryWork in Process Inventory

Manufacturing Overhead (applied)

Completion of a Job

• Move job cost sheet from WIP subsidiary to Finished Goods subsidiary

Completion of a Job

• Move job cost sheet from WIP subsidiary to Finished Goods subsidiary

• Journal entryFinished Goods Inventory

Work in Process Inventory

Standard Cost System

• Actual cost

• Normal cost

• Standard cost– Predetermined norms (or standards) for

materials, labor, and overhead– Compare actual costs to standard costs -

difference is a variance

Management Use of Job Order Costing Systems

• Estimate future job costs

• Establish realistic bids and selling prices

• Develop budgets and standards

• Compare actual costs to estimated costs

• Determine which jobs are profitable

• Manage inventory

Product and Material Losses

• Shrinkage – Evaporation– Leakage– Oxidation

• Production errors– Defects can be economically reworked– Spoilage cannot be economically reworked

Product and Material Losses

• Normal Loss – expected during production

• Abnormal Loss – exceeds that expected during production

Normal Loss

• Anticipated on all jobs– Include cost when calculating predetermined

overhead application rate– Include cost less the estimated disposal value

• Specific to a job– Applied to the specific job– Include cost less the estimated disposal value

Abnormal Spoilage

• Period cost – includes cost of abnormal loss less any disposal value

Product and Material Losses

NormalLoss

AbnormalLoss

Loss for most jobs

Loss identifiedwith a

specific job

In overheadrate

Period cost

Charge tospecific job

Period cost

Questions

• What is the difference between job order and process costing systems?

• How do actual, normal, and standard costing valuation methods differ?

• How is the job order cost sheet used?