Job Order Costing Systems

PRODUCT COSTING
SYSTEMS
(JOB ORDER COSTING AND PROCESS COSTING SYSTEM)
WHAT IS JOB ORDER COSTING SYSTEM

A system for assigning manufacturing costs to an individual product or
batches of products. Generally, the JO costing is used only when the
products manufactured are sufficiently different from each other.
Examples are:
Carpentry works for furniture and fixtures, cabinets and the like
Buildings and houses
Other products of which the customer has specified a particular

design.
JOB ORDER COSTING SYSTEM

The Job Cost Record or Cost Sheet
Since there is a significant variation in the products manufactured, a job cost record
for each item, job or special order.
The job cost record will report the direct materials and direct labor actually used
plus the manufacturing overhead assigned to each job.
The job cost records also serve as the subsidiary ledger or documentation for the
cost of the work-in-process inventory, the finished goods inventory, and the
cost of goods sold.

The accounting department is responsible to record all manufacturing costs (direct
materials, direct labor and manufacturing overhead) on the job cost sheet. A separate
job cost sheet is prepared of each individual job.
All necessary details about the job and costs incurred to complete the job are
written on the job cost sheet.
The job cost sheet is part of the accounting record. It is used as a subsidiary ledger
to WIP account because it contains all details about the job in process.

Bill of
Materials
Other
Documents
/evidences
Employee
Time
Ticket
Determine
Direct
Material
Needs
Determine
Direct
Labor
Cost
Determine
and
measure
Non-Mfg
Costs
Determine
and
Measure
Overhead
Costs
Predetermi
ned and
Applied
OH
MEASURING AND RECORDING DIRECT MATERIALS COST

Accept an order
Determine and purchase direct material
requirements (Basis: Bill of Materials)
Issue direct materials to production (Use the
Materials Requisition Form)

Bill of Materials
It is a document that lists the type and quantity of direct materials required to
manufacture a standard product as customized for a specific design.
Materials Requisition Form (MRF)
It is a document used to record the issuances of direct materials in starting the
production process. An authorized person from the production department writes the
type, quantity and job number (to which the materials cost is to be charged) on the MRF.
A complete MRF is also used by the accounting department to record the direct
materials on the Job Cost Sheet of the related job order.

Journal entry to record the flow of materials:
When materials are purchased:
Materials
xxxx
Cash or Accounts Payable
xxxx
#
When materials are issued
Work-in-Process
xxxx
Materials
xxxx
MEASURING AND RECORDING DIRECT LABOR COST

Direct labor hours worked, direct labor rate per hour, and total amount in
pesos for each for each individual job or task is recorded on a document
known as time ticket or employee time ticket.
A separate time ticket is prepared by each worker for every working day.
Accounting department collects all time tickets at the end of the day.
These time tickets are used to record DLC on the Job Cost sheet of each
individual job order.
Journal entry to record direct labor cost:
Work-in-Process
Cash or Wages Payable
#
xxxx
xxxx
MEASURING AND RECORDING MANUFACTURING OVERHEAD

Usually consists of both variable and fixed components.
Examples are indirect materials, indirect labor, depreciation, salary of

production manager, property taxes, fuel, electricity, grease used in
machines, and insurance.
Unlike DM and DL, MOH is an indirect cost that cannot be directly
assigned to each individual job. This problem is solved by using a rate that
is computed at the beginning of each period. This rate is known as
predetermined overhead rate

As stated earlier, the predetermined OH rate is computed at the beginning of the period
and is used to apply manufacturing overhead cost to jobs throughout the period.
Computation of Applied Manufacturing Overhead:
Applied MOH = Predetermined OH Rate x Amt of the allocation based incurred by the job

Ex: Suppose the GX Company has completed a job order. The time tickets show that the
workers have worked for 27 hours to complete the job. The predetermined OH rate
computed at the beginning of the period is P8 per DL hour. The MOH cost would be
applied to this job as follows:
= P8 x 27 DL hours
= P 216.00
Journal entry to record MOH cost:
Work-in-Process
Manufacturing Overhead
#
xxxx
xxxx
TREATMENT OF NON MANUFACTURING COSTS
No effect on the production costs of the company because

these are treated as period costs
Not included in the manufacturing overhead account but are
charged directly to income statement.
Examples are: sales commission, rent of office building,
advertising expense and depreciation of office equipment.
Example: GX Company uses job order costing system and has

incurred the following non-manufacturing costs in the most
recent period:
1. Selling and administrative salary
P 60,000
2. Depreciation on office furniture
14,000
3. Advertising expenses
84,000
4. Other selling and administrative expenses 16,000

Journal entry:
1.
Salaries Expenses
60,000
Cash or Salaries and Wages Payable

2.
Depreciation Expense
60,000
14,000
Accumulated Depreciation
3 & 4.
14,000
Advertising Expenses
84,000
Other Selling and Admin Expenses
16,000
Cash or Accounts Payable
100,000
FINISHED GOODS AND COST OF GOODS SOLD

Debit
Credit
Direct
Materials
Credit
Direct
Labor Cost
Credit
Manufact
uring
Overhead
WORK
IN
PROCESS

Journal Entry:
Work-In-Process
xxxx
Direct Materials
xxxx
Direct Labor
xxxx
MOH
xxxx
Credit
Work In
Process
Debit
Finished Goods
Journal Entry:
Finished Goods
Work-In-Process
#
xxxx
xxx

The total cost transferred from the work-in-process account to the
finished goods account during the period is equal to the cost of goods
manufactured for that period.
At the end of a period, the cost of incomplete jobs remain in the work-inprocess account and is shown as work-in-process inventory in assets
section of the balance sheet.
Next period these represents the opening balance of the work in process
account.

When finished goods are shipped to customers, the cost of finished goods
are transferred from finished goods account to cost of goods sold
account.
If a job is completed according to specification of a particular customer,

the complete job is shipped to the customer immediately and the
manufacturing cost associated with the job is charged to the cost of goods
sold.

Sales and the transfer of cost from finished goods to cost of goods sold account are
recorded by making the following journal entries:
Sales on Account:
Accounts Receivable
xxxx
Sales
xxxx
Cash Sales:
Cash
xxxx
Sales
xxxx
When cost is transferred to cost of goods sold account:

Cost of Goods Sold
Finished Goods
xxxx
xxxx
OVER OR UNDER-APPLIED MANUFACTURING OVERHEAD
This is the difference between the MOH applied to WIP and

MOH cost actually incurred.
This is normal in manufacturing business because overhead is

applied to WIR using a predetermined OH rate.
Over or under applied MOH is actually the debit or credit
balance of manufacturing overhead account
Actual MOH costs are debited and applied MOH costs are
credited to MOH account
Actual
OH
Applied
OH
Incurred
Applied to
WIP
DEBITED
CREDITED

DISPOSITION OF OVER OR UNDER-APPLIED MANUFACTURING OVERHEAD
FG
CGS
WIP
OVER OR
UNDER
APPLIED MOH

WHEN MOH IS UNDER
APPLIED
WHEN MOH IS OVER APPLIED

MOH
xxxx
Work in Process
xxxx
Finished Goods
xxxx
Work-In Process
xxxx
Cost of Goods Sold
xxxx
Finished Goods
xxxx
Cost of Goods Sold
xxxx
MOH
xxxx

CGS
OVER OR
UNDER
APPLIED MOH

WHEN MOH IS UNDER
APPLIED
MOH
Cost of Goods Sold xxxx
MOH
WHEN MOH IS OVER APPLIED
xxxx
xxxx
Cost of Goods Sold xxxx
THANK YOU.

ILLUSTRATIVE EXAMPLE
During the year 2015, Bebe Company started two jobs Job A and Job B. Job A consisted
of 1,000 units and Job B consisted of 500 units. At the end of the year, Job A was completed
but Job B was in process. The information about manufacturing overhead cost applied to
Job A and B was as follows:
Job A: P 65,000; Job B:P 35,000. The actual OH cost by the company during 2015 was
P108,000. Out of 1,000 units in Job A, 750 units had been sold before the end of 2015.
Required: Calculate over or under applied MOH and make journal entries required to
dispose off over or under applied MOH assuming:
a.
It is disposed off by allocating between FG inventory and cost of goods sold account.
b.
It is disposed off by transferring the entire amount to cost of goods sold account.

Job Order Costing Systems

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PRODUCT COSTING

WHAT IS JOB ORDER COSTING SYSTEM

Other products of which the customer has specified a particular

JOB ORDER COSTING SYSTEM

JOB ORDER COSTING SYSTEM

JOB ORDER COSTING SYSTEM

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING DIRECT MATERIALS COST

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING DIRECT MATERIALS COST

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING DIRECT MATERIALS COST

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING DIRECT MATERIALS COST

Cash or Accounts Payable

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING DIRECT LABOR COST

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING DIRECT LABOR COST

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING DIRECT LABOR COST

Journal entry to record direct labor cost:

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING MANUFACTURING OVERHEAD

Examples are indirect materials, indirect labor, depreciation, salary of

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING MANUFACTURING OVERHEAD

Computation of Applied Manufacturing Overhead:

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING MANUFACTURING OVERHEAD

JOB ORDER COSTING SYSTEM

MEASURING AND RECORDING MANUFACTURING OVERHEAD

Journal entry to record MOH cost:

JOB ORDER COSTING SYSTEM

TREATMENT OF NON MANUFACTURING COSTS

No effect on the production costs of the company because

JOB ORDER COSTING SYSTEM

TREATMENT OF NON MANUFACTURING COSTS

Example: GX Company uses job order costing system and has

2. Depreciation on office furniture

4. Other selling and administrative expenses 16,000

JOB ORDER COSTING SYSTEM

TREATMENT OF NON MANUFACTURING COSTS

Cash or Salaries and Wages Payable

Other Selling and Admin Expenses

Cash or Accounts Payable

JOB ORDER COSTING SYSTEM

FINISHED GOODS AND COST OF GOODS SOLD

JOB ORDER COSTING SYSTEM

FINISHED GOODS AND COST OF GOODS SOLD

JOB ORDER COSTING SYSTEM

FINISHED GOODS AND COST OF GOODS SOLD

JOB ORDER COSTING SYSTEM

FINISHED GOODS AND COST OF GOODS SOLD

JOB ORDER COSTING SYSTEM

FINISHED GOODS AND COST OF GOODS SOLD

JOB ORDER COSTING SYSTEM

FINISHED GOODS AND COST OF GOODS SOLD

If a job is completed according to specification of a particular customer,

JOB ORDER COSTING SYSTEM

FINISHED GOODS AND COST OF GOODS SOLD

JOB ORDER COSTING SYSTEM

FINISHED GOODS AND COST OF GOODS SOLD

When cost is transferred to cost of goods sold account: