Job Order Cost Accounting - Management and cost accounting - Business Administration/ Accounting and Management technology

Job Order Cost Accounting

Cost Accounting Systems

  • Cost accounting involves the measuring, recording, and reporting of product costs


  • From the data accumulated, both the total cost and unit cost of each product is determined


  • A cost accounting system consists of accounts for the various manufacturing costs. 
  • These accounts are fully integrated into the general ledger of a company.


  • An important feature of a cost accounting system is the use of a perpetual inventory system. Such a system provides information immediately on the cost of a product. 


  • The two basic types of cost accounting systems are:
  • Job-order cost system
  • Process cost system


  • Under a job-order cost system, costs are assigned to each job or to each batch of goods


  • A process cost system is used when a large volume of similar products are manufactured.  Process costing accumulates product-related costs for a period of time instead of assigning costs to specific products or job-orders







Job Order Manufacturing (Customized Production)


  • Customized production of unique products specific to a client’s needs


  • “Job Order Cost Accounting” is designed to keep track of the direct material costs, the direct labor costs, and the overhead costs that are directly traceable to specific jobs (Unique Products)


  • A “Job” is a unique item that will be manufactured for a client


  • Examples of Jobs: Machinery / Airplane / Train / Furniture Piece/ Building


  • Example of Jobs: Bombardier manufactures specific airplanes for each specific client order


  • A “Batch of goods” – Producing more than one unit of a specific product


  • Example of a “Batch of goods” – 20 identical lear-jets / 50 identical Server Computers / 1000 identical T-Shirts


Note Well: A major aim of a “Job Order Cost Accounting System” is to determine the cost of producing each specific job or each batch of goods


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Job-Order Cost Flow

  • The flow of costs in job-order cost accounting parallels the physical flow of the materials as they are converted into finished goods


  • There are two major steps in the flow of costs:  (a) accumulating the manufacturing costs incurred; and (b) assigning the accumulated costs to the work done.







Accumulating Manufacturing Costs

  • Three entries are made to accumulate the manufacturing costs incurred: (1) to accumulate the cost of raw materials, (2) to accumulate the cost of factory labour, and (3) to accumulate the cost of actual manufacturing overhead

To Record Raw Material Costs

  • The costs of raw materials purchased are debited to Raw Materials Inventory when the materials are received 


  • Raw Materials Inventory is referred to as a control account because it summarizes the detailed data regarding specific inventory accounts in the subsidiary ledger.   


  • The subsidiary ledger consists of individual records for each item of raw materials 


  • Journal Entry 1: Purchase of raw materials (See page 69)
  • Example: On January 4, Wallace Manufacturing purchases 2,000 handles at $5 per unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of $42,000


Raw Materials Inventory



    Accounts Payable



To record purchase of raw material on credit






To Record Factory Labour Costs

  • The cost of factory labour consists of gross earnings of factory workers, employer payroll taxes, and fringe benefits incurred by the employer 


  • Labour costs are debited to Factory Labour when they are incurred.  Factory Labour is assigned to work in process and manufacturing overhead at the end of the period 
  • Journal Entry 2: Labour Cost
    • Example: Wallace Manufacturing incurs $32,000 of factory labour costs, of which $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in January 

Factory Labour



    Factory Wages Payable



    Employer Payroll Taxes Payable



To Record Factory Labour Costs






To Record Manufacturing Overhead Costs

  • Overhead costs may be recorded periodically through adjusting entries by debiting Manufacturing Overhead  


  • Manufacturing Overhead is a control account and the subsidiary ledger consists of individual accounts for each type of cost 



  • Journal Entry 3: To Record Manufacturing Overhead Costs
  • Example: To Record Manufacturing Overhead Costs – See page 70        

Manufacturing Overhead



     Utilities Payable



     Prepaid Insurance



     Accounts Payable (For Repairs)



    Accumulated Amortization



   Property Taxes Payable



To Record Manufacturing Overhead Costs


  • Manufacturing costs are assigned to work in process  with
    • Debits  to Work in Process Inventory
    • Credits  to:
      •  Raw Materials Inventory
      •  Factory Labour
      •  Manufacturing Overhead
      •  Entries assigning costs to work in process are usually made monthly


Assigning Manufacturing Costs to Work in Process

  • A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job.   


  • The job cost sheets constitute the subsidiary ledger for the Work in Process Inventory account




  • Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets


  • Three entries are made in assigning the manufacturing costs to Work in Process: (1) to assign direct materials to Work in Process Inventory, (2) to assign direct labour to Work in Process Inventory, and (3) to assign manufacturing overhead to Work in Process Inventory ->  Emphasize that actual overhead costs are not assigned, but rather overhead is applied using a predetermined overhead rate 





Raw Materials Costs Assigned

  • Materials requisition slips indicate the quantity and type of materials withdrawn and the account to be charged.   


  • Direct materials will be charged to Work in Process Inventory


  • Indirect materials will be charged to Manufacturing Overhead




  • Journal Entry 4: To Assign Materials to Jobs and Overhead
    • Example: If $24,000 of direct materials and $6,000 of indirect materials are used in January, the entry is:          

Work in Process Inventory



Manufacturing Overhead



    Raw Materials Inventory



To assign materials to jobs and overhead








Factory Labour Costs Assigned

  • Factory labour costs are assigned to jobs on the basis of time tickets prepared when the work is performed 


  • The time ticket indicates the employee, the hours worked, the account and job to be charged, and the total labour cost.   


  • The Work in Process Inventory account is debited for direct labour, and Manufacturing Overhead is debited for indirect labour




  • Journal Entry 5: To Assign Labour to Jobs and Overhead
  • Example: If the $32,000 total factory labour cost incurred consists of $28,000 of direct labour and $4,000 of indirect labour, the entry is:


Work in Process Inventory



Manufacturing Overhead



    Raw Materials Inventory



To assign Labour to jobs and overhead



Manufacturing Overhead Costs Assigned

  • Manufacturing overhead is assigned to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate


  • Using a predetermined overhead rate enables a cost to be determined for a job immediately




  • The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base


  • The activity may be stated in terms of direct labour costs, direct labour hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs 


  • The predetermined overhead rate is established at the beginning of the year


  • The use of a predetermined overhead rate enables the company to determine the approximate total cost of each job when the job is completed



Example: Page 74-75




$280,000 / $350,000 = 80% of Direct Labour Costs


This means that for every $ 1 dollar of direct labour that a job requires, 80 cents of manufacturing overhead will be assigned to the job


  • Journal Entry 6: To Assign Overhead Costs to Jobs
    • Example: To Assign Overhead Costs to Jobs – See page 75-76

Work in Process Inventory



    Manufacturing Overhead



To Assign Overhead Costs to Jobs 

80% × 28,000 = 22,400


















Assigning Costs to Finished Goods

  • When a job is completed, the costs are summarized in the applicable job cost sheet and debited to Finished Goods Inventory


  • Finished Goods Inventory is a control account that controls individual finished goods records in a subsidiary ledger


  • Postings to the finished goods records are made directly from the completed job cost sheets




  • Journal Entry 7: To Record Completion of Job # 101 -  See page 79

Finished Goods Inventory



    Work in Process Inventory



To record completion of Job # 101


Assigning Costs to Cost of Goods Sold

  • Cost of goods sold is recognized when each sale occurs


  • Each sale requires an entry debiting Cash or Accounts Receivable and crediting Sales for the selling price and a second entry debiting Cost of Goods Sold and crediting Finished Goods Inventory for the cost of the goods



  • Journal Entry 8: To Record Sale of Job # 101  and Record Costs of Goods Sold – See Pages 78-79

Accounts Receivable






To record Sale of Job # 101


Cost of Goods Sold



   Finished Goods Inventory



To record cost of Job # 101 as sold












Summary of Job Order Cost Follows





Reporting Job Cost Data


  • The cost of goods manufactured schedule is the same as for companies that do not use job-order costing with one exception: manufacturing overhead applied, rather than actual overhead costs, is added to direct materials and direct labour to determine total manufacturing costs



Cost of Goods Manufactured Schedule

Month Ended January 31, 2009

Work in process, January 1


$ 0

Direct material used



Direct labour



Manufacturing overhead applied



Total manufacturing cost



Total cost of work in process



Less: Work in process, January 31



Cost of goods manufactured






Income Statement (partial)

Month Ended January 31, 2009




Cost of goods sold



Finished goods inventory, January 1

$ 0


Cost of goods manufactured



Cost of goods available for sale



Less: Finished goods inventory, January 31



Cost of goods sold



Gross profit











Underapplied or Overapplied Manufacturing Overhead




  • Underapplied overhead occurs when the overhead assigned to work in process is less than the overhead incurred (when Manufacturing Overhead has a debit balance)


  • Overapplied overhead occurs when the overhead assigned to work in process is greater than the overhead incurred (when Manufacturing Overhead has a credit balance)


  • At the end of the year, any balance in Manufacturing Overhead is eliminated by an adjusting entry. 


  • Underapplied or overapplied overhead is transferred to cost of goods sold if the amount is deemed insignificant or is allocated among ending work in process, finished goods, and cost of goods sold if the amount is considered significant


  • Journal Entry 9: Wallace Mfg. has a $1,400 dedit balance in Manufacturing  Overhead at December 31. Therefore, manufacturing overhead is underapplied. The underapplied overhead amount of $1,400 is deemed insignificant; therefore, the following journal entry is recorded  

Cost of Goods Sold



   Manufacturing Overhead



To transfer underapplied overhead to cost of goods sold



StudyUp Author: James Bagshaw
Business Administration, Accounting and Management Technology
Major: Business Administration

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