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Chapter 19 – Job Order Costing

CHAPTER 19

JOB ORDER COSTING

Related Assignment Materials

Student Learning Objectives Questions Quick

Studies*

Exercises* Problems* Beyond the

Numbers

Conceptual objectives:

C1. Describe important features of

job order production.

10, 11, 12,

19-1, 19-14 19-1

19-1, 19-2,

19-4, 19-5,

19-6, 19-7,

19-9

C2. Explain job cost sheets and how

they are used in job order cost

accounting.

3, 4 19-3 19-2, 19-3

19-1 19-4, 19-7,

19-8

Analytical objectives:

A1 Apply job order costing in

pricing services.

2, 14 19-13 19-18

Procedural objectives:

P1. Describe and record the flow of

materials costs in job order cost

accounting.

5, 6 19-2, 19-4,

19-12

19-3, 19-6,

19-7, 19-8,

19-13, 19-17,

19-19

19-1, 19-2,

19-3, 19-5

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P2. Describe and record the flow of

labor costs in job order cost

accounting

7 19-2, 19-5,

19-12

19-3, 19-6,

19-7, 19-9,

19-13, 19-17

19-1, 19-2,

19-3, 19-5

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P3. Describe and record the flow of

overhead costs in job order cost

accounting.

1, 2, 8, 11 19-2, 19-6,

19-7, 19-9,

19-11, 19-12

19-3, 19-4,

19-5, 19-6,

19-7, 19-10,

19-13, 19-14,

19-15, 19-16,

19-17

19-1, 19-2,

19-3, 19-4,

19-5

19-3, 19-8

P4. Determine adjustments for

overapplied and underapplied

factory overhead.

9 19-8, 19-10 19-7, 19-11,

19-12, 19-13,

19-14, 19-15

19-1, 19-2,

19-4, 19-5

*See additional information on next page that pertains to these quick studies, exercises and problems.

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Chapter 19 – Job Order Costing

Additional Information on Related Assignment Material

Corresponding problems in set B (in text) and set C (on book’s website), also relate to learning

objectives identified in grid on previous page. The Serial Problem for Success Systems continues in

this chapter. Problem 19-4A can be completed using Excel. Problem 19-1A, 19-2A can be

completed with Sage 50 Software.

Connect reproduces assignments online, in static or algorithmic mode, which allows instructors

to monitor, promote, and assess student learning. It can be used for practice, homework, or

exams.

Synopsis of Chapter Revision

Middleton Made Knives—NEW opener and entrepreneurial assignment

New discussion of process operations.

New discussion of differences between job order and process operations.

Moved discussion of job order costing for services.

Revised/simplified discussions of cost flows and job cost sheets.

Simplified recording of journal entries for labor costs.

Added new exhibits to show postings of product cost journal entries to general ledger

accounts and to job cost sheets.

Revised exhibits on materials and labor cost flows.

Revised discussion of time tickets to include the use of technology.

Revised text and added new exhibit on four-step process to record overhead.

Revised discussion of applying overhead.

Revised discussion of recording actual overhead.

Added new discussion and presentation of journal entries for indirect materials and

indirect labor.

Added new exhibit showing calculations for overhead applied to individual jobs.

Added new exhibit on the flow of costs to general ledger accounts, the manufacturing

statement, and the financial statements.

Added new exhibit on schedule of cost of goods manufactured

Added sustainability section—Porsche.

Added several Need-to-Know demo exercises throughout chapter.

Revised and added several end-of-chapter assignments, including two new Quick

Studies and two new Exercises.

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Chapter 19 – Job Order Costing

Chapter Outline Notes

I. Job Order Cost Accounting

A. Cost accounting system

1. Records manufacturing activities using a perpetual inventory

system.

2. Continuously updates records for costs of materials, goods in

process, and finished goods inventories.

3. Provides timely information about inventories, and

manufacturing costs per unit of product.

4. Two basic types of cost accounting systems are job order

cost accounting and process cost accounting.

a.. Job Order Production—producing products or providing

services individually designed to meet the needs of a

specific customer (special orders).

i. The production activities for a customized product is

called a job

ii. A job lot involves producing more than one unit of a

unique product.

b. Process Operations

i. Mass production of products in a continuous flow of

steps.

ii. Designed to mass produce large quantities of

identical products. Covered in Chapter 20.

B. Production Activities in Job Order Costing

an overview of job order production activity and cost flows is

shown in Exhibit 19.2

1. Cost Flows:

a. Because they are product costs, manufacturing costs

flow through inventory accounts (Raw Materials

Inventory, Work in Process Inventory, Finished Goods

Inventory) until the goods are sold.

b. While a job is being produced, costs are accumulated in

Work in Process Inventory.

c. When the goods are completed, the accumulated costs

are transferred to from Work in Process to Finished

Goods Inventory.

d. When the Finished goods are delivered to the customer,

the accumulated costs are transferred from Finished

Goods inventory to Cost of Goods Sold

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Chapter 19 – Job Order Costing

Chapter Outline Notes

2. Job Cost Sheet—separate record maintained for each job

used to record costs as incurred

a. Classifies costs as direct materials, direct labor, or

overhead.

b. Used by managers to monitor costs incurred to date and

to predict and control costs to complete each job.

c. Accumulated job costs are kept in the Work in Process

Inventory while goods are being produced.

d. Job cost sheets filed for all of the jobs in process make

up a subsidiary ledger controlled by the Work in Process

Inventory account in the general ledger.

e. The balance in Work in Process at any point in time is

the sum of the costs on the job cost sheets that are not

yet completed.

f. Finished job cost sheets—moved from jobs in process

file to finished jobs file (subsidiary ledger controlled by

Finished Goods Inventory) awaiting delivery to

customers.

II. Job Order Cost Flows and Reports

A. Cost Flows and Documents—the three cost components and

documents used to account for them are:

1. Materials Cost Flows and Documents

a. Receiving report—Source document used to record the

quantity and cost of items received. Materials purchased

are used as a debit to Raw Materials Inventory and a

credit to Accounts Payable.

b. Materials ledger cards (or electronic files)—perpetual

records that are updated each time units are purchased

and each time units are issued for use in production.

Serves as the subsidiary ledger for the Raw Materials

Inventory account.

c. Materials Requisitiondocument identifying the type and

quantity of material needed in production. Job number is

also identified on direct materials requisitions.

d. Job Cost Sheet—accumulates the cost of direct materials

(from materials ledger card) as they are placed into

production on a job. Recorded as a debit to Goods in

Process Inventory and a credit to Raw Materials

Inventory.

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Chapter 19 – Job Order Costing

Chapter Outline Notes

2. Labor Cost Flows and Documents

—used by employees to record hours worked. Used to

determine total labor costs for pay period. They indicate

how much time employees spent on each job and are

used to assign (direct) labor costs to specific jobs and

(indirect) to overhead. Direct labor costs are debited to

Work in Process Inventory and credited to Factory

Wages Payable

b. Job Cost Sheets—accumulates the cost of direct labor

(from time tickets and related entry) as these costs are

incurred.

3. Overhead Cost Flows and Documents

a. Overhead costs can’t be traced to individual jobs. The

accounting for overhead follows a 4 step process shown

in Exhibit 19.11. Managers must first estimate total

overhead for the coming period. We can’t wait until the

end of the period to apply overhead costs to jobs because

job order costing using perpetual inventory which

require up to date costs. The estimated overhead cost is

needed to estimate the job’s total costs before complete.

b. Step 1: Set Predetermined Overhead rates

i. Requires an estimated of total overhead cost and an

allocation factory such as total direct labor, total

labor hours, or total machine hours.

ii. Predetermined Overhead rate = Estimated overhead

costs divided by estimated activity based

iii. The allocation case should have a cause and effect

relation between the base and the overhead costs.

c. Step 2: Record Allocated Overhead (Applies Overhead)

i. Predetermined overhead rate x actual activity where

the activity is the allocation base such as direct labor

cost, direct labor hours, machine hours.

ii. The entry to record the applied overhead is a debit to

work in process inventory and a credit to factory

overhead.

iii. The overhead is allocated to each job based on the

resource the job used (rate x actual activity).

iv. At this point, estimated (allocated) overhead is

posted to the general ledger accounts (Work in

Process and Factory Overhead) and to the individual

job cost sheets.

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Chapter 19 – Job Order Costing

Chapter Outline Notes

d. Step 3: Record Actual Overhead costs

i. Actual factory overhead costs include indirect

materials, indirect labor, supplies, utilities, adjusting

entries for depreciation on factory assets, etc.

ii. Indirect materials ledger cards in factory overhead

ledger—accumulates indirect material costs as they

are placed into production. This subsidiary ledger is

controlled by the Factory Overhead account in the

general ledger. Use of indirect materials is recorded

as a debit to Factory overhead and a credit to Raw

Materials Inventory

iii. Indirect labor card in Factory Overhead Ledger—

accumulates indirect labor costs (from time tickets

and related entry). Entry to record indirect labor

costs debits Factory Overhead and credits Factory

Wages Payable.

iv. Other sources include vouchers authorizing

payments for items such as supplies or utilities and

adjusting entries for costs such as depreciation.

Debit Factory Overhead and Credit the other

accounts such as Cash, Accounts Payable,

Accumulated Depreciation, etc.

e. Step 4: Adjusting Factory Overhead—

i. Factory Overhead T-Account

a) The debit side shows the actual amount of

factory overhead incurred during the period

based on bills received.

b) The credit side shows the amount applied during

the period that was an estimate based on the

predetermined overhead rate.

c) A debit balance in the FOH account indicated

less was applied than incurred; an underapplied

FOH amount.

d) A credit balance in the FOH account indicates

more was applied than incurred; an overapplied

FOH amount.

ii. Underapplied and Overapplied Overhead

a) Factory Overhead debit balance (underapplied

amount) is credited (closed) and debited

(charged) to Cost of Goods Sold.

b) Factory Overhead credit balance (overapplied

amount) is debited (closed) and credited to Cost

of Goods Sold.

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Chapter 19 – Job Order Costing

Chapter Outline Notes

4. Summary of Cost Flows—Summary journal entries are used

to record cost flows as follows:

a. Into (debit) Raw Materials Inventory as acquired.

b. From (credit) Raw Materials Inventory to (debit) Work

In Process Inventory (direct materials) and (debit)

Factory Overhead (indirect materials) as good are

requisitioned. Direct material costs also accumulated on

Job Cost Sheets.

c. Into (debit) Work In Process Inventory (direct labor) and

(debit) Factory Overhead (indirect labor) as labor costs

are analyzed. Direct labor costs also accumulated on Job

Cost Sheets.

e. Into (debit) Factory Overhead as other overhead costs

are incurred.

f.From (credit) Factory Overhead and into (debit) Work In

Process as overhead costs are applied using overhead

rate.

g.From (credit) Work In Process Inventory to (debit)

Finished Goods Inventory as jobs are completed. Full

cost from Job Cost Sheets.

h.From (credit) Finished Goods Inventory to (debit) Cost

of Goods Sold as goods are sold.

i. Any under or over applied factory overhead cost is

accounted for in an adjustment to Cost of Goods Sold

and Factory Overhead

5. Schedule of Cost of Goods Manufactured Statement

a. Similar to statement covered in chapter 18.

b. Key difference: total manufacturing costs include

overhead applied rather than actual overhead costs.

III. Decision Analysis—Pricing for Services

A. Job order costing concepts and procedures are applicable to a

service setting.

B. Procedure to determine:

1. Determine direct labor costs

2. Determine the overhead based on predetermined rate(s).

3. Combine labor and overhead to obtain cost of job. Note:

service firms do not have material costs or inventory.

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Chapter 19 – Job Order Costing

Instructor’s Resource Manual, Chapter 19 41

Chapter 19 – Job Order Costing

VISUAL #19-1

Tracing Product Costs

Through a Cost Accounting System

Work in Process Finished Goods

Materials Inventory Inventory Inventory

(1) Buy Send (2) (2) Direct (7) Goods (7) Cost of (8) Goods

(Cr. A/P) materials material completed Finished Sold

to factory costs Goods

(4) Direct

labor

costs

(6) Overhead

costs

Factory Overhead Factory Payroll Cost of Goods Sold

(2) Indirect (6) Overhead (3) Labor (4) Labor (8)

material costs costs applied costs costs applied

or factory to production incurred

supplies (Cr

(4) Indirect payables)

labor costs

(5) Other

factory OH

costs incurred (Cr varies)

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Chapter 19 – Job Order Costing

VISUAL #19-2

Job Cost Sheet

Customer Build We Must, Inc. Job No. 114

Product Bracket-H3 Date Promised 10/1/xx

Quantity 200 Dates: Started 9/1/xx Completed 9/20/xx

Direct Material Direct Labor Cost Summary

Mat’l. Payroll Direct Material $ 900.00

Req’n. Summary

No. Amount Dated Dept. Amount Direct Labor 600.00

667 $ 340.00 9/2 A $ 70.00

673 180.00 9/9 A 240.00 Factory Overhead

691 200.00 9/16 B 190.00 (applied at):

623 180.00 9/23 B 100.00

150% of direct

labor cost 900.00

Total Cost $2,400.00

Totals $ 900.00 $ 600.00 Units Finished 200

Unit Cost $12.00

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Chapter 19 – Job Order Costing

Alternate Demo Problem Nineteen

The following information is the Work in Process and Factory Overhead

Accounts for Superior Company:

Work in Process Inventory

Beg Inv. 302,000

Direct Materials 280,000

Direct Labor 120,000

Overhead Applied 96,000

Costs transferred to

Finished Goods Inv. 548,000

End Inv. 250,000

Factory Overhead

Actual Overhead 98,000 96,000 Applied Overhead

Required:

1. Prepare a manufacturing statement for Superior Company for 2015.

2. Prepare the entry to adjust for under or over applied overhead.

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Chapter 19 – Job Order Costing

Solution: Alternate Demo Problem Nineteen

SUPERIOR MANUFACTURING COMPANY

Manufacturing Statement

For Year Ended December 31, 2015

Direct materials used…………………………………… $280,000

Direct labor…………………………………………………. 120,000

Factory Overhead Applied……………………………. 96,000

Total manufacturing costs…………………………… 496,000

Work in Process Inventory 1/1/15………………. 302,000

Total goods in process during the year…………. 800,000

Work in process inventory, 12/31/15 …………….. 250,000

Cost of goods manufactured…………………………

$548,000

Adjusting entry for under or over-applied overhead

Factory Overhead

Actual Overhead 98,000 96,000 Applied Overhead

Under applied 2,000

Dec 31 Cost of Goods Sold 2,000

Factory Overhead 2,000

To adjust for under applied overhead costs

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