Learning Objectives
3. What are the primary documents supporting a job order costing system and what purposes are
served by each of them?
7. (Appendix) How are standard costs used in a job order costing system?
JOB ORDER COSTING
CHAPTER
5
Chapter 05: Job Order Costing IM 2
Terminology
Abnormal loss: A loss of units in excess of expected levels (normal loss) during production; normal
Cost-plus contract: A contract in which the customer agrees to reimburse the producer for the direct
Defects: Production process errors that cause a loss of units through rejection at inspection for failure to
Employee time sheet: A source document that indicates the jobs on which an employee worked and the
Intranet: A restricted network for sharing information and delivering data from corporate databases to
Job: A single unit or group of units identifiable as being produced to distinct customer specifications
Job order cost sheet: A source document that provides virtually all the financial information about a
Job order costing system: A system of product costing used by companies that make relatively small
Material requisition form: A source document that indicates the types and quantities of material to be
Normal loss: A loss of units that falls within a tolerance level that is expected during production; normal
Process costing systems: Systems used by companies that make large quantities of homogeneous
Shrinkage: Losses of materials or partially completed products inherent in the manufacturing process
Spoilage: Production process errors that cause a loss of units through rejection at inspection for failure to
Standard cost system: A valuation method that develops unit norms or standards for direct material and
Variance: The difference between the actual quantity, price, or rate and its related standard cost; labled
Chapter 05: Job Order Costing IM 3
publicly accessible website, in whole or in part.
Lecture Outline
LO.1: How do job order and process costing systems, as well as their related valuation methods,
differ?
A. Introduction
4. The chapter begins by distinguishing between job-order and process costing and discusses three
system.
B. Methods of Product Costing
1. General
(actual, normal, or standard costing).
b. There are six possible combinations of cost systems and valuation methods as shown in text
Exhibit 5.1 (p. 151).
2. Cost Accumulation Systems
b. A process costing system is the product costing system used by entities that produce large
3. Valuation Methods
a. An actual cost system is a valuation method that uses actual direct material, direct labor, and
system.
Chapter 05: Job Order Costing IM 4
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
b. A normal cost system is a valuation method that uses actual direct material, actual direct
labor, and applied overhead (estimated using predetermined overhead rates) in determining
the cost of Work in Process Inventory.
i. This chapter assumes the use of normal costing.
c. In a standard cost system, standards (predetermined benchmarks) are developed for direct
accounts and Cost of Goods Sold.
ii. A standard cost system allows companies to quickly recognize variances from expected
production costs and to correct problems from excess usage and/or costs, a capability
LO.2: What are the fundamental characteristics of a job order costing system?
C. Job Order Costing System
measurement; and product cost assignment.
2. Costs are accumulated individually by job.
specifications.
b. Each job is treated as a unique cost object.
ii. No per unit cost can be determined if the output consists of dissimilar units for which
3. Costs of different jobs are maintained in separate subsidiary ledger accounts and are not added
costs are fairly easy to identify and associate with a particular job but overhead costs are not
4. The job order costing system provides information important to managing profitability and setting
prices for outputs. Custom manufacturers typically price their goods using two methods:
Chapter 05: Job Order Costing IM 5
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
a. Cost-plus contract is a contract in which the customer agrees to reimburse the producer for
the direct costs and some indirect costs of the job plus a specified profit margin over cost;
and
b. Competitive bidding is a technique where companies must accurately estimate the costs of
the bid price.
5. The trend in job order costing is to automate the data collection and data entry functions.
a. Automating the recordkeeping functions relieves production employees of that burden. In
many companies, intranets are being created to manage the information pertaining to jobs.
i. An intranet is a mechanism for sharing information and delivering data from corporate
ii. Text Exhibit 5.3 (p. 153) shows some of the types of information that can be accessed
via an intranet.
LO.3: What are the primary documents supporting a job order costing system and what purposes
are served by each of them?
D. Job Order Costing: Details and Documents
1. General
a. A job can be categorized by the stage of existence in its production life cycle as follows:
i. contracted for but not yet started;
b. Job order costing is used by companies making products according to user specifications and
2. Job Order Cost Sheet
balance in the general ledger.
Chapter 05: Job Order Costing IM 6
publicly accessible website, in whole or in part.
b. Direct material information is gathered from the material requisition forms, while direct labor
to production using predetermined overhead rates.
3. Materials Requisitions
a. A material requisition form is a source document that indicates the types and quantities of
materials to be placed into production or used in performing a service (see text Exhibit 5.5
on p. 156).
Materials Inventory warehouse.
b. Completed material requisition forms provide the ability to verify the flow of materials from the
warehouse to the department and job that received the materials. They are usually
4. Employee Time Sheets
on p. 156).
b. Work arriving at the employee station is accompanied by a tag or bar code specifying the job
number.
c. The time work is started and stopped are recorded on the time sheet as the day progresses
and is reviewed by supervisors for accuracy.
change from one job to another.
e. Knowledge of employee labor rates is required in transferring employee time sheet
information to the job order cost sheet.
i. Time sheet information is also used for payroll preparation.
f. Time sheets may also be used for the following purposes:
with government contracts or other buyers.
iii. Time sheets provide information on overtime hours so that the company can comply with
5. Overhead
Chapter 05: Job Order Costing IM 7
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
a. Actual overhead incurred during production is charged (debited) to a Manufacturing
Overhead Control account.
b. If actual costing is used (meaning that actual overhead is applied to jobs) the cost accountant
must wait until the end of the period to divide actual overhead cost incurred in each
earlier.
iii. Overhead must be applied at the end of each period so that the Work in Process
6. Completion of Production
a. When production of a job is complete, its job cost sheet is removed from the Work in Process
b. Job order costing documents and cost flows are depicted in text Exhibit 5.7 (p. 158).
c. Job cost sheets for sold jobs are kept in a company’s permanent files, providing management
i. The cost per unit may be helpful for planning and control purposes as well as for bidding
LO.4: How are costs accumulated in a job order costing system?
E. Job Order Costing Illustration
1. Journal entries illustrating the flow of costs for the Fabrication Department of Crown Fence
a. Materials are charged to production:
Work in Process Inventory—Fabrication (Job #PF108) 4,875
Chapter 05: Job Order Costing IM 8
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
To record direct and indirect materials issued per September requisitions
b. Labor is charged to production:
Work in Process Inventory—Fabrication (Job #PF108) 6,902
Work in Process Inventory—Fabrication (other jobs) 1,447
Manufacturing Overhead Control—Fabrication 5,900
Accumulated Depreciation 2,500
Prepaid Insurance 200
d. Overhead is charged (applied) to production:
Work in Process Inventory—Fabrication (Job #PF108) 5,070
e. Job #PF108 is transferred from Fabrication to the next department (Installation):
Work in Process Inventory—Installation 16,847
Work in Process Inventory—Fabrication 16,847
f. After installation department costs are added, Job #PF108 is transferred from Installation to
the next department (Finishing):
Work in Process Inventory—Finishing 22,376
g. Job #PF108 is completed and is transferred from Finishing to Finished Goods:
Finished Goods Inventory—Job #PF108 28,091
h. Job #PF108 is delivered with the $35,250 sales price to be collected in 30 days:
Accounts Receivable—Willowdale Homeowners’ Association 35,250
Cost of Goods Sold—Job #PF108 28,091
To record the CGS for the above sale