Chapter 05: Job Order Costing IM 9
publicly accessible website, in whole or in part.
2. Text Exhibit 5.8 (p. 161) shows the job cost sheet at the completion of Job #PF108.
LO.5: How does information from a job order costing system support management decision
making?
F. Job Order Costing to Assist Managers
1. Managers are interested in controlling costs of each department as well as for each job.
variances.
b. The primary difference in job order costing for a service organization and a manufacturing
accounted for separately.
2. Job order costing is beneficial to managers in planning, controlling, decision making, and
evaluating performance.
3. Job order costing can help determine which jobs are really profitable and can assist managers in
increase in profits.
b. In the Paul’s Pirogues example, a small business owner who had previously just
1. General
a. The production processes may result in losses of materials or partially completed products.
reductions are called shrinkage.
Chapter 05: Job Order Costing IM 10
©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.
i. Eliminating shrinkage may be difficult, impossible, or simply not cost beneficial.
c. Production process errors (either by humans or machines) can cause a loss of units.
i. Defects are units lost through rejection at inspection for failure to meet appropriate
quality standards or designated product specifications but which can be economically
reworked and later sold.
be economically reworked.
d. Normal loss is a loss of units that falls within a tolerance level that is expected during
off as a period cost.
2. Losses Generally Anticipated on All Jobs
a. If a normal loss is generally anticipated on all jobs, the predetermined overhead application
should be allocated to the goods produced.
c. As defects or spoilage occur, the disposal value of nonstandard work is included in an
Disposal value of defective work 22
3. Losses Specifically Identified With a Particular Job
a. If defects or spoilages are not generally anticipated but are occasionally experienced on
b. The cost of the lost units remains with the job that caused the defects or spoilage.
c. However, since the defects/spoilage cost attaches to the job, the disposal value of such
journal entry:
Chapter 05: Job Order Costing IM 11
publicly accessible website, in whole or in part.
4. Abnormal spoilage
a. The cost of abnormal losses should be written off as a period cost.
recurrences.
c. In the following journal entry, the first debit represents the defective inventory’s disposal
value. The debit to Manufacturing Overhead is for the net cost of normal spoilage. The debit
Disposal Value of Defective Work 45
Manufacturing Overhead 120
LO.7 (Appendix): How are standard costs used in a job order costing system?
H. Job Order Costing Using Standard Costs
1. Direct material and direct labor costs of similar units may fluctuate from period to period or job to
2. A standard costing system determines product cost by using predetermined norms, or standards,
a. Once production is completed, standard production cost is compared to actual production
produce fairly similar products.
i. One type of standard job order costing system uses standards only for input prices of
d. The text provides two brief examples to illustrate the use of price and rate standards
heterogeneous output.
e. Variances can be computed for actual–to-standard differences regardless of whether
Chapter 05: Job Order Costing IM 12
©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.
i. Standard costs for materials and labor provide the same types of benefits as
predetermined overhead rates—more timely information and comparisons against actual
amounts.
f. Standard cost job order systems are reasonable substitutes for actual or normal costing
systems as long as the standards provide managers with useful information.
i. In fact, any type of product costing system is acceptable if it is effective and efficient in
serving the company’s unique production needs, provides information desired by
Chapter 05: Job Order Costing IM 13
publicly accessible website, in whole or in part.
Multiple Choice Questions
a. a dental practice.
b. an auto repair shop.
a. Actual overhead
b. Actual direct materials
c. Actual direct labor
d. Estimated indirect labor
3. (LO.1) Which of the following product costs would be charged to Work in Process assuming a
standard costing system?
a. Actual direct material costs
4. (LO.2) Select the incorrect job order costing system characteristic.
a. Costs are accumulated by job.
each job.
d. Jobs are usually produced to distinct customer specifications.
5. (LO.3) Which of the following serves at a subsidiary ledger for the Work in Process account?
a. Standard cost card
6. (LO.3) Which of the following is not a source document used in job order costing systems?
a. Cost of production report
7. (LO.4) Select the response that represents the correct flow of costs in a job order costing system.
c. Raw materials, overhead, work in process
d. Direct material, finished goods, work in process
8. (LO.4) The journal entry to apply overhead to production would include:
a. a debit to Manufacturing Overhead Control.
Chapter 05: Job Order Costing IM 14
9. (LO.4) The journal entry to transfer production from the Finishing Department to Finished Goods
would include a:
a. credit to Finished Goods.
10. (LO.4) M Corporation manufactures a specialty line of jeans using a job-order-cost system.
During May, the following costs were incurred in completing Job M1: direct materials, $13,700;
direct labor, $4,800; administrative, $1,400; and selling, $5,600. Overhead was applied at the
rate of $25 per machine hour, and Job M1 required 800 machine hours. If Job M1 resulted in
7,000 good jeans, the cost of goods sold per unit would be
a. $5.50.
11. (LO.4) Q Company uses a normal cost system. The following information is from its financial
records for the year:
Total manufacturing costs, $2,500,000
inventory at December 31?
a. $75,000
a. Actual costing system
b. Normal costing system
that produce fairly similar products.
c. Under GAAP, standard cost job order systems may not substitute for actual or normal costing
systems.
d. Standard cost variances can be computed for actual-to-standard differences regardless of
Chapter 05: Job Order Costing IM 15
©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.
14. (LO.5) Which of the following statements is true concerning job order costing and management
decision making?
a. Job order costing assists managers in their planning, controlling, decision making and
performance evaluations functions.
b. Job order costing allows managers to trace costs associated with specific current jobs to
better estimate costs of future jobs.
associated with their operations.
d. All of the above are true statements.
15. (LO.6) Select the incorrect statement regarding the accounting for product losses.
a. Normal losses that are anticipated on all jobs are estimated and included in the development
of the predetermined OH rate.
period they are incurred.
c. Abnormal losses are charged to a loss account in the period they are incurred.
d. The difference between normal and abnormal loss is one of degree and therefore must be
Chapter 05: Job Order Costing IM 16
Multiple Choice Solutions
1. c
2. a
3. d
4. b
5. d
6. a
7. b
8. c
9. c
10. a (CMA Adapted)
12. a