323
chapter
16(2)
Job Order Costing
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OPENING COMMENTS
The first of two basic manufacturing accounting systems, job order, is described in this chapter. Students
learn how costs flow through a manufacturing system and the basis for determining product costs under
job order costing.
1. Describe cost accounting systems used by manufacturing businesses.
2. Describe and illustrate a job order cost accounting system for a manufacturing business.
3. Describe job order cost accounting systems for service businesses.
ADM: Describe the use of job order cost information for decision making
KEY TERMS
activity base
activity-based costing
cost accounting systems
cost allocation
finished goods ledger
job cost sheets
job order cost system
materials ledger
materials requisition
overapplied factory overhead
predetermined factory overhead rate
Chapter 16(2) Job Order Costing 324
process cost system
receiving report
time tickets
underapplied factory overhead
STUDENT FAQS
Why is it necessary to calculate a predetermined overhead rate?
Why is factory overhead “Actual” debited to record factory overhead?
If all material goes into a materials account when purchased, then why is it designated direct or
indirect material when it is taken out of the materials account?
What is the difference between under- and overapplied factory overhead?
Basically, job order is custom-ordered items from a customer. Then why is it necessary to keep up
with all costs when an estimate has been given before the job is taken?
Can a business use both process and job order costing?
Why is it necessary to keep up with the flow of costs in a job order system?
When we credit accumulated depreciation for the factory depreciation, why don’t we debit
depreciation expense?
OBJECTIVE 1
Describe cost accounting systems used by manufacturing businesses.
SYNOPSIS
Cost accounting systems measure, record, and report product costs. Two main types of cost accounting
systems are job order costing and process costing. A job order costing provides products costs for each
quantity of product that is manufactured. Each quantity is called a job. Such manufactures usually
produce custom products in batches. Process cost systems are used by companies that manufacture
homogeneous products using a continuous process.
Key Terms and Definitions
Cost Accounting Systems—Systems that measure, record, and report product costs.
Job Order Cost System—A type of cost accounting system that provides for a separate record of
the cost of each particular quantity of product that passes through the factory.
Process Cost System—A type of cost system that accumulates costs for each of the various
departments within a manufacturing facility.
Chapter 16(2) Job Order Costing 325
Relevant Check Up Corner and Exhibits
Exhibit 1—Summary of Legend Guitars’ Manufacturing Operations
SUGGESTED APPROACH
Transparency Master (TM) 16(2) -1 describes the focus and information provided by cost accounting
systems. After reviewing this information, introduce students to job order and process cost systems.
Emphasize that job order systems are used by companies that make custom, special-order type goods or
produce a high variety of products. Process cost systems are used by companies that make “a whole
bunch of stuff that all looks the same” under a continuous manufacturing process. Ask your students to
name types of manufacturers that would make products suitable to a job order system (such as new–
construction homes, replacement windows, class rings, business cards, and wedding invitations). Repeat
this exercise to identify process cost manufacturers.
OBJECTIVE 2
Describe and illustrate a job order cost accounting system for a manufacturing business.
SYNOPSIS
Using the job order cost system, perpetual inventory accounts and subsidiary ledgers are maintained for
materials, work in process, and finished goods inventories. The materials account in the general ledger is
a controlling account; a subsidiary ledger is kept with a separate account for each type of materials. The
accounts are increased based on receiving reports and decreased through material requisitions. The
receiving report triggers a journal entry that debits Materials and credits Accounts Payable. The material
requisition transaction debits Work in Process and credits Materials. When employees work on an
individual job, they use time tickets to record the amount of time they have worked on a specific job.
Work in Process is debited and Wages Payable is credited for the cost of the labor.
Factory overhead includes indirect materials, indirect labor, utilities, and depreciation. When these items
are due, Factory Overhead is debited and Materials, Wages Payable, Utilities Payable, and Accumulated
Depreciation are credited. The costs accumulated in the Factory Overhead account must be allocated to
the jobs as they cannot be traced directly to a specific job. A common measure called an activity base is
used to allocate the costs. Common activity bases are labor hours, direct labor cost, and machine hours.
The predetermined factory overhead rate is computed as: predetermined factory overhead rate = estimated
total factory overhead costs/estimated activity base. After these costs are accumulated, the costs assigned
to each job are debited to the associated work in process account and credited to Factory Overhead. At the
end of the year, the actual and applied factory overhead usually differs because the applied overhead is
based on estimates determined at the beginning of the year. If the applied overhead is less than the actual
overhead, Factory Overhead will have a debit balance. This balance is transferred to cost of goods sold by
debiting Cost of Goods Sold and crediting Factory Overhead, which increases the cost of goods sold. If
the applied balance is more than the actual overhead, factory overhead will have a credit balance. This
balance is transferred to the cost of goods sold by debiting Factory Overhead and crediting Cost of Goods
Sold, which decreases the cost of goods sold.
Chapter 16(2) Job Order Costing 326
During the period, Work in Process is increased by the costs of direct materials, direct labor, and applied
factory overhead. In addition to the transactions recorded, job cost sheets are also used to keep track of
costs associated with each identified job. When a job is completed, the costs associated with that job are
transferred to finished goods by a debit to Finished Goods and a credit to Work in Process. The costs of
making the product are now in finished goods, and, as the product is sold, an immediate estimate of profit
can be determined. When the product is sold, two journal entries are made. The first entry is to debit
Accounts Receivable and credit Sales to record the sale on account. The second entry, a debit to Cost of
Goods Sold and a credit to Finished Goods, is to record the removal of the product from the inventory.
Period costs are necessary to generate revenue but are not costs involved in the manufacturing process.
They are recorded as either selling or administrative expenses of the current period. Exhibit 9 illustrates
how costs flow through the cost system.
Key Terms and Definitions
Activity Base (Driver)—A measure of activity that is related to changes in cost. Used in
analyzing and classifying cost behavior. Activity bases are also used in the denominator in
calculating the predetermined factory overhead rate to assign overhead costs to cost objects.
Activity-Based Costing (ABC)—A cost allocation method that identifies activities causing the
incurrence of costs and allocates these costs to products (or other cost objects), based on activity
drivers (bases).
Cost Allocation—The process of assigning indirect cost to a cost object, such as a job.
Finished Goods Ledger—The subsidiary ledger that contains the individual accounts for each
kind of commodity or product produced.
Job Cost Sheet—An account in the work in process subsidiary ledger in which the costs charged
to a particular job order are recorded.
Materials Ledger The subsidiary ledger containing the individual accounts for each type of
material.
Materials Requisition—The form or electronic transmission used by a manufacturing
department to authorize materials issuances from the storeroom.
Overapplied Factory Overhead—The amount of factory overhead applied in excess of the
actual factory overhead costs incurred for production during a period.
Predetermined Factory Overhead Rate—The rate used to apply factory overhead costs to the
goods manufactured. The rate is determined by dividing the budgeted overhead cost by the
estimated activity usage at the beginning of the fiscal period.
Receiving Report—The form or electronic transmission used by the receiving personnel to
indicate that materials have been received and inspected.
Time Tickets—The form on which the amount of time spent by each employee and the labor cost
incurred for each individual job, or for factory overhead, are recorded.
Underapplied Factory Overhead—The amount of actual factory overhead in excess of the
factory overhead applied to production during a period.
Relevant Check Up Corner and Exhibits
Exhibit 2—Flow of Manufacturing Costs
Exhibit 3—Inventory Ledger Accounts
Exhibit 4—Materials Information and Cost Flows
Exhibit 5—Labor Information and Cost Flows
Chapter 16(2) Job Order Costing 327
Exhibit 6—Applying Factory Overhead to Jobs
Exhibit 7—Job Cost Sheets and the Work in Process Controlling Account
Exhibit 8—Finished Goods Ledger Account
Exhibit 9—Flow of Manufacturing Costs for Legend Guitars
Exhibit 10—Income Statement of Legend Guitars
Check Up Corner 16 (2)-1 – Direct Materials, Direct labor, and Factory Overhead
Check Up Corner 16 (2)-2 – Applying Overhead and Determining Job Cost
SUGGESTED APPROACH
Objective 2 introduces students to the various documents and procedures used in accumulating the
accounting data under a job order system. Two different approaches to cover the documents in a job order
system are described below.
CLASS DISCUSSION—Information Needed in a Job Order System
Ask your students to assume that they manage the manufacturing operations for the custom order division
of a company that makes fine jewelry. The company’s raw materials consist mainly of gold (10 karat and
14 karat), precious stones, and semiprecious stones. Ask your students to describe manufacturing
information that would be important to track. List their responses on the board.
Your students should list many of the following concerns. Point out the accounting documents used to
gather and report this information.
The amount of each type of Materials Ledger—shows a record of the
material on hand amount of each material on hand
The quantity of material Materials Requisition—provides
used on each customer order authorization for materials to be released
from the inventory storage area; shows
specific quantity of materials used in each
customer order
The labor costs used on each Time Tickets—filled out by
customer order. employees; shows the amount of time
spent working on each job and the
labor cost
The total cost of making a Job Cost Sheet—lists materials (from materials
customer’s order requisitions), labor costs (from time tickets),
and overhead used on each customer job
The costs incurred on jobs Cost Ledger—job cost sheets for all orders in process
currently in process
Chapter 16(2) Job Order Costing 328
The total cost of all completed Finished Goods Ledger—job cost sheets for
jobs all finished orders
CLASS DISCUSSION—Documents and Procedures in a Job Order System
You can also cover this objective through a bit of role playing. Tell your class to assume that they are
workers for the custom order division of a manufacturer that makes fine jewelry. Assign specific
manufacturing job responsibilities to various class members. Ask your students the questions listed below
concerning the procedures and documents they would use in their jobs.
The goal is for students to understand the information needed by various manufacturing personnel and
then attach a name to documents that report that information. You may need to be the person who
attaches the name to the students’ ideas. For example, when you ask the production scheduler how he or
she will inform the storeroom clerk of the need for inventoried materials, he or she will probably suggest
writing a note or memo. (If the production scheduler says, “I’d call the storeroom clerk,” state that all
requests need to be in writing because of the volume of requests for raw materials.) Next, ask the
scheduler what information would be on the memo. Then you can attach a name to this memo; the
document used to request that material is a materials requisition.
1. Appoint one of your students to be the production scheduler for your company. Whenever this
student receives a customer order, he or she is to schedule when the item will be made. Tell that
b. Determine whether the materials are on hand to make the rings.
2. Name one student as the purchasing agent. Ask what he or she would do after receiving the purchase
3. Appoint a student to be the receiving department. Ask what he or she would do when goods are
the storeroom.)
4. Name a storeroom supervisor. Ask this student what he or she would do when the materials are
received. (Answer: Put them away, preferably where they are locked up.)
(Answer: a materials requisition)
Chapter 16(2) Job Order Costing 329
5. Ask one student to be the skilled craftsman who is going to make the rings. Tell the student that the
recorded on a time ticket.)
6. Appoint one of your students as the accountant. That student needs to determine the cost to make the
rings. Ask him or her to describe how to get the information to determine the cost. (Answer: Take
materials used from the materials requisition and labor costs from the time tickets; these costs, along
with overhead, are recorded on a job cost sheet.)
the finished goods ledger.)
Finally, ask the accountant how he or she could determine the costs spent on all jobs that are still being
worked on. (Answer: Add up the job cost sheets for the jobs still in process. The job cost sheets for jobs
in process make up the cost ledger.)
LECTURE AID—Allocation of Overhead
to be allocated.
Assume that you are responsible for planning a banquet for your school’s accounting club. The banquet
will feature a dinner, followed by a speaker. The costs associated with the banquet are as follows:
Meals $10 per person
Beverages (coffee and tea) $1 per person
Use of banquet room $50
Speaker’s fee $100
In this case, meals and beverages are costs that can be traced to each student attending the banquet. Fees
paid for use of the room and to the speaker cannot be directly traced to each student. These costs must be
allocated to each attendee in order to determine what it will cost each person to attend the banquet. The
$150 in costs allocated over 50 people equals $3 per person.
DEMONSTRATION PROBLEM—Allocation of Overhead