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chapter
17(2)
Job Order Costing
______________________________________________
OPENING COMMENTS
Chapter 17(2) introduces students to managerial job order cost systems. Students will be exposed to the
terminology used to describe costs related to manufacturing.
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.
After studying the chapter, your students should be able to:
2. Describe and illustrate a job order cost accounting system.
4. Describe the flow of costs for a service business that uses a job order cost accounting system.
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
324 Chapter 17(2) Job Order Costing
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?
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 17(2) Job Order Costing 325
Relevant Example Exercises and Exhibits
• Exhibit 1 – Summary of Legend Guitars’ Manufacturing Operations
SUGGESTED APPROACH
Transparency Master (TM) 17(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
OBJECTIVE 2
Describe and illustrate a job order cost accounting system.
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.
326 Chapter 17(2) Job Order Costing
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
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
Relevant Example Exercises and Exhibits
• Example Exercise 17(2)-1 Issuance of Materials
• Example Exercise 17(2)-2 Direct Labor Costs
• Example Exercise 17(2)-3 Factory Overhead Costs
• Example Exercise 17(2)-4 Applying Factory Overhead
• Example Exercise 17(2)-5 Job Costs
Chapter 17(2) Job Order Costing 327
• Example Exercise 17(2)-6 Cost of Goods Sold
• 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
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
328 Chapter 17(2) Job Order Costing
The costs incurred on jobs Cost Ledger — job cost sheets for all orders in process
currently in process
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.
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
student to assume that the company has just received an order to make World Series rings for the
2. Name one student as the purchasing agent. Ask what he or she would do after receiving the purchase
requisition. (Answer: Fill out a purchase order and transmit it to the vendor.)
3. Appoint a student to be the receiving department. Ask what he or she would do when goods are
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.)
Chapter 17(2) Job Order Costing 329
Next, ask this student whether he or she would give materials to any employee who asked for them.
What would the storeroom supervisor need in order to give materials to a production employee?
5. Ask one student to be the skilled craftsman who is going to make the rings. Tell the student that the
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.)
Ask the student how he or she could determine the costs spent on jobs that have been completed.
(Answer: Add up the job cost sheets for all finished jobs. The job cost sheets for all finished jobs make up
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
In addition to direct materials cost and direct labor cost, objective 2 covers the allocation of overhead
costs in a job order setting. The following example may be helpful in explaining why overhead costs need
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
Assume that 50 students will attend the banquet. If you want to break even on this event, how much do
you need to charge for a ticket? (Answer: $14)
330 Chapter 17(2) Job Order Costing
DEMONSTRATION PROBLEM—Allocation of Overhead
The costs of manufacturing a product that cannot be traced to a particular job are called overhead.
Overhead costs must be allocated to the products made to determine what each product costs.
Point out that, unlike the situation in the banquet example, overhead costs usually are not divided evenly
over the number of units produced. Assume that a television manufacturer spent $500,000 on overhead
costs to make 50,000 televisions. At first glance, it might seem fair to allocate $10 in overhead to each
television. But what if some televisions were big-screen stereo sets and some were small, portable
models? It isn’t fair to charge each set with the same overhead if some models are more complicated to
manufacture than others.
The formula to calculate MTM’s predetermined overhead rate is as follows:
Estimated Total Factory Overhead Costs $1,000,000 $25/hour
Estimated Activity Base (machine hours) 40,000 hours
==
In this case, $25 in overhead is allocated each time a product accumulates one hour of machine time.
Ask your students to calculate the overhead that would be allocated to a product that uses 3.5 hours of
machine time. (Answer: $87.50) Remind students that overhead costs are added to the product’s materials
and labor costs.
Emphasize that the identification of the appropriate activity base or driver is essential to developing
accurate product costs. If a highly automated manufacturer allocates overhead based on direct labor hours,
the resulting product costs may be distorted. The activity base should be related to the incurrence of
overhead costs.
DEMONSTRATION PROBLEM—Overapplied and Underapplied Overhead
Ask your students to calculate the amount of overhead allocated to the products of a company that has a
predetermined overhead rate of $10 per machine hour if machines were used for 10,000 hours. (Answer:
$100,000)
Chapter 17(2) Job Order Costing 331
What if the company actually spent $95,000 on overhead costs? The company has overapplied overhead
2. The actual activity base (machine hours) does not equal the estimated activity base used to compute
the predetermined overhead rate.
GROUP LEARNING ACTIVITY—Journal Entries in a Job Order System
Exhibit 2 in the text summarizes the flow of costs in a job order cost system (costs move from materials
inventory to work in process to finished goods to cost of goods sold). Exhibit 8 shows the entries needed
to record manufacturing costs in T accounts. Ask your students to record the journal entries listed on TM
17(2)-3, using Exhibits 2 and 8 as a guide. The correct entries are displayed on TM 17(2)-4. You may
want to have your students post these entries to T accounts and determine account balances.
Emphasize the following points as students record their entries:
1. Materials requisitions serve as the basis for transferring material costs from materials to work in
process and factory overhead.
3. Entries to work in process are supported by job cost sheets. At the end of the period, the sum of the
totals from all job cost sheets that are still in process must equal the balance of work in process.
4. Product sales serve as the basis for transferring jobs from finished goods to cost of goods sold.
OBJECTIVE 3
Describe the use of job order cost information for decision making.
SYNOPSIS
The job order cost system allows managers to compare the costs of similar jobs, compare overtime, and
compare actual costs to expected costs. Discrepancies can be investigated and future costs controlled.
Relevant Example Exercises and Exhibits
• Exhibit 11 – Comparing Data from Job Cost Sheets
332 Chapter 17(2) Job Order Costing
SUGGESTED APPROACH
The goal of this objective is to explore the ways in which job cost information is used in decision making.
To put your students in the role of decision maker, use the following Group Learning Activity.
GROUP LEARNING ACTIVITY—Decision Making
Handout 17(2)-1 is a brief problem asking students to interpret two job cost sheets. Ask your students to
work on this problem in groups. After providing sufficient time, ask some of the groups to report their
responses. TM 17(2)-5 provides the solution.
Comparing the two job cost sheets shows that the improved price per pound of alloy does not offset the
increased costs associated with higher materials usage rates and reduced casting and machining
department efficiency. It is likely that the events are related. The lower alloy cost has probably resulted
OBJECTIVE 4
Describe the flow of costs for a service business that uses a job order cost accounting system.
SYNOPSIS
A job order cost system can also be used for a professional service business. Customers can be viewed as
jobs for which costs are accumulated. The primary product costs for services are direct labor and
overhead. These costs can be tracked on a job sheet and accumulated in a work in process account. The
work in process account is supported by a cost ledger and job cost sheet for each client. When the job is
completed, costs can be transferred to a cost of services account and the client can be billed. Service
businesses may also bill clients in advance and record the payment as deferred revenue. The flow of costs
through a service business is shown in Exhibit 12.
Relevant Example Exercises and Exhibits
• Exhibit 12 – Flow of Costs Through a Service Business
Chapter 17(2) Job Order Costing 333
SUGGESTED APPROACH
Explain that cost accounting can be applied to any organization that needs to determine the cost of its
product. For a service business, the product is the service provided. Cost accounting can be used by an
Refer your students to Exhibit 11 in the text. While reviewing that diagram, stress the following points:
2. A cost of services account is used to record the cost of completed jobs.
GROUP LEARNING ACTIVITY—Job Order Costing in a Service Business
TM 17(2)-6 presents information about a CPA firm that does audit and tax work. Divide your class into
small groups and instruct students to determine the cost to prepare a tax return. The solution is shown on
TM 17(2)-7.
Handout 17(2)-1
Decision Making Using Job Cost Data
Griffin Casting Company is a job shop that manufactures castings for a variety of purposes. The
following two job cost sheets relate to two different orders for an identical casting used to house
automobile generators. As can be seen from the two job cost sheets, the unit cost has
increased between March and October. The purchasing manager has explained that the
problem is not with the purchasing department. In October, purchasing was able to buy metal
alloys from a new vendor at a price of $12 per pound, a savings of $3 per pound from the
previous vendor used in March. The new vendor has not been quality certified.
Required: Interpret the job cost reports to determine what has caused the per unit cost increase.
Job 100 Date Completed: March 30 Item: 40 automobile generator housings
Materials: Quantity Price Amount
Alloy (pounds) 60 $15.00 $900
Fasteners 160 0.25 40
Total materials $940
Job 210 Date Completed: October 15 Item: 100 automobile generator housings
Materials: Quantity Price Amount
Alloy (pounds) 200 $12.00 $2,400
Fasteners 400 0.25 100
Total materials $2,500
Type Item Description LO(s) Difficulty Time Est BUSPROG AICPA ACBSP - APC Bloom's EE Excel GL SMH FAI Service Real World Writing Ethics Internet Group
DQ 1 1 Easy 5 min. Analytic Measurement Job Order Costing Knowledge
PE 2A Direct labor costs 2 Easy 5 min. Analytic Measurement Job Order Costing Application x
PE 2B Direct labor costs 2 Easy 5 min. Analytic Measurement Job Order Costing Application x
PE 3A Factory overhead costs 2 Easy 5 min. Analytic Measurement Job Order Costing Application x
PE 3B Factory overhead costs 2 Easy 5 min. Analytic Measurement Job Order Costing Application x
EX 6 Entry for factory labor costs 2 Easy 5 min. Analytic Measurement Job Order Costing Application x
EX 7 Entry for factory labor costs 2 Moderate 15 min. Analytic Measurement Job Order Costing Application
EX 8 Entries for direct labor and factory overhead 2 Moderate 10 min. Analytic Measurement Job Order Costing Application x
EX 9 Factory overhead rates, entries, and account balance 2 Moderate 30 min. Analytic Measurement Job Order Costing Application x
PR 3A Job order cost sheet 2,3 Challenging 1 hour Analytic Measurement Job Order Costing Application x x
PR 4A Analyzing manufacturing cost accounts 2 Challenging 1.5 hours Analytic Measurement Job Order Costing Application x
PR 5A Flow of costs and income statement 2 Challenging 1.5 hours Analytic Measurement Job Order Costing Application x
PR 1B Entries for costs in a job order cost system 2 Moderate 45 min. Analytic Measurement Job Order Costing Application x x
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