JOB ORDER COSTING Maria Cristina P.
Obeso, CPA, MBA
PRODUCT COSTING – is a process of accumulating, classifying and assigning direct materials,
direct labor and factory overhead costs to products or services
In designing the details of product costing systems to fit a specific firm, management
should keep these four points in mind.
1. The cost benefit approach is essential in designing and choosing costing systems.
2. Costing systems should be tailored to the underlying operations; the operations
should not be tailored to fit the costing systems.
3. Costing systems accumulate costs to facilitate decisions.
4. Costing systems are only one source of information for managers.
The accountant must make three choices, one for each of the three following categories of
costing methods:
(1) The cost accumulation method – job order costing or process costing
(2) The cost measurement method – actual, normal or standard costing
(3) The overhead assignment method – volume-based or activity-based
COST ACCUMULATION METHOD
JOB ORDER COSTING –
- This refers to the costing procedure whereby costs are accumulated by products (or by
jobs).
- It is adopted for products (or group of products ) that can be physically identified (or
are heterogeneous) so that they can be charged with their respective costs.
- The cost unit is the job order (or work order) of the contract for such job.
Examples: houses, boats, pianos, radios, television sets, automobiles, doors and
furniture
PROCESS COSTING –
- This refers to the costing procedure whereby costs are accumulated by departments or
processes.
- This is adopted for products manufactured under conditions of continuous processing so
that they are not distinguishable from one another (or are homogeneous).
- Cost accumulation in process costing is done on cost of production reports (or
departmental cost sheets)
Examples: beverages, flour, chemicals, minerals
DIFFERENCES BETWEEN JOB ORDER COSTING AND PROCESS COSTING
JOB ORDER COSTING PROCESS COSTING
Nature of Products Heterogeneous Homogeneous
Cost accumulation By job orders By departments or
processes
Reporting By job orders By departments or
processes
When is unit cost Upon completion End of costing period
computed: (usually a month)
Unit cost Production costs per Departmental costs
computation job Equivalent units of
Number of units production
Subsidiary record Job order cost sheets Cost of production
for work in process reports (or
departmental cost
sheets)
Concept and Application of Job Order Costing
With a job-order cost system, costs are assigned to each job. A job may be an order, a
contract, a unit of production, or a batch performed to meet customers’ specifications.
All costs directly traceable to each job (direct materials and direct labor) are charged to
it directly. Factory overhead is charged to each job at a predetermined rate periodically or upon
completion.
Cost per unit of the products in each job is computed by dividing its accumulated cost by
the number of units.
FLOW OF COSTS IN JOB-ORDER COSTING
MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING
1. JOB ORDER COST SHEET
a. These records accumulate product costs of specific units or small batches of units for
both product costing and control purposes.
b. The file of job-order cost sheets for uncompleted jobs serves as a perpetual book
inventory and the subsidiary ledger for work in process control
2. MATERIALS STOCK CARD
a. These records are the perpetual book inventory of costs and quantities of materials
on hand
b. The file of materials stock cards for unused materials is the subsidiary ledger for
Materials Control.
3. FINISHED GOODS STOCK CARD
a. These records are the perpetual book inventory of costs and quantities of completed
goods held for sale
b. The file of finished goods stock cards for unsold goods is the subsidiary ledger of
Finished goods control
4. FACTORY OVERHEAD CONTROL COST RECORD
a. These records accumulate detailed manufacturing overhead costs by department
b. The file of these records for the accounting period is the subsidiary ledger for
Factory Overhead control
5. MATERIALS REQUISITION, TIME TICKET AND CLOCK CARD
a. As the source documents for charging costs to jobs and department.
b. To aid in fixing responsibility for control and usage of materials and labor.
JOB ORDER COST SHEET
The Job order cost sheet is the subsidiary record for “work in process”
Job Order Cost Sheet Form
Example of a Job Order Cost Sheet
MATERIALS REQUISITION SLIP
JOB TIME TICKET
MATERIAL STOCK CARD
ELEMENTS OF PRODUCT COST IN JOB ORDER COSTING
1. DIRECT MATERIALS
2. DIRECT LABOR
3. FACTORY OVERHEAD
USE OF PREDETERMINED FACTORY OVERHEAD
Direct materials and direct labor are charged directly to jobs while Factory overhead,
being the indirect cost, needs to be allocated yet.
However, accumulation of factory overhead is generally completed only after the end of
the accounting period, that is, after all adjusting entries are made. Inasmuch as prompt cost
information is required, factory overhead is preferably charged to production at a
predetermined rate.
Factory Overhead Rate = Estimated Factory Overhead
Estimated Base
Base Used: Direct labor hours, machine hours, direct labor cost, materials , units of production
Factory Overhead Applied = Factory Overhead Rate x Actual Base
Example:
Base used – Direct labor hours
Estimated Factory Overhead = 500,000
Estimated Base = 1,000 Direct labor hours
Actual Base (for the month) = 500 Direct labor hours
Factory Overhead rate = 500,000/ 1,000 DL house = 500 / Direct labor hours
Factory overhead applied = 500 x 500 DL hours = P 250,000
SAMPLE JOURNAL ENTRIES for JOB ORDER COSTING
A. Materials xx
Accounts Payable xx
B. Work in Process xx
Materials xx
C. Factory Overhead Control xx
Materials xx
D. Payroll xx
Accrued Payroll xx
E. Work in Process xx
Factory Overhead Control xx
Payroll xx
F. Work in Process xx
Factory Overhead Applied xx
G. Finished Goods xx
Work in Process xx
H. Accounts Receivable xx
Sales xx
Cost of Goods Sold xx
Finished Goods xx
Adjusting entry:
(If estimated Factory overhead is lesser than actual factory overhead)
Factory Overhead Applied xx
FOH Variance xx
FOH Control xx
Cost of Goods Sold xx
FOH Variance xx
(If estimated Factory overhead is greater than actual factory overhead)
Factory Overhead Applied xx
FOH variance xx
FOH control xx
FOH Variance xx
Cost of Goods xx
