UNIT III

JOB ORDER COSTING

Cost Accumulation Method:
1. Job order costing – cost is traced to individual batch, order, specific unit, lot or contract.
2. Process Costing – cost is traced to department, operation or some other subdivision within the
factory as long as it involves continuous flow rather than a series of separate jobs.
3. Activity Based Costing (ABC) – a system in which multiple overhead cost pools are allocated using
bases that includes one or more non-volume-related factors.
4. Backflush costing - is often used by companies that have adopted the JIT of inventory control which
works backward through the available accounting information completed.

JOB ORDER COSTING SYSTEM

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.

Characteristics of Job Order Costing System:

1. The product manufactured are heterogeneous or dissimilar products.
2. Products are manufactured individually or in a distinct lots, jobs, contracts or batches
3. Each job requires different amounts of materials, labor and overhead.
4. It helps in finding out the cost of production of every order and thus helps in ascertaining profit or loss
made out on its execution. The management can judge the profitability of each job and decide its
future courses of action.
5. A job is a cost object that can be distinguished easily because:
▪ They are unique in some way
▪ Separate documents are kept to record the costs of the jobs in the form of Job Cost Sheets.

Sample Job Cost Sheet

To compute for the cost of goods manufactured:

To compute for the cost of goods sold:

ILLUSTRATIVE PROBLEMS
Illustrative Problem 1
• During the month of January, FR Co.’s direct labor cost totaled P36,000.00 and direct labor cost was
60% of prime cost. If total manufacturing costs during January P85,000.00, the manufacturing
overhead was:
Solution: 85,000 - (36,000/ 60%) 60,000 = 25,000.00

Illustrative Problem 2
• The following selected information pertains to Ajax Processing Co., direct materials, P62,500; indirect
materials, P12,500; P75,000 of direct labor, P11,250 of indirect labor; and other factory overhead
incurred, P37,500. The total conversion cost was:
Solution: 12,500 + 75,000 + 11,250 + 37,500 = 136,250
Illustrative Problem 3
• Tarzan Co. employs a job order cost system. Its manufacturing activities in July 2022, its first month of
operation, are summarized as follows:

1201 1202 1203 1204

Direct materials P 7,000.00 P 5,800.00 P 11,600.00 P 5,000.00

Direct labor cost 6,600.00 6,000.00 8,400.00 2,400.00

Direct labor hours 1,100.00 1,000.00 1,400.00 400.00

Units produced 200.00 100.00 1,000.00 300.00

Manufacturing overhead applied at the rate of P2 per direct labor hour for variable overhead, P3 per hour for fixed
overhead. Jobs 1201; 1202 and 1203 were completed in July. What is the cost of the completed jobs?
Solution:

EXERCISES
Exercises 1.
Peterson Company uses a job order cost system and applies factory overhead to production orders on the basis of
direct labor cost. The overhead for 2021 are 200% for Dept. A and 50% for Dept. B. Job 123 started and
completed during 2021, was charged with the following costs:
Department A Department B
Direct Materials P 25,000.00 P 5,000.00
Direct Labor ? 30,000.00
Factory Overhead 40,000.00 ?

Answer: __________________
Exercises 2.
The Childers Company manufactures chairs. During the fiscal year just ended, the company incurred prime costs of P
1,500,000 and conversion costs P 1,800,000. Overhead is applied at the rate of 200% of direct labor cost. How
much of the above costs represents material costs?
Answer: __________________
After accepting a job or order, the first step in a job order costing system is to determine the direct materials
requirement to complete the job.

MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING

1. Job order cost sheet
a. records accumulate product costs of specific units or small units of batches of units for both product
costing and control purposes.
b. file of job order cost sheets for uncompleted jobs serves as a perpetual book inventory and subsidiary
ledger for Work in Process Control.
c. a separate job cost sheet is prepared for each job.

2. Materials Stock card

a. there records are the perpetual book inventory of cost and quantities of materials on hand.
b. the file of materials stock cards for unused materials is the subsidiary ledger for Materials Control.
c. a separate stock card is prepared for each type of material on hand.
 3. Finished Goods Stock card
a. there records are the perpetual book inventory of cost and quantities of completed goods held for
sale.
b. the file of finished goods stock cards for unused materials is the subsidiary ledger for Finished Goods
Control.

4. Factory overhead Control Cost Record

a. there records accumulate detailed factory overhead costs by department.
b. the file of these records for the accounting period is the subsidiary ledger for Factory Overhead
Control.
c. a separate stock card is prepared for each type of material on hand.

5. Materials Requisition, Time Ticket and Clock Card

a. the source document for charging costs to jobs and department,
b. to aid fixing responsibility for control and usage of materials and labor.

ACCOUNTING FOR MATERIALS

Accounting System for Materials
1. Perpetual method - maintains material ledger for the continuous recording of materials received and
issued to production department. Materials purchased are recorded using “Materials Inventory”
account. Both the cost of material issued to production and ending inventory can be easily determined
after every transaction.
2. Periodic method - materials purchased are recorded using the account “ Purchases” and requires a
periodic count and valuation of inventory (often monthly). The cost of materials issued to the
production department can be determined by deducting the inventory end from the total cost of
materials available for use. Under this method cost of material issued to production and ending
inventory cannot be easily determined.
Materials Control
• Material controls basically aims at efficient purchase, storage and consumption of materials. Since
materials is the major part of the total manufacturing cost, the company should have a good and
effective system of internal control over materials not only to guard against theft but also to minimize
waste and misuse due to excessive inventories, over issuance, deterioration, spoilage and
obsolescence.
• An internal control procedure for storing and issuing materials should reflect the following principles:
1. Admittance to the storage area should be restricted.
2. Materials ledger cards, covering all receipts and issued should be maintained,
3. Each type of material should be clearly identified, stored and carefully protected while in storage.
4. Materials should be issued only upon proper written authorization.
5. The accounting system should permit a periodic check of the materials ledger against the balance of
the Materials account.
6. Different persons should be involved in storage and issuance operations.
Objectives Of Materials Control
1. To ensure better quality of materials at right quantity at right time for efficient and uninterrupted production
of output.
2. To maintain the cost of materials at the minimum level.
3. To purchase materials at a reasonable price.
4. To minimize the handling cost and time in storing and using the materials.
5. To provide information to the management about raw materials, their costs and availability.
6. To protect materials against loss by fire, theft and leakage.
7. To avoid obsolescence of materials by adopting an appropriate method of materials issue.

Modern system of inventory control include the following features:

• Physical safeguards for receiving, storing and issuing materials.
• Formal procedures for ordering and paying for materials
• Perpetual inventory system to provide an ongoing record of the quantity and value of each type of
materials received and issued and the balance on hand.
 Two basic aspects of material control
1. Physical control or safeguarding of materials
a. Limited access - only authorized personnel should have access to material storage area. All
issuance of materials for use in production and release of finished goods for shipment should
be properly documented and approved.
b. Segregation of duties - different functions (purchasing, receiving, storage, use and recording)
should be segregated to minimize opportunities of misappropriation of inventories
c. Accuracy in recording - inventory records should permit the determination of inventory
quantities on hand upon request and cost records should provide the data for evaluation of
inventories for the preparation of financial statements.

2. Control of investment in materials

• Maintain the proper balance of materials on hand.
• An inventory of sufficient size and diversity for efficient operation must be maintained, but the
size should not be excessive in relation to the scheduled production needs.
• In planning and controlling the inventory size, these factors should be considered – a) when orders
should be placed and b) how many units should be ordered.
• Commonly used control procedures
a. Order cycling – method where materials on hand are reviewed on a regular basis.
b. Min-max method – based on the assumption that materials inventory have minimum and
maximum levels. Minimum quantity is the order point, an order is placed to increase the
inventory to the maximum level
c. Two-bin method – materials are divided and place into two separate bins. The first bin contains
materials that will be used between the time an order was received and the next order. The
second bin contains the materials that will be used between the ordering and the delivery,
plus additional safety stock. When the first bin is emptied, an order is place. This method is
used for materials that are considered inexpensive and/or non-essential.
d. Automatic order system – used by most companies that are computerized. An order is
automatically placed when the level of inventory reaches a predetermined order point
quantity. Perpetual inventory record cards are maintained.
e. ABC plan – used by companies with large number of materials, each having different value.
This is a systematic way of grouping materials into separate classification and determining the
degree of control that each group requires.
Economic Order Quantity
• Represents the quantity necessary to get the best price while keeping inventory at an appropriate
level to ensure uninterrupted production. In determining the quantity to be ordered, the cost of
placing an order and the cost of carrying inventory must be considered

Example 1:
The shop sells 1,000 shirts each year. It costs the company P5.00 per year to hold a single shirt in inventory, and the
fixed cost to place an order is P2.00

EOQ = √ [(2 x 1,000 x 2)/5]

EOQ = 28.3 or 28 shirts

Example 2:
The Norman Company predicts that 64,000 units of materials will be used during the year. The materials are expected
to cost P 20 per unit. It is anticipated that it will cost P 40 to place an order. The annual carrying cost is P 2.00
per unit
Determine: Economic Order Quantity

Material Purchasing Procedures

Purchasing agent – person who has responsibility of purchasing materials in correct quantities at the proper time
and at the lowest price. The purchasing agent’s staff is part of the procurement section of the purchasing
departments.
The purchasing staff – keeps informed of various source of supply, negotiates purchase contracts, prepares
purchase orders and follow up deliveries. Their routine work begins with the receipt of purchase
requisition.

Documents for Material Transactions

(Business Papers used to Support Material Transactions)
• Purchase Requisition • Disbursement Voucher
• Purchase Order • Materials Requisition Slip
• Receiving Report • Materials Ledger Card

Purchase Requisition
• Informs the purchasing agent concerning the quantity and type of materials needed.
• Is a document or a written request for materials sent to the purchasing department and is prepared in
duplicate. The original copy is sent to purchasing department and the duplicate copy is retained in the
storeroom files. This must be numbered for easy reference. This request is prepared by storeroom
supervisor once the materials reach the reorder point.
• Information on a Purchase Requisition Form
a. Name of the requesting department
b. Purchaser’s location and mailing address
c. Exact amount of items
d. Description of items
e. Legal name of the outside supplier
f. Expected price of purchase
g. Requested delivery date
 Reorder Point - A point at which the item should be ordered occurs when the predetermined minimum
level of inventory on hand is reached.
a. Usage – the anticipated rate at which the materials will be used.
b. Lead time – the length of time or the interval between the placement or order and the receipt of
the materials.
c. Safety stock – estimated minimum level of inventory needed to protect against running out of
stock.
Example:
Assume that expected daily usage of material X is 100 units, and it takes 4 days to receive an order and the estimated
safety stock is 400 units, then the reorder point is:
LTQ = Daily usage 100 units x 4 days (lead time) = 400 units
SSQ = Safety stock = 400 units
Reorder point 800 units
Note: it means that when Material X inventory reaches 800 units, then the storeroom supervisor must prepare a
purchase requisition for purchase of material X.
Reorder Point = Sum of Lead time Quantity (LTQ) + Safety Stock Quantity (SSQ)
where:
LTQ = normal usage x normal lead time
SSQ = Safety stock (in usage) + Safety Stock (in time)
SS (in usage) = (Maximum usage – Normal usage) x Normal lead time
SS (in time) = (Maximum lead time – Normal lead time) x normal usage
Maximum Inventory Level = SSQ + order size
Average inventory = Order size /2
Minimum Inventory level - SSQ
Answer:
Lead time quantity: 12 days x (30,000/300) = 12 days x 100 = 1,200
Safety Stock (in time): (19 days – 12 days) = 7 days x 100 = 700
Safety Stock (in usage): (125 units – 100 units) = 25 units x 12 days = 300
Total Safety Stock = 700 + 300 = 1,000
Average Inventory = (6,000/2) + 1,000 = 3,000 + 1,000 = 4,000
Maximum Inventory = 6,000 + 1,000 = 7,000

Purchase Order
• A contract for appropriate type and quantities of materials to be delivered at a specified date to
assure uninterrupted operations
• A written request to a supplier for a specified goods at an agreed price and also stipulates the
term of delivery and terms of payment.
• This document is prepared by the purchasing agent after the receipt of the purchase requisition.
• All purchase orders should be prenumbered to provide control for the issuance
• At the end of each month, the accountant verifies that all the numbered purchase order either
sent to the suppliers or are on hand to ensure that purchase orders are used only for authorized
purposes.
• This is prepared in 5 copies to be distributed as follows:
a. suppliers – as an authority to deliver the materials
b. storeroom – as a notification that the materials requested are on order.
c. Receiving department – as an authorization to accept incoming shipment.
d. Purchasing department – (2 copies) for file in unfilled order.
Receiving Report
• Certifies quantities received and ma report results of inspection and testing for quality.
• Shows all details of the shipment, including comments on the condition of the materials received. The goods
are checked to be sure that they are not damaged and they met the specifications of the purchase order.
• The clerk prepares a receiving report in quadruplicate
a. the original copy is sent to purchasing department (to indicate order was received);
b. to the accounts payable department - to be compared with the purchase order and supplier’s
invoice,
c. one copy to the storeroom together with the materials and purchase order (for entry in the store
records),
d. then the storeroom supervisor signs the final copy to confirm that the materials reached the
storeroom and this final copy is kept in the receiving clerk’s permanent file.
• The following information is typically included on a receiving report:
a. Date and time on which the delivery was received
b. Name of the shipping company that delivered the goods
c. Name of each item received
d. Quantity of each item received
e. The authorizing purchase order number, if noted on the delivery documentation or box
f. Condition of the items received. This can be a negative entry, where only damaged goods are noted.

Disbursement Voucher
• If the three documents agree or in order – the purchase order, receiving report and purchase invoice,
payment is authorized. A disbursement voucher is prepared, with the supporting documents, once
approved the voucher is sent to the accounting department for recording.
• When the voucher and the supporting documents reach the accounting department, the voucher clerk
checks all the documents if they are properly approved and signed. Double checking is another part of
effective internal control. After checking, the voucher clerk records the purchases in the voucher register.
• A check is prepared in the Cash department for the amount in the voucher. The check is recorded in the
check register and sent to the supplier. The voucher is marked paid and records the check number and
date of payment in the voucher.
Materials Requisition Slip
• Authorization to the storeroom to issue materials to departments.
• A written order to the storekeeper to deliver materials or suppliers to the place designated or to
issue materials to the person presenting a properly executed requisition.
• Each requisition form shows the job number, the department requesting the goods, their quantity
and description and the unit cost and total cost of the goods issued.
• The cost of the goods charged to the production is entered on the materials requisition form and
the quantity and the amount are entered in the materials ledger card under issuance column.
 Materials Ledger Card
• Records the receipt and issuance of each class of materials and provide a perpetual inventory
record.

Objectives of Store Keeping

An efficient system of store keeping has the following objects:
1. To ensure uninterrupted supply of materials and stores without delay to various production and service
departments of the organization.
2. To prevent over-stocking and under-stocking of materials.
3. To check in all materials as to quality and quantity.
4. To minimize storage cost.
5. To ensure proper and continuous control over materials.
6. To ensure most effective utilization of available storage space and workers engaged in the process of store-
keeping.
7. To protect materials from loss and wastage due to defective storage.
8. To identify and locate materials in the store-rooms without delay.
9. To protect and safeguard material items against pilferage, theft and fire etc.
10. To develop such a system so that fullest information about store items is available in the stores at every
time.

Special Issuing procedures

a. Materials returned to storeroom
- Materials returned to storeroom must be accompanied by returned materials report.
- The storeroom clerk records the materials returned in the materials ledger card under
Issued column in parenthesis.
b. Materials returned to supplier
- A return shipping order is prepared by the purchasing agent together with a debit
memorandum.
- The storeroom clerk receives a copy of the debit memo which is to be used in recording
the return in the materials ledger card under Received column.
c. A computerized system facilitates to update inventory records, simplifies processing purchase
orders and provides effective internal control system for materials issuance.

Accounting Procedures
Accounting procedures for materials procurement and use involves forms and records necessary for financial
accounting and cost accounting purposes.

• Financial accounting – the forms are necessary to be able to record the transactions in the books
of accounts - purchase journal, cash payments journal, general journal and general ledger control
account.
• Cost accounting – forms are used for materials control purposes and necessary for costing a job, a
process or department and for maintaining perpetual inventories.