JOB-ORDER COSTING
Chapter 4
Accounting Principles II
AC 2102 - Fall Semester, 1999
Chapter 5 - 1
Two Basic Types Of Production
• Job-Order Production & Costing
– Production of unique, one-of-a-kind
products
– Note: the job can contain a batch of these
special, distinct units
• Process Production & Costing
– Mass production of large quantities of
similar or homogeneous products
Chapter 5 - 2
Job-Order Cost Systems
• Unique, one-of-a-kind, custom-made,
tailor-made, built-to-order products
• Often a job is associated with a particular
customer’s order
• Costs collected by job
• Frequently prices are based on costs in a
job-order environment
• Examples: printing, construction,
furniture making, auto repairs
Chapter 5 - 3
Process Costing Systems
• Mass production of large quantities of similar
or homogeneous products
• Accumulate production costs by process or
department for a given period of time
• The output for the process for that period is
also measured
• Unit costs are computed by dividing the total
process costs for the period by the output
• Example: gallons of paint, cans of corn, bottles
of softdrinks, boxes of cereal
Chapter 5 - 4
Job-Order vs. Process Costing
Job-Order Costing
Process Costing
• Wide Variety of
distinct products
• Costs accumulated by
job
• Unit costs computed
by dividing total job
costs by units
produced on that job
• Homogeneous products
• Costs accumulated by
process or department
• Unit costs computed by
dividing process costs
of the period by the
units produced in the
period
Chapter 5 - 5
Assigning Costs To A Job
• Production costs consist of direct materials,
direct labor and manufacturing overhead
• Overhead can be assigned using traditional
approaches or an activity-based approach
• Thus overhead can be assigned to a job
using one of the three following methods:
(1) unit-based plant-wide overhead rates,
(2) unit-based departmental overhead rates,
(3) activity-based costing
Chapter 5 - 6
Applying Overhead Using
Unit-Level Systems
• Unit-level systems include applying
overhead using plant-wide or departmental
rates based on direct labor hours, machine
hours, direct-labor dollars or units produced
• Such systems can be effective or adequate if
certain conditions exist
Chapter 5 - 7
Conditions Under Which
Unit-Level Systems Are Effective
• Whenever one of the three following conditions
exist, unit-level systems are adequate for costing
and decision-making
• The three conditions are:
(1) The nonunit-level overhead is a small
percentage of the total overhead
(2) The products produced have the same
overhead consumption ratios
(3) the cost of using both unit-level & nonunitlevel drivers exceeds the benefits
Chapter 5 - 8
Using Predetermined Overhead
Rates In Job-Order Costing
• The completion of a job rarely coincides
with the completion of a fiscal year
• Thus if overhead rates are not determined in
advance - i.e.. by the use of predetermined
rates, then there will be substantial delays in
costing out jobs
• Normal costing systems are therefore
generally used in a job costing environment
Chapter 5 - 9
Normal Costing Systems
• Includes the following three costs in the
cost of a job:
– Actual material cost
– Actual direct labor cost
– Applied overhead based on
predetermined rates
• Those rates can be unit-based or activitybased rates
Chapter 5 - 10
Calculating The Cost of A Job
• The unit cost of a job is simply the total cost
of the following items:
– Materials used on the job
– Labor worked on the job
– Overhead assigned or charged to the job
• And, to state it once again, the overhead can
be assigned using single unit-level drivers
or using the multiple-driver approach of
activity-based costing
Chapter 5 - 11
Why Companies Need Unit Costs
• The generation of financial statements
• The determination of profitability
• The making of decisions
– example: determining what price to
charge
Chapter 5 - 12
The Flow of Costs
Through The Accounts (1)
The “cost flow” refers to the way
we account for costs from the point
at which they are incurred to the
point at which they are recognized
as an expense on the income
statement
Chapter 5 - 13
The Flow of Costs
Through The Accounts (2)
• Five accounts are generally involved in the
manufacturing cost flow process:
– Raw Materials Inventory
– Work-In-Process Inventory
– Finished Goods Inventory
– Manufacturing Overhead Control
– Cost of Goods Sold
Chapter 5 - 14
Accounting For Overhead
In A Normal Costing System (1)
• Actual overhead costs are collected in the
manufacturing overhead account
• The overhead rate used to assign overhead
to jobs was predetermined based on
estimated figures for the overhead dollars
and the estimated level of the application
bases
• Thus, actual overhead is never assigned
directly to jobs
Chapter 5 - 15
Accounting For Overhead
In A Normal Costing System (2)
• Although actual overhead is not being
directly assigned to jobs, it is still being
accounted for
• At the end of each fiscal year, the difference
between the total overhead that has been
charged to jobs and the total actual
overhead incurred leads to an adjustment in
the cost of goods sold account
• for details read pages 168-175 in the text
Chapter 5 - 16
Key Job-Order Source Documents
Job-Order Cost Sheets
• Each job has its own job-order cost sheet
• On this sheet direct material and direct labor
costs are collected and periodically
overhead is assigned
• The collection of all job-order cost sheets
make up the work-in-process file
Chapter 5 - 17
Key Job-Order Source Documents
Material Requisitions
• This document is completed whenever
material is transferred into WIP inventory
for a particular job
• It specifies the identification number of the
job and the quantities and cost per unit of
the materials being used on the job
• It is via this document that material can be
physically traced to a job and therefore
becomes a “direct” cost of a particular job
Chapter 5 - 18
Key Job-Order Source Documents
Job Time Tickets
• This document is used to trace direct labor costs to
particular jobs.
• On this document workers provide their identity,
the task they are performing, the amount of time
consumed, and the job number
• Then using the applicable wage rate, direct labor
costs can be assigned to jobs
• It is via this document that labor can be physically
traced to a job and therefore becomes a “direct”
cost of a particular job
Chapter 5 - 19
Chapter 5 - 20
Chapter 5 - 21