Managerial Accounting
2002e
Belverd E. Needles, Jr.
Susan Crosson
----------Multimedia Slides by:
Harry Hooper
Santa Fe Community College
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1
Chapter 3
Costing Systems:
Job Order Costing
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2
LEARNING OBJECTIVES
1. Discuss the role information about costs
plays in the management cycle and explain
why product unit cost is important.
2. Distinguish between the different types of
product costing systems and identify the
information each provides.
3. Explain the cost flow in a job order costing
system for a manufacturing company.
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3
LEARNING OBJECTIVES
4. Prepare a job order cost card and
compute a job order’s product unit
cost.
5. Apply job order costing to a service
organization.
6. Distinguish between job order costing
and project costing.
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4
Product Cost Information and
the Management Cycle
OBJECTIVE 1
Discuss the role costing information
plays in the management cycle and
explain why product unit cost is
important.
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5
Management Cycle
• The role of the management
accountant is to develop a
management information
system that provides
managers with the product
costing information they need.
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6
Uses of Information About Costs in the Management Cycle
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Planning Stage
• During the planning stage, managers
set performance expectations and
estimate unit costs in order to:
Establish prices.
Set sales goals.
Determine how much products or services
should cost to deliver.
Determine human resource needs.
Develop budgets.
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Executing Stage
• During the executing stage,
managers make decisions about:
The quality of a product or service.
Controlling costs.
Managing the company’s activity
volume.
Negotiating prices.
Other production or sourcing
decisions.
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Reviewing Stage
• Information gathered during the
reviewing stage allows managers to:
Control operations and costs.
Determine the sources of problems.
Evaluate performance.
Adjust planning and decision-making
strategies.
Determine how an activity can be
performed more efficiently.
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Reporting Stage
• During the reporting stage,
management accountants prepare
reports that help managers:
Compare the period’s actual product
costs with budgeted costs.
Determine whether the goals for
product or service costs are being
achieved.
Determine relevant information for the
company’s financial statements.
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Discussion
Q. At what point in the
management cycle do
managers determine selling
prices and delivery costs?
A. The planning stage.
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12
Job Order Versus Process
Costing
OBJECTIVE 2
Distinguish between the different
types of product costing systems and
identify the information each
provides.
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13
Product Costing Systems
• Organizations have a range of
choices in order to distribute
product costs. Two ends of that
spectrum are:
Job order costing systems.
Process costing systems.
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Product Costing Systems
• The kind of production process
that an organization uses
determines which of the two
approaches is used.
• Organizations that make large,
unique, or special-order products
typically use job order costing.
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A Job Order
• A job order is a customer order
for a specific number of
specially designed, made-toorder products.
• Job order costing measures
the cost of each complete unit.
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Job Order Costing Systems
• Under a job order costing system,
the costs of:
 Direct materials
 Direct labor
 Manufacturing overhead
are traced or assigned to specific
job orders or batches of products.
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Process Costing Systems
• Organizations that produce large amounts
or similar products or liquids that have a
continuous product flow use process
costing. Examples include:
Bricks
Beverages
Paper
Sauces
Paint
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Process Costing Systems
• Under a process costing system, the
cost of direct materials, direct labor,
and manufacturing overhead are first
traced to processes or work cells and
then assigned to the products
produced by that process or work cell.
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Discussion
Q. What are the two basic product
costing systems that have been
developed?
A. 1. The job order costing system.
2. The process costing system.
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Hybrid Systems
• The typical product costing system
combines parts of both job order
costing and process costing to
create a system for an
organization’s particular
production process.
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Job Order Costing in a
Manufacturing Company
OBJECTIVE 3
Explain the cost flow in a job
order costing system for a
manufacturing company.
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Job Order Costing System
• A job order costing system
records information on the
following cost flows:
The costs of materials and supplies
are first charged to the Materials
Inventory Control account and to
the respective materials accounts in
the subsidiary ledger.
Labor costs are first accumulated in
the Factory Labor account.
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Job Order Costing System
• The various manufacturing overhead
costs are charged to the
Manufacturing Overhead Control
account.
• As products are manufactured, the
costs of direct materials and direct
labor are transferred to the Work in
Process Inventory Control account.
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Job Order Costing System
• Manufacturing overhead costs are
applied and charged to the Work in
Process Inventory Control account
using a predetermined overhead rate.
Those charges are used to reduce the
balance in the Manufacturing
Overhead Control account and
increase the Work in Process
Inventory Control account.
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Job Order Costing System
• When products and jobs are
completed, the costs assigned to them
are transferred to the Finished Goods
Inventory Control account.
• When the products are sold and
shipped, their costs are transferred to
the Cost of Goods Sold account.
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Cost Flow
• Any balance in the Manufacturing
Control account at the end of the
period is closed to Cost of Goods
sold.
• The effective use of procedures
and documents facilitates a timely
flow of information through the
accounting records.
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Reconciliation of Manufacturing
Overhead
• If the Manufacturing Overhead
Control account has a balance at
the end of the period:
Overhead was either over or under
applied.
• Given that the amount is minor:
Close the account to Cost of Goods
Sold.
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Discussion
Q. How are manufacturing overhead
costs determined in a job order
costing system?
A. A predetermined overhead rate
is used to calculate
manufacturing overhead costs.
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29
The Job Order Cost Card
OBJECTIVE 4
Prepare a job order cost card and
compute a job order’s product
unit cost.
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The Job Order Cost Card
• All costs of
 direct
materials
 direct
labor
 manufacturing
overhead
for a particular job are accumulated
on a job order cost card.
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The Job Order Cost Card (cont’d)
• It also shows:
Job order number
Product specifications
Customer name
Order date
Projected completion date
A cost summary
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32
Job Order Cost Card – Manufacturing Company
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Job Order Cost Card – Service Organization
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The Job Order Cost Card
• Because all manufacturing costs are
accumulated in the Work in Process
Inventory Control account, individual job
order cost cards serve as subsidiary
ledgers so that costs are identified to
specific jobs.
• Ending balance in the Work in Process
Inventory account equals the totals of
costs shown on job order cost cards.
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Computing Product Unit Costs
• Product unit cost in a job order
system is calculated by:
1. Totaling all manufacturing costs
accumulated on a particular job
order cost card.
2. Dividing total manufacturing costs
by the number of units produced
for that job.
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Discussion
Q. The Job Order Cost Card
provides space for what three
kinds of costs?
A. 1. Direct Materials.
2. Direct Labor.
3. Manufacturing Overhead.
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Job Order Costing in a Service
Organization
OBJECTIVE 5
Apply job order costing to a service
organization.
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38
Job Order Cost Card - Service Organization
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39
Job Order Costing in a Service
Organization
• In service organizations, costs are not
associated with a product that can be
assembled, stored and valued.
• Services cannot be held in inventory.
• The most important cost is labor, which is
carefully tracked.
• Other costs include materials, supplies and
service overhead.
• Cost-plus contracts add a pre-determined
profit to the total costs incurred on the job
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40
Job Order Costing Versus
Project Costing
OBJECTIVE 6
Distinguish between job order
costing and project costing.
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41
Project Costing
Projects are complex, multidisciplinary
approaches to the production of goods
and services. Examples: building
construction, software development.
Project Costing links many different job
orders and processes by transferring
costs from one job or process to another.
Costs are accumulated and summarized
in various ways to provide internal
controls.
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OK, LET’S REVIEW . . .
1. Discuss the role information about costs
plays in the management cycle and
explain why product unit cost is
important.
2. Distinguish between the different types
of product costing systems and identify
the information each provides.
3. Explain the cost flow in a job order
costing system for a manufacturing
company.
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43
AND FINALLY . . .
4. Prepare a job order cost card
and compute a job order’s
product unit cost.
5. Apply job order costing to a
service organization.
6. Distinguish between job order
costing and project costing.
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44