Job Order Costing
Chapter 17
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Learning Objectives
1. Describe cost accounting systems used by
manufacturing businesses.
2. Describe and illustrate a job order cost
accounting system.
3. Describe the use of job order cost
information for decision making.
4. Describe the flow of costs for a service
business that uses a job order cost
accounting system.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 1
Describe cost
accounting systems
used by
manufacturing
businesses.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Cost Accounting Systems Overview
 Cost accounting systems measure, record,
and report product costs. The two main
types of cost accounting systems for
manufacturing are:
1. Job order cost systems
2. Process cost systems
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LO 1
Cost Accounting Systems Overview
 A job order cost system provides product
costs for each quantity of product that is
manufactured.
 Each quantity of product that is
manufactured is called a job.
 Manufacturers that use a job order cost
system are sometimes called job shops.
 Examples: an apparel manufacturer, such
as Levi Strauss & Co, or a guitar
manufacturer like Washburn Guitars
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LO 1
Cost Accounting Systems Overview
 A process cost system provides product
costs for each manufacturing department
or process.
 Process cost systems are often used by
companies that manufacture units of a
product that are indistinguishable from
each other and are manufactured using a
continuous production process.
 Examples: Oil refineries, paper producers,
chemical processers, and food processors
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Learning Objective 2
Describe and
illustrate a job order
cost accounting
system.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Job Order Cost System for Manufacturing
(continued)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Job Order Cost System for Manufacturing
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Job Order Cost System for Manufacturing
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Materials
 The materials account in the general ledger
is a controlling account. A separate
account for each type of material is
maintained in a subsidiary materials ledger.
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LO 2
Materials
 The receiving report and the invoice
are used to record the receipt of the
merchandise and to control the
payment for purchased items.
Receiving
Report
No. 196
Supplier
Invoice
$10,500
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LO 2
Materials
a.
To Materials Requisitions
To Materials Requisitions
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(continued)
LO 2
Materials
From Materials Ledger Account
b.
b.
b.
b.
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LO 2
Materials
 A receiving report is prepared when
materials that have been ordered are
received and inspected.
Receiving
Report
No. 196
750 units of
No. 8 Maple
Wood
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Supplier’s
Invoice
$10,500
LO 2
Materials
If there are no discrepancies, a journal entry is
made to record the purchase.
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LO 2
Materials
The storeroom releases materials to use in
manufacturing when a materials requisition is
received. A materials requisition for Job No. 71 is
shown below.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Materials
For direct materials, the quantities and amounts from
the materials requisitions are posted to job cost
sheets. Job cost sheets make up the work in
process subsidiary ledger. Job No. 71 is shown
below.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Materials
A summary of the materials requisitions is used as
a basis for the journal entry recording the materials
used for the month.
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LO 2
Factory Labor
When employees report for work, they may
use clock cards, in-and-out cards, or
electronic badges to clock in. When
employees work on an individual job, they
use time tickets.
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LO 2
Factory Labor
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Factory Labor
A summary of the time tickets is used as the basis
for the journal entry recording direct labor for the
month.
(continued)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Factory Labor
(concluded)
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LO 2
Factory Overhead Cost
 Factory overhead costs come from a
variety of sources including the following:
 Indirect materials comes from a summary
of materials requisitions.
 Indirect labor comes from the salaries of
production supervisors and the wages of
other employees such as janitors.
 Factory power comes with the utility bills.
 Factory depreciation comes from
Accounting Department data.
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LO 2
Factory Overhead Cost
Legend Guitars incurred $4,600 of overhead in
December. The $500 of materials consisted of
$200 of glue and $300 of sandpaper.
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LO 2
Allocating Factory Overhead
 The process by which factory overhead or
other costs are assigned to a cost object,
such as a job, is called cost allocation.
 The factory overhead costs are allocated to
jobs using a common measure related to
each job. This measure is called an activity
base, allocation base, or activity driver.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Predetermined Factory Overhead Rate
 Factory overhead costs are normally
allocated or applied to jobs using a
predetermined factory overhead rate. The
predetermined factory overhead rate is
computed as follows:
Predetermined Factory
=
Overhead Rate
Estimated Total
Factory Overhead Costs
Estimated Activity Base
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LO 2
Predetermined Factory Overhead Rate
Legend Guitars estimates the total factory overhead
cost as $50,000 for the year and the activity base
as 10,000 direct labor hours.
Predetermined
Factory
=
Overhead Rate
Predetermined
Factory
=
Overhead Rate
Estimated Total Factory Overhead Costs
Estimated Activity Base
$50,000
10,000 direct labor hours
Predetermined
Factory
= $5 per direct labor hour
Overhead Rate
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LO 2
Applying Factory Overhead
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LO 2
Applying Factory Overhead
Using a factory overhead rate of $5 per direct
labor hour, $4,250 of factory overhead is applied
as follows:
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LO 2
Applying Factory Overhead
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LO 2
A Closer Look at Job 72
On December 26, 2012, S. Andrews spent eight
hours on Job 72 at an hourly rate of $15 for a
cost of $120 (8 hrs. x $15). A total of 500 hours
was spent by all employees who worked on Job
72 during December, for a total cost of $7,500.
(continued)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
A Closer Look at Job 72
December Job
72 (500 hours)
for a total cost
of $7,500
to Job Cost Sheet
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
A Closer Look at Job 72
from
materials
from time
requisitions
500
hrs. x
tickets
$5
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Applying Factory Overhead
 The factory overhead account is:
1. Increased (debited) for the actual
overhead costs incurred.
2. Decreased (credited) for the applied
overhead.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Applying Factory Overhead
 If the applied overhead is less than the
actual overhead incurred, the debit
balance is called underapplied factory
overhead or underabsorbed factory
overhead.
 If the applied overhead is more than the
actual overhead incurred, the credit
balance is called overapplied factory
overhead or overabsorbed factory
overhead.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Applying Factory Overhead
The factory overhead account for Legend Guitars
shown below illustrates both underapplied and
overapplied factory overhead.
(continued)
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LO 2
Applying Factory Overhead
Underapplied balance
Overapplied balance
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LO 2
Disposal of Factory Overhead Balance
 If there is an ending debit balance
(underapplied overhead) in the factory
overhead account, it is disposed of by the
entry shown below.
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LO 2
Disposal of Factory Overhead Balance
 If there is an ending credit balance
(overapplied overhead) in the factory
overhead account, it is disposed of by the
entry shown below.
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LO 2
Disposal of Factory Overhead Balance
The journal entry to dispose of Legend Guitars’
December 31, 2012, underapplied overhead
balance of $150 is as follows:
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LO 2
Work in Process
 During the period, Work in Process is
increased (debited) for the following:
 Direct materials cost
 Direct labor cost
 Applied factory overhead cost
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LO 2
Work in Process
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LO 2
Work in Process
During December, Job 71 was completed. Upon
completion, the product costs are totaled. The
job’s total cost of $10,250, divided by the 20 Jazz
Series guitars produced as Job 71, provides a unit
cost of $512.50. Job 71 is transferred from
production to finished goods inventory by the
following entry:
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LO 2
Finished Goods
The Finished Goods account is a controlling
account for the subsidiary finished goods ledger,
or stock ledger.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Sales and Cost of Goods Sold
During December, Legend Guitars sold 40 Jazz
Series guitars for $850 each, generating total
sales of $34,000 ($850 x 40). Exhibit 7 (previous
slide) indicates that the cost per guitar sold was
$500 or a total cost of $20,000 ($500 x 40).
Two entries are required, one for the sale and
one to record the cost of goods sold and to
reduce the Finished Goods account.
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LO 2
Sales and Cost of Goods Sold
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LO 2
Period Costs
 Period costs are used in generating revenue
during the current period, but are not
involved in the manufacturing process. They
are recorded as either selling or
administrative expenses.
 Selling expenses are incurred in marketing
and delivering the product.
 Administrative expenses are incurred in
managing the company, but are not
related to the manufacturing or selling
functions.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Summary of Cost Flows for Legend Guitars
Costs & Expenses
Product Costs
Balance Sheet
Materials
Purchases
Materials
Inventory
Direct
Labor
Factory
Overhead
Work in
Process
Inventory
Finished
Goods
Inventory
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Cost of goods
manufactured
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(a)
10,500
Factory Overhead
Dec. 1
Work in Process
200
Dec. 1
3,000
Credit Accounts
Payable, $10,500
Glue
Dec. 1
200
Sandpaper
Dec. 1
a. Materials purchased
during December
300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
Factory Overhead
13,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Dec. 1
Work in Process
200
Dec. 1
(b)
3,000
13,000
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
60 Units of American Series Guitars, Job 72
b. Materials requisitioned to jobs
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
Factory Overhead
13,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Dec. 1
Work in Process
200
Dec. 1
(b)
3,000
13,000
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
(b) Direct materials
2,000
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
60 Units of American Series Guitars, Job 72
(b) Direct materials
11,000
b. Update job cost sheets
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
Factory Overhead
13,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Dec. 1
Work in Process
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Credit Wages
Payable, $11,000
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
c. Factory labor used in
production of jobs
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
Factory Overhead
13,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Dec. 1
Work in Process
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
(b) Direct materials
2,000
(c) Direct labor
3,500
Glue
Dec. 1
200
60 Units of American Series Guitars, Job 72
(b) Direct materials
11,000
(c) Direct labor
7,500
Sandpaper
Dec. 1
300
c. Update the job cost sheets
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
(d)
500
Dec. 1
Work in Process
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Glue
Dec. 1
200
Sandpaper
Dec. 1
300
d. Factory overhead
incurred in production
(indirect materials
used, $500)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
10,500
Glue
Dec. 1
200
Sandpaper
Dec. 1
(d)
(d)
500
900
Dec. 1
Work in Process
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
credit Utilities Payable, $900
d. Factory overhead
incurred in production
(utility bill, $900)
300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
200
Sandpaper
Dec. 1
500
900
1,200
Dec. 1
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
credit Accumulated
Depreciation, $1,200
10,500
Glue
Dec. 1
(d)
(d)
(d)
Work in Process
300
d. Factory overhead
incurred in production
(depreciation on factory
machinery, $1,200)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000
(b)
13,000
(a)
200
Sandpaper
Dec. 1
500
900
1,200
2,000
Dec. 1
200
Dec. 1
(b)
(c)
3,000
13,000
11,000
credit Wages
Payable, $2,000
10,500
Glue
Dec. 1
(d)
(d)
(d)
(d)
Work in Process
d. Factory overhead
incurred in production
(indirect labor, $2,000)
300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
e. Factory overhead
is applied to jobs
according to the
predetermined
overhead rate
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000 (b)
13,000
(a)
10,500
Glue
Dec. 1
200
(d)
300
(d)
500 Dec. 1
900 (e)
1,200
2,000
200
4,250
Dec. 1
(b)
(c)
(e)
3,000
13,000
11,000
4,250
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
(b) Direct materials
2,000
(c) Direct labor
3,500
(e) Factory overhead
1,750
200
60 Units of American Series Guitars, Job 72
(b) Direct materials
11,000
(c) Direct labor
7,500
(e) Factory overhead
2,500
Sandpaper
Dec. 1
(d)
(d)
(d)
(d)
Work in Process
300
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000 (b)
13,000
(a)
10,500
(d)
(d)
(d)
(d)
500 Dec. 1
900 (e)
1,200 (f)
2,000
Work in Process
200
4,250
150
Dec. 1
(b)
(c)
(e)
3,000
13,000
11,000
4,250
debit Cost of
Goods Sold, $150
Glue
Dec. 1
200
(d)
200
f. Closed underapplied factory
overhead to cost of goods sold
Sandpaper
Dec. 1
300
(d)
300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000 (b)
13,000
(a)
10,500
Glue
Dec. 1
200
(d)
200
Sandpaper
Dec. 1
300
(d)
300
(d)
(d)
(d)
(d)
500 Dec. 1
900 (e)
1,200 (f)
2,000
200
4,250
150
Work in Process
10,250
Dec. 1
3,000 (g)
(b)
(c)
(e)
13,000
11,000
4,250
Job Cost Sheets
20 Units of Jazz Series Guitars, Job 71
Dec. 1
3,000
(b) Direct materials
2,000
(c) Direct labor
3,500
(d) Factory overhead
1,750
10,250
g. Job 71 completed in December
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Materials
Dec. 1 6,500
(a)
10,500
(b)
(d)
Factory Overhead
13,000
500
(d)
(d)
(d)
(d)
500 Dec. 1
900 (e)
1,200 (f)
2,000
200
4,250
150
Materials Ledger
No. 8 Wood—Maple
Dec. 1
6,000 (b)
13,000
(a)
Work in Process
10,250
Dec. 1
3,000 (g)
(b)
(c)
(e)
13,000
11,000
4,250
Finished Goods
Dec. 1
(g)
20,000
10,250
10,500
Glue
Dec. 1
200
(d)
200
Finished Goods Ledger
Jazz Series Guitars
Dec. 1
(g)
Sandpaper
Dec. 1
300
(d)
20,000
10,250
300
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Work in Process
10,250
Dec. 1
3,000 (g)
(b)
(c)
(e)
Cost of Goods Sold
(f)
150
13,000
11,000
4,250
Finished Goods
Dec. 1
(g)
20,000
10,250
Finished Goods Ledger
Jazz Series Guitars
Dec. 1
(g)
20,000
10,250
h. Sold 40 units of
Jazz Series guitars
on account
Accounts Receivable XXX
Sales
XXX
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
Work in Process
10,250
Dec. 1
3,000 (g)
(b)
(c)
(e)
13,000
11,000
4,250
Cost of Goods Sold
(f)
(i)
150
20,000
Finished Goods
Dec. 1
(g)
20,000 (i)
10,250
20,000
i. Cost of 40 units of Jazz
Series guitars sold
Finished Goods Ledger
Jazz Series Guitars
Dec. 1
(g)
20,000 (i)
10,250
20,000
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 2
Summary of Cost Flows for Legend Guitars
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(concluded)
LO 2
Summary of Cost Flows for Legend Guitars
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 3
Describe the use of
job order cost
information for
decision making.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Job Order Costing for Decision Making
 A job order cost accounting system
accumulates and records product costs by
jobs. The resulting total and unit product
costs can be compared to similar jobs,
compared over time, or compared to
expected costs.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Job Order Costing for Decision Making
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 4
Describe the flow of
costs for a service
business that uses a
job order cost
accounting system.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Job Order for Professional Services
 Since the “product” of a service business is
service, management’s focus is on direct
labor and overhead costs.
 A job cost sheet is used to accumulate the
costs for each client’s job. When the job is
completed and the client billed, the costs
are transferred to a cost of services
account.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Job Order for Professional Services
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Job Order Costing
The End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.