ACCOUNTING UNIT 2
MODULE 2: COSTING SYSTEMS
TOPIC: JOB ORDER COSTING
Cost accounting includes the collection, measuring and reporting of the costs of a product. The
product may be an item or batch of anything produces, a job performed or a service provided.
A costing system is the technique used in identifying, collecting and presenting the costs
associated with manufacturing of the product, performing the job or providing the service.
Before products can be costed, a determination must be made about the product costing system
and the valuation method to be used.
Costing Systems include:



Job Order costing
Process Costing
Activity Based Costing
Job order costing is a system of allocating costs to a particular job or batch of products. It is
used by companies where products are identifiable by individual units or batches rather than on
continuous basis. Examples include: auto repair, building houses, case in an attorney’s office,
auditing a client’s book. The costs attributable to certain job are assigned directly to it.
Costs are accumulated individually by job in a job order product costing system. Therefore, each
job is treated as a unique cost object.
Features of Job Order costing or Batch costing

It is used when finished product is separate and readily identifiable as a unit or as
batches.

It provides a separate record of the cost of each particular quantity of product that passes
through the firm.

The key elements of costs collected are direct material, direct labour and manufacturing
overheads.

The source documents used are material requisition forms, labour time tickets, or time
cards and predetermined overhead rates.

The summary of job costs is collected in a job cost sheet.
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
It flows through a series of accounts: manufacturing cost → work in process inventory
→ finished goods inventory → cost of goods sold inventory.
Accounting for cost flows
A job cost flow follows the movement of costs through different stages of production. It
highlights the accumulation of costs as:






Raw materials purchased
Factor labour costs are incurred
Manufacturing overheads incurred
The work in process inventory
The finished goods inventory
The cost of goods sold account.
Accounting for materials
When an agreement has been made between a manufacturer and a customer regarding the
quantities, prices and delivery of an order, a production order is issued. The production
department then prepares a material requisition.
Source documents used in a manufacturing environment are:

Material requisition form – is a source document that indicates the types and quantities of
materials to be placed into production or used in performing a service. It causes materials
and their costs to be released from the raw material inventory warehouse and sent to
work-in-process inventory. Completed material requisition forms provide the ability to
verify the flow of materials from the warehouse to the department and job that received
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the materials. They are usually pre-numbered and come in multiple sets so that
completed copies can be maintained in the warehouse and the department for each job.

Purchase requisition – is a source document that is issued by the production department
request of materials to be ordered

Purchase order – is a source document that is issued by the purchasing department to
suppliers.

Receiving report – is a source document that is used to record the receipts of materials
that were ordered.
Material control account in the general ledger
A separate account for each type of material is maintained in a subsidiary ledger. This is called
the material ledger. Information on the quantity and cost of materials received are recorded in the
material ledger on the basis of the receiving reports or purchase invoices.
Materials are transferred from the store-room to the factory in response to material requisitions.
Material costs are released from raw materials inventory – materials that are direct to the job are
sent to work-in-process inventory, while indirect materials are assigned to the manufacturing
overhead account.
Example
1. (i) On May 1, Been Manufacturing Co. had $70 000 in raw materials on hand. During
the month the company purchased an additional $60 000 in raw materials on account.
Prepare the necessary journal entry for the recording of the purchase of raw materials.
Been Manufacturing Co.– The Journal
Debit
Raw material inventory
Credit
$60 000
Accounts Payable
$60 000
To record the purchase of raw materials
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(ii)
During May, $45 000 in raw materials were requisitioned from the storeroom for use
in production. These materials included $40 000 worth of direct materials and $5000
of indirect materials.
Show the journal entry for raw materials issued to production.
The Journal
DEBIT
Work-in-process inventory
Manufacturing overhead
CREDIT
$40 000
$5 000
Raw material inventory
$45 000
2. The following information was extracted from the records of TriCo.
(a) Purchased raw material on account, $86 000.
(b) Requisitioned raw material for production as follows: direct material – 80% of
purchases; indirect material – 15% of purchases.
Prepare the necessary journal entries.
Accounting for Labour
Factory labour is intangible and cannot be acquired and stored in advance of its use. Therefore
there is no perpetual inventory account for labour. There are two main objectives in accounting
for labour:
1. Determination of the correct amount to be paid each employee for each payroll period.
2. Appropriate allocation of labour costs to factory overhead and individual job orders.
The amount of time spent by an employee in the factory is usually recorded on time sheets or
clock cards.
The amount of time spent by each employee and the labour cost incurred for each job or for
factory overheads are recorded on time tickets.
An employee’s time sheet is a source document that shows for each worker the jobs worked on
during the day and the amount of labour time consumed. Information regarding employee labour
rate is required in transferring employee time sheet information to the job order cost sheet. Time
sheet information is also used for payroll preparation.
The times reported on an employee’s time tickets are compared with the related clock cards as an
internal check on the accuracy of payroll disbursements. Summary of time tickets at the end of
each month serve as the basis for recording the direct and indirect labour cost.
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Labour cost is charged to the work-in-process account and is recorded on the appropriate job cost
sheet.
Journal entry for labour
Examples
1. During July Kool Manufacturing Inc, wages were computed using the time sheet
information and determined that $70 000 of the payroll costs were for direct labour and
$12 000 were indirect labour costs.
Prepare the necessary journal entry for direct and indirect labour used in production.
The Journal
Debit
Credit
Work-in-process inventory $70 000
Manufacturing overhead
$12 000
Wages payable
$82 000
2. During the month of October the following information complied by the cost accountant
at TriCo revealed that direct labour wages of $33 100 are accrued as are indirect labour
wages of $12 500. Show the necessary journal entry.
Debit: Work-in-process inventory $33 100
Manufacturing overhead $12 500
Credit: Wages Payable
$45 600
Cost Tracing vs Cost Allocation
In job order costing, some costs can be traced directly to the cost objects while other costs have
to be applied or allocated to the cost object using some activity base.
Accounting for manufacturing overhead
Manufacturing overhead includes all manufacturing costs, except direct materials and direct
labour. Although overheads cannot be specifically identified with particular jobs, it is as much a
part of manufacturing costs as direct materials and labour.
Journal entry to record overhead
Debit – manufacturing overhead
Credit – accounts payable
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Example
Peyton Inc incurred the following general factory cost during October.
$
Utilities
Rent on factory equipment
Indirect materials
Miscellaneous factory costs
Total
30 000
15 000
5 000
3 000
53 000
(a) Prepare the journal entry to record the incurrence of these costs.
Debit: Manufacturing overhead $53 000
Credit: Accounts payable
$53 000
(b) In addition, the company recognized $15 000 in depreciation on its factory equipment.
Show the necessary journal entry.
Debit: Manufacturing overhead $15 000
Credit: Accumulated depreciation $15 000
Application of manufacturing Overhead
The factory overhead rate is determined by relating the estimated amount of manufacturing
overhead to some activity base. The common bases include: direct labour cost, direct labour
hours, and machine hours.
Cost Allocation vs Cost Apportionment
Cost allocation refers to the sharing of the full cost to a cost centre. The cost is divided but the
full amount is allocated to the department, for example, allocating maintenance cost to the
maintenance department. Cost apportionment, on the other hand, is where the cost is shared
among cost centres using equitable basis. For example, to assign the rent cost on the basis of
floor area occupied.
Equation used to allocate overhead cost in the job order costing system
Predetermined Overhead Rate (POHR) = Estimated Overhead during period
Estimated Activity Level during period
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Allocation of Manufacturing Overhead Costs
As factory overhead costs are incurred, they are debited to the manufacturing overhead account.
The manufacturing overhead costs applied to production are periodically credited to the
manufacturing overhead account and debited to the work-in-progress account.
Example
1. During the month of May the following information complied by the cost accountant at
TriCo revealed that direct labour wages of $33 100 are accrued as indirect labour wages
of $12 500. Manufacturing overhead incurred and paid for is $66 900. Overhead is
applied to production based on 110% of direct labour cost.
Prepare the necessary journal entries for manufacturing overhead.
(i)
Journal entry to record manufacturing overhead
Debit: Manufacturing overhead $66 900
Credit: Cash/bank $66 900
(ii)
Debit: Working-in-process inventory (110% of $33 100) $36 410
Credit; Manufacturing overhead $36 410
2. Lyn Manufacturing Company uses a job order costing system and keeps perpetual
inventory records. Prepare journal entries to record the following transactions during the
month of May.
May 1
Purchased raw materials for $25 000 on account.
Debit: Raw material inventory $25 000
Credit: Accounts payable
May 8
$25 000
Raw materials requisitioned by production:
Direct materials
$6 000
Indirect materials
$1 000
Debit: Work-in-process inventory $6 000
Manufacturing overhead
$1 000
Credit: Raw material inventory $7 000
May 15
Paid factory utilities, $2100 and repairs for factory equipment, $3 000.
Debit: Manufacturing overhead $5 100
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Credit: Cask/Bank
May 25
$5 100
Time tickets indicated the following:
Direct labour 4000 hrs x $12 per hr = $48 000
Indirect labour 3 000 hrs x $8 per hr.
24 000
$72 000
Debit: Work-in-process inventory $48 000
Manufacturing overhead $24 000
Credit Wages payable
$72 000
Ledger (T Accounting) for the flow of costs
Raw material inventory
Balance b/d
Material purchases
XX
XX
XX
Material used
Balance c/d
XX
XX
XX
Balance b/d
Direct Labour/Wages
Direct labour
XX
Factory labour used
XX
Manufacturing overheads
Factory supplies
Indirect labour
Depreciation/power /etc
Overhead applied
XX
XX
XX
XX
XX
Overhead applied
XX
XX
Costs are then transferred to the Work in Process Inventory:
Work in process inventory
Direct material
Direct labour
Factory overheads
XX Completed
XX Unfinished
XX
XX
XX
XX
XX
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From the work in process inventory, job costs are then transferred on completion to the finished
goods inventory, and finally to the cost of goods sold inventory when the product or batch is
sold.
Finished goods inventory
Work in process
Cost of goods sold
Cost of goods sold
Finished goods
The Job Cost Sheet
This is a source document that provides practically all the financial information about a
particular job. The set of all job order cost sheets for uncompleted jobs composes the work-inprocess inventory subsidiary ledger. In Job order costing each job has its own job cost sheet. As
entries are made to the work-in-process account, an entry is made in the particular job cost sheet.
Features of Job Order Cost Sheet is shown below; however in answering questions which require
a job cost sheet only the section relating to Direct materials, direct labour and Production
overheads is presented.
ABC Manufacturing Company
Job Order Cost Sheet for Job XYZ
Department A
Department B
Direct Material
Direct Labour (@$6.50
Manufacturing O/H
Total cost
XX
XX
XX
XX
XX
XX
XX
XX
Total
XX
XX
XX
XX
Questions
9
1. Akupa Engineering Ltd is asked to provide information in relation to the supply of a
replacement motor for a standby generator at a local factory. The motor will need to be
passed through the machining department, the assembly department and the finishing
department.
JOBY152
Material required will be:
-
Iron 280kg at $52.50 per kg
Zinc 195 kg at $36.80 per kg
Copper 209 kg at $28.95 per kg
Direct labour required will be:
-
Machining department 80 hours at $450 per hour
Assembly department 336 hours at $360 per hour
Finishing department 184 hours at 280 per hour
Production overhead is charged on the following basis:
(i)
$245.00 per machine hour in machining department
$384.00 per labour hour in the assembly department
$4.06 per labour hour in finishing department
The profit margin is 25%
Prepare the job cost sheet for Akupa Engineering Ltd.
[12 marks]
Akupa Engineering Ltd
Job Order Cost Sheet for Job Y152
Direct materials: Iron
Zinc
Copper
Working
280kg x $52.50 per kg
195kg x $36.80 per kg
209kg x $28.95 per kg
Y152 ($)
14 700.00
7 176.00
6 050.55
Direct Labour: Machining
Assembly
Finishing
80 hrs x $450
336 hrs x $360
184 hrs x $ 280
36 000.00
120 960.00
51 520.00
Production overhead:
Machining
Assembly
Finishing
Total Cost
80 hrs x $245
336 hrs x $384
184 hrs x $4.06
19 600.00
129 024.00
747.04
Total ($)
27 926.55
208 480.00
149 371.04
385 777.59
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(ii)
Calculate the quotation price for the job.
[3 marks]
Calculation of quotation price for JobY152
Given that:
Profit margin = 25%
Sales = 100%
CP = 75% ($385 777.59)
75% of SP = $385 777.59
This implies that:
Quotation price (SP) = Cost of the Job
75%
= $385 777.59
0.75
= $514 370.12
2. Better Quality furniture store received an order to manufacture desk for a school the
order was assigned a JOB#BF6. BF6 was priced at $400 000 and selling and
administration cost allocated to the job was 10% of selling price.
MATERIAL REQUISITION
Date
May 5
May 15
May 25
Requisition No.
978
1060
1100
Cost ($)
25 000
50 000
40 000
JOB TIME SHEET
Date
Hours
Rate
Cost
May 5
400
50.00
20 000
May 15
400
50.00
20 000
May 25
200
50.00
10 000
Total
1000
50 000
Factory overhead is applied at $180 per direct labour hour.
Required: Prepare a Job Order Cost Sheet for JOBBF6
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3. Bold Company makes customer bikes. It incurred the following costs for the just
completed job B011. 500 pounds of direct materials were used at a cost per pound of
$25. The job cost sheet indicates that a total of 90 direct labour-hours incurred on job
B011. The workers were paid at a rate of $18 per hour. The company applies overhead
based on machine hours. At the beginning of the year, it was estimated that the total
amount of overhead would be $180,000 and a total of 30,000 machine hours would be
incurred. Job B011 required 150 machine hours.
Prepare the cost sheet for B011.
Solution
Step 1: Calculate the POAR
POAR = Estimated overhead ÷ Machine hours
= $180 000 ÷ 30 000 Mach. Hrs
= $6 per mach. hr.
Bold Company
Direct Materials
Direct Labour
Overhead applied
Total Job cost
Job Cost Sheet – JobB011
$
$
500 lbs x $25
12 500.00
90 hrs x $18
1 620.00
150 hrs x $6
900.00
15 020.00
4. Wharfe Company manufactures custom-built furniture for residential and commercial
clients. Lisa Entage is the cost accountant for Wharfe Company and she is in the process
of educating a new employee, Julie English, about the job order costing system that
Wharfe Company uses. (The system is based on normal costs; overhead is applied
based on direct labour cost and rounded to the next whole dollar). Lisa gathers the
following job order cost records for May:
Job no.
667
Direct
Direct labour
Applied
Total cost
materials ($)
overhead
5 901
1 730
1 990
9 621
12
669
670
671
672
18 312
406
51 405
9 615
1 810
500
9 500
550
2 082
575
10 925
633
22 204
1 481
71 830
10 798
To explain the missing job number, Lisa informed Julie that JOB #668 had been completed in
April. She also told her that Job #667 was the only job in process at the beginning of May. At
that time, the job has been assigned $4 300 for direct material and $900 for direct labour. At the
end of May, Job#671 had not been completed, all others had. Lisa asked Julie several questions
to determine whether she understood the job order system.
Required:
a) What is the predetermined overhead rate used by Wharfe Company
POAR = Estimated overhead ÷ Base
= ($1 990 ÷ $1 730) x 100
= 1.15 x100
= 115% of direct labour cost
b) What was the total cost of beginning Work-in process inventory?
Calculation of total cost of beginning WIP
Total Cost of WIP
Direct material
Direct labour
$
4 300
900
Factory overhead (115% x $900)
1 035
WIP at beginning
6 235
c) What was total prime cost incurred for the month of May?
Calculation of prime cost
Prime cost = Direct Material + Direct Labour
($85 639 - $4 300) + ($14 090 - $900)
= $81 339 + $13 190
= $94 529
d) What was cost of goods manufactured for May?
Cost of Goods manufactured = $9 621 + $22 204 + $1 481 + $10 798
= $44 104
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e) What is the cost of ending work-in-process inventory?
Cost of ending WIP inventory
Ending WIP inventory
Direct material
Direct labour
Factory overhead
$
51 405
9 500
10 925
71 830
Required: Determine the total cost assigned to Job B011
Over and Under- Absorption of Overhead
Manufacturing overhead costs applied and actual manufacturing overhead costs incurred during
a particular period will differ. If the amount applied exceeds the actual costs, the manufacturing
overhead account will have a credit balance and the overhead is over-applied or over absorbed.
If the amount applied is less than the actual costs, the account will have a debit balance and the
overhead is under-applied or under absorbed.
Questions
1. Kaybee Toys uses a predetermined overhead rate based on direct labour hours to apply
manufacturing overhead to jobs. Use the following data to compute under or over
applied overhead:
Estimated overhead
Estimated Direct Labour hours
Actual direct labour hours used
Actual overhead cost incurred
$500 000
40 000
35 000
$450 000
Calculate Under or Over Applied Overhead
Calculation of under or over applied overhead
Step 1: Calculate the POAR
POAR = Estimated overhead ÷ Estimated DLH
= $500 000 ÷ 40 000 DHL
= $12.50 per DLH
Step 2: Use the rate computed in step 1 to multiply the actual hours used
Overhead applied to Job 35 000 hrs x $12.50 = $437 500
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Step 3: We subtract over applied from the actual overhead cost
Actual overhead
Applied overhead
Under applied overhead
$450 000
$437 500
$12 500
2. ABC Company applies manufacturing overhead to job on the basis of machine hours. In
2015, manufacturing overhead costs were expected to total $600 000 and machine usage
was estimated at 130 000 hours.
The manufacturing overhead cost incurred in May 2015 was $60 000 and the number of
machine hours used was 20 000 hours.
(i)
Calculate the pre-determined manufacturing overhead rate for the year.
(ii)
Calculate the under or overhead applied in May 2015.
3. Baker Company uses a job order costing system and applies manufacturing overhead
costs to job using a predetermined overhead rate based on direct labour hours. Last
year’s manufacturing overhead costs and direct labour hours were estimated at
$100 000 and 40 000 hours, respectively, for the year. In July job ABC was
completed, Material costs on the job totalled $8 000 and labour costs were $3 000 at
$5 per hour. At the end of the year, it was determined that the company worked
34 000 direct labour hours for the year and incurred $80 000 in actual manufacturing
costs.
Calculate the over or under applied overhead.
4. Hendry Inc. uses a job order costing system and has the following information for
the first week of June 2005:
(i)
Direct labour and direct materials used:
Job No.
498
506
507
508
509
511
512
Total
Direct
Material
($)
1500
960
415
345
652
308
835
5 015
Direct Labour
Hours
116
16
18
42
24
10
30
256
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(ii)
(iii)
(iv)
(v)
(vi)
The direct labour wage rate is $4 per hour.
The overhead rate is $5 per direct labour hour.
Actual overhead costs for the week, $1 480.
Jobs completed: Nos. 498, 506, and 509.
The factory had no work-in-process at the beginning of the week.
(a) Prepare a summary that will show the total cost assigned to each job.
(b) Compute the amount of overhead over or under applied during the week.
(c) Calculate the cost of work-in-process at the end of the week.
Reasons for overhead under absorption or over absorption
1. The actual hours worked is more or less than the budgeted hours.
2. The actual overhead costs are different from budgeted overheads.
3. Both actual overhead costs and actual activity level are different from the budgeted
costs and level.
4. The method of overhead absorption may be wrong.
5. Unexpected expenses may be incurred during the accounting period.
6. Extra ordinary expenses might have been included in the calculation of overhead
absorption rate.
7. Major changes like replacement of manual labour with machines. This leads to increase
in capacity levels.
8. Seasonal fluctuations in the overhead expenses from period to period.
SOURCE DOCUMENTS
16
Time ticket
17
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