CHAPTER 17
Job Order Costing
Chapter 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.
Cost Accounting Systems
INFORMATION
PROVIDED
1. Product costs to be used for
FOCUS
1.
Information to manage
manufacturing operations
pricing and other management
decisions.
2. Inventory and Cost of Goods Sold
balances to be reported on
financial statements.
3. Costs incurred by each
manufacturing department or
process to be used for cost
control.
TYPES OF SYSTEMS
Job Order
Process Cost
1. Provides product costs for each
1. Provides product costs for each
quantity of product that is
manufactured or job.
2. Used by companies that
manufacture custom products for
customers or batches of similar
products.
3. Examples:
manufacturing department or
process.
2. Used by companies that
manufacture units of a product
that are indistinguishable from
each other and are manufactured
using a continuous product
process.
3. Examples:
1.
2.
3.
4.
5.
6.
New construction homes
Replacement windows
Class rings
Business cards
Wedding invitations
Apparel
1.
2.
3.
4.
Oil refineries
Paper producers
Chemical processors
Food processors
Search the Internet for 3 companies that fit into the two categories.
Apply It!
State whether a job order costing system or a process
costing system would typically be used to account for the
costs of the following:
a. Manufacturing golf tees
b. Manufacturing custom-designed fencing for a specific
golf course
c. Providing pet grooming
d. Manufacturing golf balls
e. Manufacturing dog food
f. Providing private golf lessons
Information Needed in a Job Order
System: Documents
• What types of manufacturing information would be
important to track for a company that makes fine jewelry?
Information
Document
Amount of each type of material on hand
Material Ledger
Quantity of material used on each order
Materials Requisition
Labor cost used on each order
Time Tickets
Total cost of making order
Job Cost sheet
Cost incurred on jobs in process
Cost Ledger
Total cost of all completed jobs
Finished Goods Ledger
Materials Ledger
Shows a record of the amount
of each material on hand.
Materials Requisition
Provides authorization for materials to
be released from the inventory storage
area.
Time Tickets
Filled out by
employees, shows
amount of time spent
working on each job
and labor cost.
Job Cost Sheet
Lists materials from requisition form,
labor costs from time tickets and
overhead used on each job.
Cost Ledger (in process)
Job cost sheets for all orders in
process.
Finished Goods Ledger
Job cost sheets for all
finished orders.
Role Play in a Job Order System
• Assume the following positions in the customs order
division of a manufacturer of fine jewelry:
• Production Scheduler
• Purchasing Agent
• Receiving Department
• Storeroom Supervisor
• Skilled Craftsman
• Accountant
You are to answer questions concerning procedures and
documents they would use in your jobs.
The goal of this assignment is to understand the
information needed by various manufacturing personnel
and then attach a name to documents that report that
information.
Production Scheduler: whenever you receive a customer
order you are to schedule when the item will be made. The
company has just received an order to make World Series
rings.
Name the steps that would need to be taken to schedule
the job.
A. Look at other jobs scheduled to see when workers will have time to start this
job.
B. Determine whether the materials are on hand to make the rings.
Purchasing Agent
• What would you do after receiving the purchase
requisition?
• Fill out a purchase order and transmit it to the vendor.
Receiving Department
What would you do when goods are received?
Inspect and count the items
Fill out a receiving report
Take the materials to the storeroom
Storeroom Supervisor
What would you do when the materials are received?
Put them away where they are locked up.
Skilled Craftsman
What will be the labor cost of all orders?
What information do you need?
The time spent working on the order would be recorded on
a time ticket.
Accountant
Determine the cost to make the rings.
Describe how to get the information to determine the cost.
How could you determine the costs spent on jobs that have
been completed?
How could you determine the costs spent on all jobs that
are till being worked on?
Take materials used from the materials requisition and
labor costs from the time tickets along with overhead from
the job cost sheet.
Add up job cost sheets for all finished jobs
Add up the job cost sheets for the jobs still in process
Allocation of Overhead
• Assume you are responsible for planning a banquet for
your school’s accounting club. The banquet will feature a
dinner, followed by a speaker. The cost associated with
the banquet are as follows:
• Meals
• Beverages
• Use of Banquet Room
• Speaker’s Fee
$10 per person
$ 1 per person
$50
$100
traceable cost
traceable cost
allocated cost
allocated cost
Now assume that 50 students will attend the banquet. If
you want to break even on this event, how much do you
need to charge for a ticket?
How much per ticket?
Meals + beverages
=
$11 per person
Allocate room and fee: 50 + 100 = 150/50 students = $3
Ticket cost to break even will be
$11 + $3 = $14 per person
Allocation of Pre-determined Overhead
• Costs of manufacturing a product that cannot be traced to
a specific job are called overhead. You must allocate
these costs to determine what each product costs.
• $1million in overhead expenses
• Machine hours will be a reasonable way to allocate o/h
• Run machines for 40,000 hours during the year.
• Formula to calculate overhead rate is:
Estimated total factory overhead costs
Estimated Activity Base (hours)
Allocation of pre-determined overhead
costs
$1,000,000
40,000 hours = $25/hour of machine time
Now calculate the overhead that would be allocated to a
product that uses 3.5 hours of machine time.
$25 * 3.5 hours = $87.50 This cost will be added to the
product’s materials and labor costs.
Practice Problem
Job WR53 at NW Fab, Inc. required $200 of direct
materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000
and estimated direct labor hours were 20,000. What
would be recorded as the cost of job WR53?
Traceable costs are: $200 direct materials
10 hours @ $15 = $150
$760,000 = $38/hour = $380
20,000 hrs
200
150
380
730
Job Order Costing for Decision Making
• Accumulates and records product costs by jobs.
• Resulting total and unit product costs can be compared to
similar jobs.
• Compare over time
• Compare to expected costs
• Used for cost evaluation and control.
• Let’s view Exhibit 10 and make some decisions.
1. Same type & number of guitars so direct materials cost per unit should be
about the same.
2. Used more materials for Job 54 than Job 63.
Possible Explanations for Differences
1. A new employee not properly trained cut wood for Job
63; thereby causing excess waste and scrap.
2. Wood used for Job 63 was purchased from a new
supplier. Poor quality, creating excessive waste and
scrap.
3. Cutting tools needed repair and were not properly
maintained resulting in excessive waste and scrap.
4. Instructions attached to the job were incorrect. Wood
was cut according to instructions. Result: wood had to
be recut and initial cuttings scrapped.
Flow of Costs for a Service Business
• Can be applied to any organization that needs to
•
•
•
•
determine the cost of its product.
The product is the service provided.
Use by an advertising agency to determine the cost to
produce an ad for a customer
Used by an accountant to determine the cost of preparing
a tax return.
Used by a plumber to determine the cost to clean a drain.