Chapter 3
Job Order Costing
Review: Control and
Subsidiary Accounts
Most financial statement line items are
totals of multiple lower level accounts
 Subsidiary accounts aggregate to the
total in the control account
 Accounts receivable total might be the
totals from several divisions, each of
which classifies by customer type, and
then by customer
Control and Subsidiary
Accounts: Job order costing
Subsidiary and control accounts are
important for job order costing.
 Costs for each separate job are
accumulated in a subsidiary account
for that job
 Amounts are totaled when preparing
financial statements
Product costing: 2 extremes
Process costing: Large numbers of
identical products.
Total costs for period calculated
 Total production calculated
 Per unit cost calculated
 Costs assigned to accounts based on
number of units at each stage
 Uses “equivalent units”
Product costing: 2 extremes
Job order costing
Each job is different and separate
subsidiary account is set up
 Each job is accounted for individually
 Costs assigned to each job as
 Overhead presents special problems
 At end of period, job costs classified
based on stage of where the job is
Product costing:
hybrid=operation costing
Many processes are a middle ground
Car Manufacturing
 Dell’s computer manufacturing
 Clothing makers
Can be called “operation costing”
 Combines elements of job order and
process costing
Job costing: cost flows
For an individual account
Beg. Balance
 + transfers in
 - transfers out
 = End. Balance
Transfers out for certain accounts =
transfers in for other accounts
Job order costing: basic flow
Set up a subsidiary account in WIP for
each new job as accepted or started
 Add materials and direct labor to this
account as work is done on the job
 Add overhead based on an allocation
 Transfer to finished goods when
complete, than to COGS when sold
Overhead Issues
Determining allocation formula
 Looking for cost driver that reasonably
measures use of overhead resources
 Multiple input formulas possible, but
usually not worth the cost to use
 Process of assigning overhead costs
to specific job involves the use of
Overhead estimates
Would not be needed if could wait till
end of year to assign all overhead
 At that point would know actual costs
and actual production levels
 Relevance is more important that
reliability, thus….
 Use estimates, because more timely,
even though less accurate
Overhead: What must be
What our costs will be for overhead
 How much of certain overhead items
will be used for each job
 What our production level will be
This last is mainly a fixed overhead
Overhead: Predetermined
Estimate overhead input costs,
overhead usage, level of production,
and use of cost driver. (activity level)
 From this calculate a predetermined
rate per unit of cost driver.
 Overhead costs assigned to jobs
based on use of cost driver and
predetermined rate.
e.g. labor hours or machine hours
Effects of using predetermined
overhead rates
Costs assigned to jobs as work is
 Costs won’t be exactly correct
because of use of estimates
 Leads to too much or too little in costs
being assigned
 Adjustment for this must be done at
the end of the year.
Overhead variance
Difference in actual overhead costs
and costs that have been assigned to
At year end, overhead account must
be closed to zero, thus variance must
be closed out
Overhead control account
A cost accumulation account
Overhead costs debited to account as
 Overhead “applied” to jobs recorded
as a credit to control account
• Applied, as jobs completed, and at end of
period for jobs in process
Balance remaining is variance
• This must be closed out at period end
Closing out overhead
Variance represents unassigned (if
debit balance) or over-assigned (if
credit balance) overhead costs
 Debit or credit to zero out, with other
half of entry to either
COGS only
 WIP, Fin. Gds., and COGS (prorate)
Advantages of each?
Overhead Variances:
Debit balance in overhead account =
underapplied overhead = unfavorable
overhead variance
 Credit balance in overhead account =
overapplied overhead = favorable
overhead variance
Favorable and Unfavorable
What makes a variance favorable or
Factors that cause a variance?
Costing Systems
Should product costs be recorded
based on actual expenditures or what
“should have been” spent?
 Stated differently, should “inefficiency”
costs be added to the product or
considered an expense of the period?
3 Costing Systems
Actual: All costs direct and indirect,
added based on actual usage and
actual prices
 Normal: Indirect costs added based
on set prices, typically based on past
long-term averages
 Standard: All costs added based on
standard amounts and standard
Cost of Goods Manufactured
& cost flows
For an individual account
Beg. Balance
 + transfers in
 - transfers out
 = End. Balance
For merchandiser, this appears as: BI
+ Purchases – COGS = EI
COGM & Cost Flow
COGM must show the “flow” for:
Raw Materials
 Finished goods
….and remember:
Flow is same for each
 Xfers out for one is xfer in for next
 WIP has multiple “xfers in”
COGM format issues
Multi-column format
 “Big Picture” down rightmost column
 Go one column to the left to show
detail of an amount
 Can be as many as 4 columns
Final Points: COGM
BB + xfers in – xfers out = EB
Can show this in different ways, eg:
Xfers in + bb – xfers out = EB
BB xfers in – EB = xfers out