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
incurred
 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
formula
 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
estimates.

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
estimated
What our costs will be for overhead
inputs
 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
issue
Overhead: Predetermined
Rates
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
done
 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
jobs.

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
incurred
 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
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:
terminology
Debit balance in overhead account =
underapplied overhead = unfavorable
overhead variance
 Credit balance in overhead account =
overapplied overhead = favorable
overhead variance

Favorable and Unfavorable
Variances

What makes a variance favorable or
unfavorable?

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
prices

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
 WIP
 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
Or
BB xfers in – EB = xfers out
