Chapter: 5

Job Order Costing

Product Costing:
Product costing is the process of assigning manufacturing costs (i.e. Direct material, Direct labor and
Factory overhead to the products produced by the company. Product costing system is necessary for
fixation of their products prices.
Two types of systems may be used in manufacturing and service industries for determining the
products costs, but which system to be used, it depends on the types of products/ Industries.
These two systems are as under:

1. Job order Costing system

2. Process Costing system
1. Job order costing system
A Job orders costing system is used in such situations where heterogeneous or much different type of
products are produced simultaneously in each period. Each one must have a separate identification in
terms of units type or Job in each period. Moreover costs are accumulated for each job/product as the
work performs.
In a job order costing system, costs are traced to the each job by allotting an order number to each job
as soon as its production starts and then the costs are accumulated against this order number till the
end. Total accumulated costs of the job are divided by the number of units in the job to arrive at an
average cost per unit.
The manufacturing industries that commonly use Job order costing systems are, Air craft, automobile,
furniture, textile, shipbuilders, Construction Company, etc.
The service sectors may also use Job order costing system. Such as, hospitals, law firms, movie
studios, accounting firms, advertising agencies and repair shops, etc.

2. Process Costing system

A process costing system is used in situations where the company produces homogeneous products or
identical products in bulk quantities on continuous basis for a long period of time. Process costing is
basically used in companies that convert basic raw materials into homogenous products (Liquid or
Powder) or identical products.
In process costing system the costs are accumulated departmental/ process wise for the period rather
Job order wise. Job order wise cost accumulation is not possible in process costing system; products
are products are homogeneous or identical in nature.
The industries that commonly use process costing systems are as under:
Oils, Chemicals, cement, petroleum, beverage, paper etc industries.
In this chapter we will discuss only job order costing system in detail

Page 1 of 5

1. Job order costing system

Documents used in Job order costing system:
Following documents are used in job order costing system:
i). Material Requisition Form
ii). Time Ticket
iii). Job order Cost sheet

i). Material Requisition Form

A material requisition form is a document that specifies the type and quantity of material to be drawn
from the store. It also indicates the job number that will be charged with the cost of material.

ii). Time Ticket

The time ticket is a document that specifies hour by hour summary of the direct workers activities
through out the day.

iii). Job order Cost sheet

A job order cost sheet is a form prepared for each job. We record in job order cost sheet date wise
direct material consumption, direct labor and factory overhead applied through material requisition
form and time ticket. This control document serves two purposes:
a). Job order wise cost sheet.
b). It is subsidiary ledger for control account.i.e. Departmental total expenses.
The format of Job order cost sheet may be the following, please see on next page
ABC Company
Job order cost sheet
Job order number: 210
Date started: 10/12/2015
product: Sleeves of Alto Car
Date finished: 15/12/2015
Direct material:
Dated
Requisition #
10/12/2015
110
15/12/2015
130
Total direct material cost
Direct labor:
Dated
Time ticket #
10/12/2015
1112
15/12/2015
1126
Total direct labor cost
Factory overhead:
Dated
Total hours worked* FOH Rate
15/12/2015, Total FOH cost: 250 hours* Rs15
Total cost

Amount/Rs
3,100
3,700
6,800
Amount/Rs
2,900
3,650
6,550
Amount/Rs
3,750
Rs17,100
=======
20 units
Rs 855

Number of pieces
Cost per unit

..
Page 2 of 5

General entries in job order cost sheet:

The following accounting entries are necessarily required to run successfully job order costing system.
These are as under:
1. Journal entries for Raw materials (direct and indirect materials).
2. Journal entries for labor (direct and indirect labor).
3. Journal and closing entries for factory overhead [Other than indirect material and indirect
labor (Actual and applied)
4. Journal entries for finished goods inventory completed.
5. Journal entries for finished goods inventory sold.

1. Journal entries for raw materials (direct and indirect materials).

When material is purchased

Raw Materials inventory
Accounts payable ..
[To record purchase of raw materials on account]

When raw material is issued to production

Work in process inventory .
Factory overhead ..
Raw Materials

xx
xx

xx
xx
xx

[To record issuance of direct and indirect material issued to production)

2. Journal entries for labor cost for both direct and indirect labor
Work in process ..
Factory overhead
Income taxes payable .
Wages payable

xx
xx
xx
xx

(To record direct and indirect labor cost)

3. Journal entries and closing entries for factory overhead

General Entries for factory overhead are made in two phases:
(a).When actual factory over head is recorded (Other than indirect material and indirect labor)
Factory overhead control
A/C payable or Cash
Accumulated depreciation

xx
xx
xx

(To record actual factory overhead incurred)

Page 3 of 5

(b). When factory overhead is applied to production

Work in process .
xx
Factory overhead control
xx
(To record applied Factory overhead)
Or, above (b) entry may be made alternatively, in case factory overhead applied account
is also maintained along with the factory overhead control account
Work in process .
xx
Factory overhead applied
xx
(To record applied Factory overhead)
Factory overhead applied .
xx
Factory overhead control
xx
(To record transfer of Factory overhead Applied to Factory overhead control)

Closing entries to close factory overhead control account at month end

Case #1: If factory overhead is under applied
Cost of goods sold
Factory overhead head control

xx
xx

Case 2: If factory overhead is over applied

Factory overhead head control
Cost of goods sold ..

xx
xx

4. Journal entries for finished goods inventory completed.

Finished goods .
xx
Work in process .
xx
(To record finished goods inventory completed)

5. Journal entries for finished goods inventory sold.

When cost of goods sold is recorded

Cost of goods sold .
xx
Finished goods .
(To record cost of goods sold)

When sale is recorded

Accounts Receivable or Cash
Sale ..
(To record sales)

xx

xx
xx

-----The end -----

Page 4 of 5

Prepared by: S.Zulfiqar Jafar ACMA, ACIS, APFA, M.Com.

Page 5 of 5