JOB ORDER COSTING

Cost Systems

There are two basic systems used by manufacturers to assign costs to their products:
Process Costing & Job Order Costing

Process Costing

A company produces many units of a single product

One unit of product is indistinguishable from other units of product
The identical nature of each unit of product enables assigning the same average cost
per unit.

Example companies:
1. Weyerhaeuser (paper manufacturing)
2. Reynolds Aluminum (refining aluminum ingots)
3. Coca-Cola (mixing and bottling beverages)

Job Order Costing

Many different products are produced each period.

Products are manufactured to order
The unique nature of each order requires tracing or allocating costs to each job, and
maintaining cost record for each job.

Example companies:
1.Boeing (aircraft manufacturing)
2. Bechtel International (large scale construction)
3. Walt Disney Studios (movie production)

Job Order Costing is used by a manufacturer who produces products as individual units or
in distinct batches or jobs. It is also used extensively in service industries. Hospitals, law
firms, movie studios, accounting firms, advertising agencies, and repair shops, for example,
all use a variation of job-order costing to accumulate costs for accounting and billing
purposes.

Types of Job Order System

Job order cost Single unit

Batch Cost Identical units
Contract Cost This is usually long term contracts
Documents Used In Job Cost System

Job Cost Sheet

A job cost sheet is a form prepared for each separate job that records the materials, labor,
and overhead costs charged to the job.

It is used to compute unit product cost that in turn are used to values ending inventories
and to determine cost of goods sold.

Direct Material Cost

As raw materials are needed for the production process, they are transferred from the
warehouse to the production department.

Material Requisition Form is used to authorize the release of materials needed for the
production. The materials requisition form is a detailed source document that (1) specifies
the type and quantity of materials to be drawn from the storeroom, and (2) identifies the
job to which the costs of the materials are to be charged.
Direct Labor Cost
Direct Labor cost is handled in much the same way as direct material cost. Direct labor
consists of labor charges that are easily traced to a particular job. The assignment of the
direct-labor costs to jobs is based on time records filled out by the employees.

A time record is a form that records the amount of time an employee spends on each
production job.

Manufacturing-Overhead Cost
Manufacturing overhead is a heterogeneous pool of indirect production costs, such as
indirect material, indirect labor, utility cost, and depreciation.

Assigning manufacturing overhead to units of product can be a difficult task.

Manufacturing overhead must be included with direct materials and direct labor on the job
cost sheet since manufacturing overhead is also a product cost. However, assigning
manufacturing overhead to units of product can be a difficult task. There are three reasons
for this.

1. Manufacturing overhead is an indirect cost. This means that it is either impossible or

difficult to trace these costs to a particular product or job.

2. Manufacturing overhead consists of many different items ranging from the grease used
in machines to the annual salary of the production manager.

3. Even though output may fluctuate due to seasonal or other factors, total manufacturing
overhead costs tent to remain relatively constant due to the presence of fixed costs.

Given these problems, the only way to assign overhead costs to product is to use an
allocation process. Select an allocation base that is common to all of the companys
products and services.
Allocation base is a measure such as direct labor hours (DLH) or machine Hours (MH) that
is used to assign overhead costs to products.

The allocation base is used to compute the predetermined overhead rate as follows:

*Note that the predetermined overhead rate is based on estimates rather than actual
results.

Example:
A company has estimated its total manufacturing overhead cost will be 12,000,000 for the
year and its total direct labor-hours will be 40,000.

= 12,000,000/40,000 direct labor-hours

= 300 per direct labor-hour

Overhead Application
The process of assigning overhead cost to jobs is called overhead application

Example:

The job cost sheet indicates that 27 direct labor-hours were charged to job F16.

Overhead applied to a particular job= Predetermined overhead rate X Amount of

the allocation base incurred by the job

= 300 per DLH X 27 DLHs

= 8,100 of overhead applied to job F16
Computation of Unit Cost &Unit Product Cost

Total Cost = Total for direct materials + direct labor + manufacturing overhead

Unit Product Cost = Total cost/number of units

Summary of Documents Flow

A careful study of the flow of documents will provide a good overview of the overall
operation of a job-order costing system.

A Sales order is prepared as a basis for issuing a Production order. A production order
initiates work on a job, whereby costs are charged through Material requisition form, Direct
labor time ticket, and Predetermined overhead rates. These production costs are
accumulated on a form, prepared by the accounting department, known as a Job cost sheet.
The job cost sheet is used to compute unit product cost that in turn are used to values
ending inventories and to determine cost of goods sold.

Job Completion
Work in Process Inventory is used when we have started but not completed a job and
include all job costs including any costs from the previous period and costs added this
period include direct materials, direct labor and applied overhead. The subsidiary ledger
consists of the job cost sheet showing all the direct materials, direct labor, and overhead
costs applied to a job. The total of all jobs still in process will equal the balance of Work in
Process Inventory.

Finished Goods Inventory is used when we finish a job and before we sell it. We move the
total job cost of the job from Work in Process Inventory to Finished Goods Inventory. The
subsidiary ledger will the be for each job showing its full job cost until the item is sold.

Flow of Cost