Chapter 4 – Job Order Costing

Job Order Costing

LEARNING OBJECTIVES Don't rush things, everything has a
perfect timing
After completing this module, you should Anonymous

be able to know the following:

1. What is the difference between process costing and job order
costing
2. What are the characteristics of a job order costing
3. How costs are being accumulated under job order costing

Difference between process costing and job order costing

In Module 1, it has been discussed that there are two systems of product costing.
These product costing systems are the means by which costs are being
accumulated. It can be through a job-order based or process costing depending on
the nature of the products being produced, whether similar mass production or
dissimilar individual.
As a review, job-order costing is a system for allocating costs to groups of dissimilar
products of which is in accordance with customer specifications, whereas process
costing is a system for allocating costs to groups of similar products which go
through continuous production even without a direct demand from customers.

Characteristics of Job Order Costing

1. Costs are being accumulated by job, whether exclusive, multiple similar or
dissimilar products, which have been produced in accordance with customer
specifications.
2. Each job is treated as an independent cost object
3. It measures costs for each completed job.
4. Maintains only one Work-in-process Inventory Control account in the general
ledger but are supported by subsidiary ledgers.
5. Since each job is distinct and separate from each other, separate subsidiary
ledgers are being maintained to account the costs of different jobs.
6. To begin a job, a source document called material requisition form is being
prepared so materials can be purchased or issued to production and employee
time sheet is being kept to properly monitor the hours worked on a certain job.
7. Job order costing maintains a job-order cost sheet to appropriately account the
costs incurred in manufacturing the custom-made products.

Illustration:
Assume that ABC Furniture Inc. manufactures world-class living room furniture. Shown below
are the variety of the sofa products the company manufactures.
 Accounting for Materials

Two ways to account the materials:

1. First-in, First-out (FIFO) Method
2. Weighted Average Cost Method
First-in, First-out (FIFO) Method
Under this method, costing of materials should be assigned first to those materials
which are purchased earlier. So it is assumed that the cost issued to production is in
the order of which materials are earliest incurred, therefore, cost of materials in the
ending inventories are carried to the most recent costs.
Weighted Average Cost Method
Under this method, it is assumed that units issued to production should be charged
at its average cost. Average cost is calculated by dividing the total costs incurred in
purchasing the materials to the total units on hand. Take note that computation of
average cost per unit is being done every time a purchase is made. Consequently,
ending inventory should be carried at the latest average cost per unit.
Illustration: