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Module 3 Job Order Costing

Cost Accounting and Control (Pontifical and Royal University of Santo Tomas, The
Catholic University of the Philippines)

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CA 5107 – COST ACCOUNTING & CONTROL

Module 3 – Job Order Costing

Job Order Costing – is a system for allocating costs to groups of unique product. It is
applicable to the production of customer specified products such as the manufacture of special
machines. Each job becomes a cost center for which costs are accumulated. A subsidiary
record (job cost sheet) is needed to keep track of all unfinished jobs (work in process) and
finished jobs (finished goods).

Characteristics of a job order cost system:

1. It collects all manufacturing costs and assigns them to specific job or batches of
product.

2. It measures costs for each job, rather than for set time periods.

3. It uses just one WIP Inventory Control account in the general ledger. This account is
supported by a subsidiary ledger of job order cost cards or sheets for each job in process
at any point of time.

Job Cost Sheet/Job Order Cost Sheet – shows the total cost incurred in the manufacture of
a particular order and it contains the following:

1. Job number

2. Job description

3. Name and address of the customer

4. Date ordered and date of delivery

5. Direct materials showing:

a. description of materials used
b. quantity of materials used
c. cost of materials

6. Direct labor section showing:

a. the number of hours worked
b. the rate per hour
c. the total cost of direct labor

7. Overhead section (Applied FOH)

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Job Cost Sheet:

JOB COST SHEET

Job Number Date Started
Job Description Date Completed
Customer’s Name Units Completed
Address Date Delivered

Date Direct Materials Direct Labor Factory Overhead

Total No. of Rate/ Total App. Total
Description Qty. Hours
Cost Hrs. Hour Cost Rate Cost

COST SUMMARY UNITS SHIPPED

Direct Materials Date Number Balance
Direct Labor
Factory Overhead
Total Cost
Unit Cost

» In support of the materials to be issued to production, a Materials Requisition Form is

accomplished. This form shows the description, the quantity and the unit cost of materials
issued to a particular job.

Materials Requisition Form

MATERIALS REQUISITION
Employee: Date of Request:
Department: Date Needed:
Materials Job Order
Customer Name Quantity Unit Cost Total Cost
Description No.

Total

Requested by: Approved:

. . . .

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» The supporting document for labor cost is the Time Ticket. This shows the name of
employee, the job he worked on and the number of hours he worked on a particular job and
his rate.

Time Ticket

EMPLOYEE TIME TICKET

Time Ticket No.: Date:
Employee: Department:
No. of
Start End Rate/ Hour Amount Job No.
Hours

TOTALS

Supervisor:

Illustration: Job Order Cost Flow

Saitama Manufacturing Company started its operation on January 1, 2020. The following
are its transactions during the month of January:

1. Purchased P1,000,000 worth raw materials on account.

2. Accepted job orders from different customers and assigned Job No. X1, X2 and X3.

3. Materials amounting to P700,000 were issued to production broken down as follows:

20% for Job X1, 35% for Job X2, and 35% for Job X3. The balance represents indirect
materials.

4. Payroll for the month totaled P450,000. The total amount of payroll is itemized as
follows:

Job X1 7,000 hours P 84,000

Job X2 10,500 hours 105,000
Job X3 12,000 hours 132,000
Indirect labor 29,000
Selling 60,000
Administrative 40,000

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5. The following overhead were incurred during the month in addition to indirect
materials and indirect labor:

Maintenance of factory machineries P 20,000

Utilities 35,000
Depreciation of factory plant & equipment 25,000
Insurance expired 10,000
Miscellaneous factory expenses 5,000

6. The policy of the company is to apply overhead to each job at the rate of P5.00 per
direct labor hour.

7. Job Nos. X1 and X2 were completed.

8. Job No. X1 was sold at cost plus 40% mark-up.

Required:

1. Journal entries to record the transactions for the month.

2. Prepare T-Accounts for Raw Materials, Work in Process, Finished Goods,

Manufacturing Overhead and Cost of Goods Sold accounts.

3. Prepare the entry to close the over/under-applied Factory Overhead assuming:

a) The amount was considered immaterial.
b) The amount was considered material.

SOLUTION AND DISCUSSIONS:

Journal Entries:

1. Raw Materials P 1,000,000

Accounts Payable P 1,000,000

2. No entry

3. Work in Process 630,000

Job X1: 20% x P700,000 = P140,000
Job X2: 35% x P700,000 = P245,000
Job X3: 35% x P700,000 = P245,000
Factory Overhead – Control
(10% x P200,000) 70,000
Raw Materials 700,000

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4. Work in Process 321,000

Job X1: P84,000
Job X2: P105,000
Job X3: P132,000
Factory Overhead-Control 29,000
Selling Expenses 60,000
Administrative Expenses 40,000
Accrued Payroll 450,000

5. Factory Overhead-Control 95,000

Accounts Payable or Cash 60,000
Accumulated Depreciation 25,000
Prepaid Insurance 10,000

6. Work in Process 147,500

Job X1: 7,000 hours x P5 = P35,000
Job X2: 10,500 hours x P5 = P52,500
Job X3: 12,000 hours x P5 = P60,000
Factory Overhead – Applied 147,500

7. The total amount to be debited to Finished Goods that represents the total costs of the
completed jobs (X1 and X2) can only be determined through the use of Job Cost Sheet
and one of the purposes of the Sheet is to determine the total cost accumulated by
each job. But to just to simplify and just for this discussion purpose , a T-account is
already enough.

Job No. X1
PRIOR PERIOD COSTS Beg. balance -0-
DM P 140,000
CURRENT COSTS DL 84,000
FOH-applied 35,000
P 259,000

Job No. X2
PRIOR PERIOD COSTS Beg. balance -0-
DM P 245,000
CURRENT COSTS DL 105,000
FOH-applied 52,500
P 402,500

Finished Goods 661,500

Work in Process 661,500
Job X1: P259,000
Job X2: P402,500

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Take note that in case that the jobs have beginning balances, assuming they were
already put into production prior this period, such balances should also be included in
the amount that should be debited because the entry represents the total costs of the
completed jobs not the current costs only.

8. Cost of Goods Sold 259,000

Finished Goods* 259,000

* Job X1 only

Accounts Receivable 362,600

Sales* 362,600

* P259,000 x 140% = P362,600

T-Accounts:

RAW MATERIALS
Beginning balance -0- 700,000 Issued to production
Purchases 1,000,000
Ending balance 300,000

WORK IN PROCESS
Beginning balance -0-
Direct materials issued 630,000 661,500 Completed units
Direct labor incurred 321,000
Factory overhead applied 147,500
1,098,500 661,500
Ending balance* 437,000

*represents the total cost of the only completed job, Job X3

FINISHED GOODS
Beginning balance -0-
661,500 259,000
Ending balance* 402,500

*represents the total cost of the completed but still unsold job, Job X2

COST OF GOODS SOLD

259,000*

*represents the total cost of the only sold job, Job X1

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Production Losses

In the process of production, some goods may be defective which require additional reworking
to make them good units and some may be spoiled. Spoiled units cannot be reworked but they
can be disposed of a very minimal market value.

Defective Units

Defective units are part of the final produce which cannot be accepted by the customer
because it does not meet the required specifications. However, those specifications can be met
by working on the item once again. The accounting for defective units in job order depends
on the following:

a) Defect is normally anticipated in all jobs

Pro-forma entry (to record the rework costs):

Factory overhead – control xx

Raw materials inventory xx → cost of additional materials
Accrued payroll xx → cost of additional labor
Factory overhead – applied xx → cost of additional FOH-applied

b) Defect is caused by customer’s intervention

If a customer requests for any change in the previously-agreed specifications of the product
and this results to a defective work, then the cost of shall be shouldered by such customer
and the rework is charged to the job by debiting work in process and crediting the proper
account (raw materials, accrued payroll or manufacturing overhead).

Pro-forma entry (to record the rework costs):

Work in process xx
Raw materials inventory xx → cost of additional materials
Accrued payroll xx → cost of additional labor
Factory overhead – applied xx → cost of additional FOH-applied

Illustration: Defective Units

Rose Manufacturing Company manufactures different office furniture and accounts for costs
using the Job Order Costing System. During the 2 nd quarter of 2020, 500 tables (Job Order
No. 210) are ordered by an international firm. The cost incurred on this job is:

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Materials – P1,250 per unit

Labor – 5 hours per unit @ P23.50 per hour
Factory overhead – P15 per hour

Final inspection revealed that 100 tables are defective and this can be reworked requiring 2
hours a unit and overhead is applied at the same rate as above. The 500 units are delivered
and billed the customer at cost plus 40%.

Required:
1. Give the entries to record the above assuming that the defective job is due to:
a. customer’s intervention
b. internal failure

2. Determine the manufacturing cost per unit under both of the above assumptions.

1) Journal entries

a. Defective units are due to customer’s intervention:

Entry to record the costs of producing the 500 tables:

Work in process 721,250

Materials (500 x P1,250) 625,000
Accrued payroll (2,500 hrs.* x P23.5) 58,750
FOH-applied (2,500 hrs.* x P15) 37,500

* 5 hrs./unit x 500 units

Entry to record the costs of rework:

Work in process 7,700

Accrued payroll (100 x 2 x P23.5) 4,700
FOH-applied (100 x 2 x P15) 3,000

Entry to record the completion and sale of goods:

Cost of sales (P721,250 + P7,700) 728,950

Work in process 728,950

Accounts receivable (P728,950 x 150%) 1,020,530

Sales 1,020,530

b. Defective units are due to internal failure:

Entry to record the costs of producing the 500 tables:

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Work in process 721,250

Materials (500 x P1,250) 625,000
Accrued payroll (2,500 hrs.* x P23.5) 58,750
FOH-applied (2,500 hrs.* x P15) 37,500

Entry to record the costs of rework:

FOH-control 7,700
Accrued payroll 4,700
FOH-applied 3,000

Cost of Sales 721,250

Work in process 721,250

Accounts receivable (721,250 x 150%) 1,081,875

Sales 1,081,875

2) Manufacturing cost per unit

a. Defective units are due to customer’s intervention:

Total cost (P721,250 + P7,700) P 728,950.00

Div. by: No. of good units 500
Manufacturing cost per unit P 1,457.90

☺ Total cost can be computed by simply adding all the debits and deducting the credits to
the Work in process account.

☺ The number of goods units is still the number of units initially put into production. The
100 defective units cannot be deducted because these were already reworked. It means,
after inspection, these units are found defective but after the rework, these are already
good units.

b. Defective units are due to internal failure:

Total cost P 721,250.00

Div. by: No. of good units 500
Manufacturing cost per unit P 1,442.50

☺ The cost of rework amounting to P7,700 is no longer added in the total cost of the units
produced simply because the Work in Process account is not debited. It means that the
cost of rework is no longer added to the cost of the job ordered by the customer because
the defective units are no longer caused by him. This is already expected and considered

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normal in the production so the Factory Overhead-Control account is debited instead to

allocate the rework cost to all jobs.

Spoiled units

Spoiled units are also part of the final produce that does not adhere to the specifications given
by the client and is therefore not accepted by them. The difference between defective units
and spoiled units is that, defective will be reworked on and sold at regular price whereas
spoiled units cannot be reworked and discarded at lower prices in the market. The accounting
for spoilage in job order depends on the following:

a) Spoilage is normally anticipated in all jobs

Manufacturers usually anticipate that spoilage may occur in production, thus, an allowance
for possible spoilage is included in the determination of predetermined overhead rate.

In this case, the cost of spoilage is charged to all the jobs in process. If actual spoilage occurs,
Spoiled Goods Inventory account is debited for the market value of spoiled goods and any
unrecovered manufacturing cost is charged to manufacturing overhead account. The total
cost associated with the spoiled goods is credited to work in process account.

Pro-forma entry:

Spoiled goods inventory xx → at market value of the spoiled units

Factory overhead – control xx → “original cost” of the spoiled units less
market value
Work in process xx → “original cost” of the spoiled units

If spoilage does not occur, any normal spoilage/defects associated with a specific job are
carried as part of the cost of that particular job.

b) Spoilage is caused by customer’s intervention

A customer sometimes may change the specifications of a job order causing for some spoilage.
Since this is no longer a problem of the company’s quality control but customer’s action during
the process, a particular customer will shoulder the loss of spoilage. If the spoiled units still
have market value, such amount is debited to Spoiled Goods Inventory account and credited
to Work in Process. The unrecovered cost of such job remains with the job, thus, resulting to
a higher cost.

Pro-forma entry:

Spoiled goods inventory xx at market value of

Work in process xx the spoiled units

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Illustration: Spoiled Units

Paul Manufacturing Company accepted 1,000 units order from Clippers Company. Each unit
costs P40 materials; P15 labor; and overhead is applied at 60% of direct labor cost. Final
inspection revealed that 100 units are spoiled and can be sold for P20 per unit. Paul
Manufacturing Company’s overhead rate includes allowance for normal rework.

Required:

1. Give all the necessary entries to record the above transactions assuming:

a) The spoilage is normal to production

b) The spoilage is due to customer’s specification

2. Compute for the manufacturing cost per unit under the two assumptions.

1) Journal entries

a. The spoilage is normal to production

Work in Process 64,000

Raw Materials (P40 x 1,000) 40,000
Accrued Payroll (P15 x 1,000) 15,000
FOH-applied (P15,000 x 60%) 9,000

Spoiled Goods (100 x P20) 2,000

FOH-control 4,400
Work in Process (100 x P64*) 6,400

* (P40,000 + P15,000 + P9,000) / 1,000 units = P64

☺ The Spoiled Goods account is debited to reclassify the asset account from Work in Process
to Spoiled Goods because the units are no longer considered good units and can no longer
have a chance to be good units by means of rework. The Spoiled Goods account is debited by
the market value of the spoiled units and the Work in Process account is credited at the total
cost of the spoiled units to reclassify the amount still recoverable in the assets.

☺ The P4,400 difference represents the loss which is charged to all the jobs being
manufactured since the loss is normal and not caused by a specific customer. There, FOH-
control account is debited.

b. The spoilage is due to customer’s specification

Work in Process 64,000

Raw Materials 40,000

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Accrued Payroll 15,000

FOH-applied 9,000

Spoiled Goods (100 x P20) 2,000*

WIP 2,000*

* The spoilage is caused by the customer, therefore the P4,400 difference between the market
value and the cost of the spoiled units representing the loss shall not be credited to the Work
in Process and debited to FOH-control because it should still form part of the total costs of
the job ordered by that particular customer.

Actually, the credit in Work in Process account in second entry is just a combination of
debit and credit to this account shown as follows:

Spoiled Goods (100 x P20) 2,000

Work in Process (100 x P44) 4,400
Work in Process (100 x P64) 6,400

☺ The P4,400 difference represents the loss which is specifically charged to the cost of the
job ordered by the customer so the Work in Process account is debited which will be directly
added to the job cost sheet of the customer who is the cause of the loss.

2) Manufacturing cost per unit

a. The spoilage is normal to production

Initial manufacturing costs incurred P 64,000

Less: Cost of spoiled units 6,400
Total manufacturing costs of remaining good units P 57,600
Div. by remaining good units:
Total units produced 1,000
Less: Spoiled units 100 900
Manufacturing cost per unit P 64

b. The spoilage is due to customer’s specification

Initial manufacturing costs incurred P 64,000

Less: Market value of spoiled units 2,000
Total manufacturing costs of remaining good units P 62,000
Div. by remaining good units:
Total units produced 1,000
Less: Spoiled units 100 900
Manufacturing cost per unit P 68.89

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Scrap Materials

Scrap materials are defective materials or leftover materials in production. If these materials
can be traced to a specific job, the market value of the scrap materials is debited to Scrap
Materials and credited to Work in Process. If the scrap recovered cannot be traced to a specific
job, the market value is credited to Miscellaneous Income.

Waste

Waste is defined as discarded substances having no values. In many industries, some waste
is inevitable. Such waste may arise due to the inherent nature of materials, chemical
reaction, evaporation, drying, sublimation of goods etc.

EXERCISES

PROBLEM 1

During June, the following transactions took place at the Summit Corp.

June 3 Purchased materials, P30,000.

5 Requisitioned materials from inventory, P20,000 (75% of these were direct; 25%
were indirect). Direct materials of P3,000 and indirect materials of P1,000 were
for Job 00-1. The remaining costs were for Job 00-2.

7 For Job 00-2, returned P150 of direct materials and P200 of indirect materials.

8 Recorded liabilities for payroll: direct labor, P15,000 and indirect labor, P5,000.
Of the direct labor cost, 60% was for Job 00-1; the remainder was for Job 00-2.

10 Incurred other factory overhead costs, P20,000 (all applicable to Jobs 00-1 and
00-2).

14 Applied overhead at the rate of 200% of direct labor cost to Jobs 00-1 and 00-2,
which were completed and transferred to finished goods account today.

Required: Assuming that Jobs 00-1 and 00-2 were the only jobs during the period and that
all overhead (as recorded above) is the total applicable overhead for these projects:

(1) Prepare a job order cost sheet for each job.

(2) Determine the difference between applied and actual overhead for the month.

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PROBLEM 2

The following completed cost sheets were prepared for three jobs that were in production
during April in the Special Order Division of Eve Company:

Job 097 Job 781 Job 946

Direct materials ............................................................ P 6,000 P2,700 P4,100
Direct labor ................................................................... 9,200 7,300 8,200
Applied factory overhead .............................................. 6,900 5,475 6,120
Allowance for commercial expenses and profit ............ 11,050 7,738 9,210

On April 1, Job 097 was 75% complete as to materials, labor, and overhead. It was finished
during the month. The other jobs were started and finished during the month. Jobs 097 and
946 were sold on account at the end of the month.

Required: Prepare general journal entries to be recorded in April to accumulate these job
costs for Work in Process as well as for Finished Goods and for the sale of the two jobs.

PROBLEM 3

Abel Inc. produces customized vans in a job order shop. On November 1, the following
balances appear in the inventory records:

Finished goods ........................................................................................................ P179,000

Work in process ...................................................................................................... 308,000
Materials ................................................................................................................. 83,000

The amount in Finished Goods represents P101,000 recorded for Van 175 and P78,000
recorded for Van 177. The work in process account represents the three vans in process, as
follows:

Van 179 Van 180 Van 181

Factory overhead .......................................................... P75,000 P50,000 P25,000
Direct labor ................................................................... 60,000 40,000 20,000
Direct materials ............................................................ 26,000 7,000 5,000

The following transactions occurred during November:

(a) Purchased materials on account, P80,000.

(b) Requisitioned P60,000 of materials from inventory: P15,000 applied to Van 180,
P25,000 to Van 181, and P16,000 to Van 182, a new order; the balance was for indirect
materials.

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(c) Recorded the liability for the payroll and the labor cost distribution in a single entry:
total payroll, P208,750. Of the payroll cost, 10% applied to Van 179, 20% to Van 180,
35% to Van 181, 30% to Van 182, and the remainder to indirect labor.

(d) Paid the payroll.

(e) Applied factory overhead at the rate of 150% of direct labor cost.

(f) Completed Vans 179 and 180.

(g) Sold Vans 175, 177, and 180 at 50% over manufacturing costs.

Required: Prepare general journal entries to record these transactions.

PROBLEM 4

The work in process account of Noah Company showed:

Work in Process

Materials P 22,000 Finished goods P 68,000

Direct labor 37,000
Factory overhead 55,500

Materials charged to the one job still in process amounted to P 5,000. Factory overhead is
applied as a predetermined percentage of direct labor cost.

Required: Compute the following:

(1) The amount of direct labor cost in finished goods.

(2) The amount of factory overhead in finished goods.

PROBLEM 5

Lockdown Motors accepted an order for 10 units of passenger jeepney on a job order cost
system. Job 3-601 is assigned for this order. The following costs are incurred for the
manufacture of the 10 units:

Materials P 600,000
Labor (5,000 hours x P25) 125,000
Overhead 120% of DLC

Final inspection revealed that 2 units required rework due to improper installation of lighting
because of the intervention of the customer. The rework required 50 direct labor hours,

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overhead is applied at the normal rate and an additional lighting material amounting to
P2,500. the units are then billed to the customer at 140% above cost.

Required: Prepare the journal entries to record the above transactions assuming that:
a. The loss is charged to specific job
b. The loss is charged to all production

PROBLEM 6

Albino Appliances manufactured 100 microwave ovens in a recent production run and
discovered that 10 ovens were defective and required reworking as follows:

Rework cost per unit:

Materials ........................................................................................................... P 10
Labor ................................................................................................................. 25
Factory overhead .............................................................................................. 25
Total ............................................................................................................ P 60
Normal production cost per unit:
Materials ........................................................................................................... P 50
Labor ................................................................................................................. 75
Factory overhead .............................................................................................. 75
Total ............................................................................................................ P 200

Required:

1. Prepare the journal entries to record the production costs, rework costs, the transfer
of the job costs to Finished Goods assuming that the defective units were caused by
an internal failure.

2. Prepare the journal entries to record the production costs, rework costs, the transfer
of the job costs to Finished Goods assuming that the defective units were caused by a
change in customer specifications.

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