Module

JOB ORDER COSTING

3
Learning Objectives
After reading this chapter, the students will be able to:

1) describe cost systems and the flow of costs in a job order system;
2) use a job cost sheet to assign costs to work in process;
3) demonstrate how to determine and use the predetermined overhead rate;
4) prepare entries for manufacturing and service jobs completed and sold; and
5) distinguish between under- and over-applied manufacturing overhead.

Read and Learn

A job order costing system is used by entities that make relatively small
quantities or distinct batches of identifiable, unique products or services. In this system,
costs are accumulated on a per- job basis.

A job is a single unit or group of units identifiable as a unique cost object. Costs
of different jobs are maintained in separate ledger accounts and are not added together
or commingled in those in ledger accounts.

The job order cost procedure keeps the cost of various job or contracts
separate during their manufacture or construction. The method is applicable to job
order work factories, workshops, and repair shops as well as to work by builders,
construction engineers, shipbuilders, and printers. The cost unit is the job, the work
order, or the contract; and the records will show the cost of each. The method
presupposes the possibility of physically identifying the job produced and charging
each with its own cost.

Costs of a particular job are traced in a so-called job order cost sheet. It is a
source document that provides virtually all financial information about particular job.
The set of job order cost sheets for all uncompleted jobs comprises the Work in
Process Inventory subsidiary ledger. Total costs contained on the job order cost sheets
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for all uncompleted jobs should reconcile the Work in Process Inventory control
account balance in the general ledger.

Several jobs or orders may be going through a factory at the same time; each
cost sheet is given a job number which is placed on each material requisition and labor
time ticket in connection with job. These forms used for materials and labor, number
for the job to which they apply, are totaled daily or weekly and entered on the cost
sheets. The cost sheet eventually becomes a summary of all the cost, including factory
overhead, involved in completing a job. The cost sheet is subsidiary records and
controlled by the work in process account. Jobs perform on the basis of costumer
specification allow the computation of a profit or loss on each order. If job constitute
production of specific quantity for inventory, job order costing permits computation of
unit cost inventory costing purposes.

MAJOR SOURCE DOCUMENTS FOR JOB ORDERS COSTING

1. Job Order Cost Sheet
a. The record accumulate product cost of specific unit or small batches of unit
for both product costing and purposes.
b. The file of job sheets for uncompleted jobs serves as a perpetual book
inventory and the subsidiary ledger for Work in Process Control.
c. A separate cost sheet is prepared for each job.

Example of a job order cost sheet

Job Cost Sheet

Job Number ________________ Description ______________

Date Started ________________ Date completed ___________
Number of Units Completed_____

Direct Materials
Date Requisition No. Quantity Unit Price Cost

Direct Labor
Date Time card No. Hours Rate Cost

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Factory Overhead
Date Activity base Quantity Application Rate Cost

Cost Summary

Direct Materials ___________

Direct Labor ___________
Factory Overhead _________
Total Cost _______________

2. Material Stock Card

a. These records are the perpetual book inventory of cost and quantities of
materials on hand.
b. The files of materials socks cards for unused material is the subsidiary
ledger for material control.
c. A separate stock card is prepared for each type of material on hand.

3. Finish Good Stock Card

a. These record are the perpetual book inventory of cost and quantities of
completed good held for sale.
b. The file of finished goods stock cards for unsold goods is the subsidiary
ledger of finished goods control

4. Factory Overhead Control Cost Records

a. These record accumulate detailed manufacturing overhead cost by
department
b. The file of these records for the accounting is the subsidiary ledger for the
factory overhead control.
5. Materials Requisition, Time and Clock Card
a. As the source document for charging cost to jobs and department
b. To aid in fixing responsibilities for control and usage of material and labor

ACCOUNTING PROCEDURE FOR MATERIALS

In manufacturing enterprises, the common practice is to record all materials and

supplies in one control account, materials or store. Procedures that affect the materials
account involved the:

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1. Purchase of materials and supplies

2. Indirect materials and supplies
a. Direct materials
b. Indirect materials and supplies

Recording the Purchase of Materials

The account debited when materials are purchase in materials or storea

(instead of purchase for periodic) the account credited is account payable or voucher
payable. As materials are purchase, the amount is posted in material control account
and at the same time the purchase is also entered on an individual materials ledger
card/stock card (a separate card is used for each material item) showing the quantity
received, unit cost, and total amount.

Material xxxx

Accounts Payable xxxx

An entry is made on stock card under the received section

The entry to record the return of materials to vendor is:

Accounts Payable xxxx

Materials xxxx

An entry is made on the stock card under the received section enclosed in
parenthesis to indicate reduction in quantity.

Recording the issuance of Materials

When a job is started, the materials needed for a job is issued based on the
materials requisition prepared by the employees. A copy of the requisition is given to
the storekeeper which will serve as a basis for the materials to be issued. The job order
number is shown on the materials requisition together with the specifics on type and
quantity of materials required by each job. The quantity, unit cost, and total cost of
each of the materials entered on the issued section of the stock card.

The entry to record the issuance of direct materials is

Work in Process xxxx

Materials xxxx

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An entry is made on the stock card under issued section and also on cost sheet-
materials.

The entry to record the issuance of indirect materials is

Factory overhead control xxxxx

Materials xxxxx

An entry is made on the stock card under the issued section and also on the
overhead analysis sheet.

Shown below is an illustration of a material stock card.

Description_______________ Location in Storeroom________________

Maximum_______ Minimum________ Store Ledger Acct. No.___________

Received Issued Balance

Date
Qty. Unit price Amt. Qty. Unit price Amt. Qty. Unit price Amt.

Shown belong is an illustration of a material requisition slip

MATERIALS REQUISITION

Date __________ No. ___________

To ___________
Quantity Description Unit Price Amount

Approved by ________ Issued by __________

Received by ________
Charge to Jobs/Dept. __________

The material control account may be summarized as follows:

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Materials

1. Inventory beginning 1. Cost of direct materials issued

2. Purchase of materials 2. Cost of indirect materials issued
3. Freight – in (using direct 3. Cost of materials returned to
Charging) supplier
4. Cost of excess materials
Returned from factory
The balance of the Materials account represents the Materials inventory at the
period under of the consideration. The amount should be equal to the total of the
balances of the entire materials stock card.

ACCOUNTING PROCEDURE FOR LABOR

The accounting procedure for labor may be divided into two distinct phases:

1. Collection of payroll data, computation of earnings, calculation of payroll taxes,

payment of wages.
2. Distribution and allocation of labor costs to jobs, departments, and other
classification cost.

In most factories, clock cards/time records are used as the basis in computing the
gross earnings of employees who are paid hourly wages. In addition to these clock
cards, time ticket are prepared for each worker to determine the time spend for each
job as basis in determining the amount to be charged to direct labor and indirect labor
cost. The time tickets for various job sorted, priced, and summarized, and the time
tickets hours should be reconciled with the clock cards hours.

Shown below is an illustration of a job time ticket.

Employee Name ___________________ Date ______________

Employee Number _________________ Department _________

Time Started Time Stopped Job number

At regular intervals, usually daily or weekly, the labor time and labor cost for
each job are entered on the job order cost sheet. For each payroll period – weekly,
every two weeks or completed is:

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Finished goods monthly – the summary of employees’ earnings and the liability
for payment is journalized and posted to the general ledger.

The entry to record the payroll and the incurrence of liability is:

Payroll xxxx

Withholding Tax Payable xxxx

SSS Premium Payable xxxx

Phil Health Contribution Payable xxxx

Accrued Factory Payroll xxxx

The entry to record the distribution of payroll is:

Work in process xxxx

Factory Overhead Control xxxx

Payroll xxxx

An entry is made on the cost sheet under the labor section.

The entry to record the payment of payroll is:

Accrued Factory payroll xxxx

Cash xxxx

The work in process account is used to charge the job with the direct labor cost.
Factory overhead control is charged for the indirect labor cos incurred. The tax withheld
is computed based on the table provided by the Bureau of Internal Revenue. For SSS
Premium and PhilHealth Contribution, the table is provided by Social Security System.
The clearing account for the total wages due to the factory personnel is the payroll
account summarized as follows:

Payroll

1. The wages and salaries earned 1. The payroll during the payroll
by factory personnel during the period at the same time debiting
payroll period work in process for direct labor
and overhead for indirect labor

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The account used to accumulate the liability for the payroll or factory
overhead payroll is the Accrued Factory Payroll summarized as follows:

Accrued Factory Payroll

1. Total amount of wages paid to 1. Balancing beginning

factory personnel at the time 2. Total amount of wages and
crediting account cash payable salaries due to factory personnel
at the same time debiting payroll

ACCOUNTING FOR FACTORY OVERHEAD

There are two account used – factory overhead control and factory overhead
applied. Factory overhead control is used to accumulate actual overhead incurred,
while factory overhead applied is used to accumulate estimated factory overhead
applied to production. For factory overhead applied production, a predetermined rate
is used and this is computed using any of the following as base:

1. Units of production
2. Direct material cost
3. Direct labor hours
4. Direct labor cost
5. Machine hour

The predetermined factory overhead rate computed may be used for all
departments in the company (blanket rate) or a rate maybe computed for each
department to fit the nature of the operation of the department (departmentalized rate).

Estimated factory overhead (Factory Overhead Applied) is used even if there is

actual factory overhead because at the time the overhead is needed for costing of jobs
completed, the actual overhead is not yet available (the actual will be known only at
the end of the month). The computation of the cost of each job will be done upon the
completion of the job and this may be during the first week, second seek, or third week
of the month, and at the same time, the actual overhead is not yet available because
some of the items included in the actual overhead will be known only at the end of the
month.

At items in the factory overhead control account is incurred, the Factory Overhead
Control account is debited. The applied factory overhead entered on the job order cost
sheet for each job is the basis for the following entry.

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Work in process xxxx

Applied Factory Overhead xxxx

An entry is made on the cost sheet – factory overhead section

Some actual overhead cost, such as indirect materials, indirect labor, and
payroll taxes, are debited to Factory Overhead Control as they are incurred. Other
overhead cost, such as depreciation and expired insurance are debited to Factory
Overhead Control when adjusting entries are recorded.

The controlling account for accumulating the indirect charges incurred in productions:

Manufacturing Overhead Control

1. Cost of indirect materials and 1. The total debit footing at the end of
supplies issued from the the accounting period when closing
warehouse at the same time the books.
crediting materials
2. Cost of indirect labor at the same
time crediting payroll
3. Cost of indirect expense
purchase from outsiders
4. Cost of other indirect expense
incurred by the company

Manufacturing overhead applied – account used for accumulating the total

overhead charged to production during period.

Manufacturing Overhead Applied

1. Total credit footings at the end 1. Cost of overhead allocated to

of the accounting period upon production and computed by
closing of the books. multiplying the – actual factor
being used during the period
by the same predetermined
rate, at the same time,
debiting work in process.
Over/under applied overhead – the difference between the actual overhead
incurred and the applied overhead.

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Over/Under Applied Overhead

1. Difference between the actual 1. Difference between the actual

manufacturing overhead and the manufacturing overhead and the
applied overhead when actual is applied overhead when applied
more the applied. is more the actual.

The closing of the Factory Overhead Control account and the Factory
Overhead Applied account may be done at the end of the month or the end of the
year. If the closing is to be done monthly, the following are the entries:

End of the month:

Factory Overhead Applied xxxx

Under over applied overhead xxxx

Factory Overhead Control xxxx

End of the year

Cost of Goods Sold xxxx

Under/over applied overhead xxxx

If the closing is to done yearly, the entry will be at the end of the year only.

End of the year

Factory Overhead Applied xxxx

Cost of Goods Sold xxxx

Factory Overhead Control xxxx

The variance is computed as follows:

Actual Factory Overhead xxxx

Less: Applied factory overhead xxxx

Variance xxxx

If the actual is the biggest than applied, the variance is called under applied
factory overhead (unfavorable), and this is taken as an addition to the cost of goods
sold in the statement. If applied is bigger than the actual, the variance is called over
applied factory overhead (favorable) and this is taken as the deduction from the cost

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of goods sold statement. Whatever method of closing the control and applied account
is used, the statement is always adjusted for the under applied/over applied) on the
statement. For the purposes of preparing the cost of goods sold statement. Factory
applied is used because this is the amount changed to the work in process account.
As stated above, the cost of goods sold will be adjusted for variance only at the end of
the year. If the cost of goods sold is stated in the problems, then it must be taken as
normal, prior to the adjustment for the variance.

Work in process – controlling account used to record the flow of the elements
of cost through the factory during a given period.

Work in Process

1. Cost of beginning inventory 1. Cost of materials, labor and

2. Cost of direct materials issued to factory overhead applied to jobs
production at the same time completed during the period at
crediting materials. the same time debiting finished
3. Cost of direct labor applied to goods.
production during the period at 2. Cost of direct materials returned
the same time crediting account to warehouse at the same time
4. Amount of overhead applied to debiting materials.
production at the same time
crediting applied overhead.

The work in process account is used to accumulate during the month the total
cost of materials placed in process, labor used and factory overhead applied. The
amount entered on the cost sheet should equal the amounts debited to work in process
account during the month. As jobs are completed, the cost sheets for the
corresponding jobs are totaled and the amount is now transferred to the finished goods
account. The journal entry to record the jobs:

Finished goods xxxx

Work in process xxxx

When the finish goods are delivered to customer, the sales and the cost of
goods sold are recorded as follows:

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Accounts receivable xxxx

Sales xxxx

Cost of goods sold xxxx

Finished goods xxxx

If a job is delivered to a customer, the entries to record the completion of the

job and the delivery to the customer maybe merged into one as follows:

Cost of goods sold xxx

Work in process xxx

Finished goods – a controlling account used to record the flow of the cost of goods
completed and transferred to the finished goods storeroom during period.

Finished Goods

1. Cost of inventory at the 1. Cost of finished goods sold

beginning during the period at the same
2. Factory cost of job order time debiting cost sold.
completed at the same time in
process
3. Cost of goods returned by the
customer at the same time
crediting cost of goods sold

Cost of goods sold – an account used to accumulate the cost of finished goods
disposed through sale to customer.

Cost of Goods Sold

1. Cost of finished goods disposed 1. Cost of finished goods returned

through sale to costumers at the by costumers at the same time
same time crediting finished debiting the finished goods
goods. costumers.
2. Adjustment for under – applied 2. Adjustment over – applied
factory overhead. factory overhead

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3. Balanced of account at the end

of the period at the same time
debiting income summary

COMPREHENSIVE PROBLEM
The Northern Consolidated Company has the following balances as of January 1,
2018.
Materials P 4,900
Work in process 4,600
Finished goods 6,000
Accrued factory payroll 200

Details of the three inventories are:

Finished goods
Commodity x – 2000 units at P 3.00 6,000

Work in process – Job No. 101

Materials
A - 200 units at P 5.00 P 1,000
B – 175 units at P 4.00 700

P1, 700
Direct Labor
290 hours at P 5.00 1, 450
Factory overhead – applied as
100% of direct labor cost 1, 450
4,600
Materials
Materials A – 600 units at P 5.00 P3, 000
Materials B – 350 units at P 4.00 1, 400
Indirect materials 500
P4, 900

The transaction for the month of January, 2018 are follows:

1. Purchase for the month of January – Material A – 600 units at P 5.50, Materials
B – 800 units at P 5.00: Indirect materials – P 700.
2. Materials requisitioned and issued on a FIFO basis amounted to P 7,000.
Material A, 200 units (charged to job 101); Material A, 600 units and Material
B, 225 units (charged to job 102), Material B, 425 units (charged to job 103.
Indirect materials amounted to P 1,000.

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3. Materials B returned to vendors, 70 units at 5.00.

4. Payroll during January amounted to P 10,300, of which P2,000 is for job 101,
P 4,000 is for job 102; P 2,000 for job 103, and P 2,300 is indirect labor.

Deductions are follows:

SSS Premiums P 422
Medicare Contribution 225
Withholding 1,050

5. Factory overhead is applied based on 100% of direct labor.

6. Jobs completed during the month – Job 101 for 3,000 units of Commodity X
and Job 102 for Commodity Y at P 2.40 per unit.
7. Sales during January on FIFO basis – 4,000 units of Commodity X at P 6.00
per unit and 4,000 of Commodity Y at P 4.00 per unit.
8. Cash collection from costumer P 35,000.
9. Recorded the following liabilities: Factory overhead P 4, 800: Selling expenses,
P 2, 100; General expenses, P 1, 500.
10. Paid accounts – P 9, 500; Payroll.

Journal entries:

1. Materials 8,000
Accounts Payable 8,000

Materials purchase computed as follows:

Mat. A 600 units at P 5.50 – P 3,300
Mat. B – 800 units at P 5.00 – 4,000
Indirect materials 700

P 8,000

2. Work in process 7,000

Factory overhead control 1,000
Materials 8,000
Materials issued to production
Job 101
Mat. A – 200 units at P 5.00 – 1,000 1,000
Job 102
Mat. A – 400 units at P 5.00 – 2,000
200 units at P 5.50 – 1,100
Mat. B – 225 at P 4.00 900 4,000

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Job 103
Mat. B – 125 unit at P 4.00 – 500
300units at P 5.00 – 1,500 2,000
7,000

3. Accounts Payable 350

Materials 350
Materials returned to vendors

4. Payroll 10,300
SSS premium payable 422
Medicare contribution payable 225
Withholding taxes payable 1,050
Accrued factory payroll 8,603
Payroll for the month

Work in process 8,000

Factory overhead control 2,300
Payroll 10,300
Classification of payroll

5. Work in process 8,000

Factory overhead applied 8,000
Factor applied overhead to production based on 100% of direct
labor

6. Finished goods 21,600

Work in process 21,600
Cost jobs completed computed as follows:
Job 101 Job 102
Materials- P 2,700 P 4,000
Labor- 3,450 4,000
Overhead- 3,450 4,000

7. Accounts receivable 40,000

Sales 40,000

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Sales computed as follows:

X – 4,000 at P 6.00 – P 24,000
Y – 4,000 at P 4.00 – P 16,000

Cost of goods sold 22,000

Finished goods 22,000

Cost of units sold for the month:

X – 2,000 P 3.00 – P 6,000

2,000 at P 3.20 – 6,400

Y – 4,000 at P 2.40 – 9,600

8. Cash 35,000
Accounts receivable 35,000
Collection of accounts

9. Factory overhead control 4,800

Selling expense control 2,100
General expense control 1,500
Accounts Payable 8,400

10. Accounts Payable 9,500

Cash 9,500

Materials Work In Process

1/1 4,900 2) 8,000 1/1 4,600 6) 21,600

1) 8,000 3) 350 2) 7,000
1/31 4,550 4) 8,000
5) 8,000 1/31 6,000

Finished Goods Cost of Goods Sold

1/1 6,000 7) 22,000 7) 22,000

8) 21,600 1/31 5,600

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Factory OH Factory OH Applied

2) 1,000 5) 8,000
4) 2,300
9) 4,800

Stock Cards

Material A

Received Issued Balance

1/1 600 at P 5.00 P
3,000
1)600 at P 5.50 P3,000 600 at P 5.00 P 3,000
600 at P 5.50 P 3,300
2)600 at P 5.00 P 3,000 400 at P 5.50 2,200
200 at P 5.50 P 1,100

Material B

Received Issued Balance

350 at P 4.00 1,400
1)800 at P5.00 4,000 350 at P 4.00 1,400
800 at P 5.00 4,000
2) 350 at P 4.00 P 1,400 500 at P 5.00 2,500
300 at P 5.00 P 1,500
3)(70) at P 5.00 (350) 430 at P5.00 2,150

Indirect Materials

Received Issued Balance

500
700 1,200
1,000 200

Commodity X

Received Issued Balance

2,000 at P 3.00 P 6,000
6) 3,000 at 3.20 9,600 2,000 at P 3.00 P 6,000
300 at P 3.20 9,600
7) 2,000 at P 3.00 6,000 1,000 at P 3.20 3,200
2,000 at P 3.20 6,400

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Commodity Y

Received Issued Balance

6) 5,000 at P 2.40 5,000 at P 2.40 P 2,000
12,000
7) 4000 at P 2.40 1,000 at 2.40 P2,400
9,600

Cost Sheet

Job 101

Materials Labor Overhead

1/1 1/1 1,450 1/1 1,450
A – 200 at P 5.00 P
1,000
B – 175 at P4.00 700 4) 2,000 5) 2000
2) A – 200 at P5.00
1,000
3,450 3,450
2,700

Job 102

Materials Labor Overhead

2) A – 400 at P 5.00 4 4,000 5) 4,000
2,000
200 at P 5.50
1,100
B – 225 at P4.00 900
4,000 4,000
4,000

Job 103

Materials Labor Overhead

2) 4 2,000 5) 2,000
B – 125 at P4.00 500
300 at P5.00
1,500

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NORTHERN CONSOLIDATED COMPANY

Cost of Goods Sold Statement
For the month ended January 31, 2018

Direct materials
Materials, January 1 P 4,900
Purchases P 8,000
Less: Purchases returns 350 7,650
Total Available for Use P 12,550
Less: materials, January 31 4,550
Indirect materials 1, 000 5,550 P 7,000
Direct Labor 8,000
Factory overhead 8,000
Total manufacturing cost P 23,000
Add: work in process, January 1 4,600
Cost of goods put into process P 27,600
Less: work in process. January 31 6,000
Cost of goods manufactured P 21,600
Add: finished good. January 1 6,000
Total goods available for sale P 27,600
Less: Finished goods. January 31 5,600
Cost of goods sold Normal P 22,000
Add: Under applied factory overhead 100
Cost of goods sold-actual P 22,100

The under applied factory overhead is computed as follows:

Actual factory overhead P 8,100
Less: applied factory overhead P 8,000
100
The closing of the factory overhead control account maybe done on monthly basis or
annual basis. The statement is always adjusted for the under applied (unfavorable) or
the over applied (favorable) factory overhead. Under applied factory overhead is
considered unfavorable because there is an increase in the cost of goods sold, thereby
decreasing the gross profit. On the other hand, the over applied overhead is

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considered favorable because the effect is the decrease of the cost of goods sold
thereby increasing the gross profit.

If the closing is done on a monthly basis, the special account, under-and-over applied
factory overhead, will accumulate the differences period-to-period. At the end of
calendar or fiscal year, the balance under-and over applied account will be closed to
cost of goods sold or allocated on a pro-rata basis to work in process, finished goods
and cost of goods sold. The remaining balance should be prorated if the amount of the
balance would materially distort net income if it were charged entirely to cost of goods
sold. If a small balance remains in the under-and over applied factory overhead at a
year-end it may be closed directly to cost of goods sold because it will not materially
affect net income.

End of Module 3
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“If you don’t sacrifice for what you want, what you want becomes the sacrifice”.

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