Chapter 2Job Order Costing and Analysis
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Conceptual Learning ObjectivesC1: Explain the cost accounting
system.C2: Describe important features of job order production.C3:
Explain job cost sheets and how they are used in job order cost
accounting.
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Analytical Learning ObjectivesA1: Apply job order costing in
pricing services.
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Procedural Learning ObjectivesP1: Describe and record the flow
of materials costs in job order cost accounting.P2: Describe and
record the flow of labor costs in job order cost accounting. P3:
Describe and record the flow of overhead costs in job order cost
accounting. P4: Determine adjustments for overapplied and
underapplied factory overhead.
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Job Order Production Used for production of large, unique, or
high-cost items. Built to order rather than mass produced. Many
costs can be directly traced to each job. Chapter 3C 2
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Job Order Manufacturing Typical job order cost applications:
Special-order printing Building construction Also used in service
industry Hospitals Law firms Chapter 3C 2
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Events in Job Order CostingReceive order from customersPredict
cost to complete jobNegotiate a sales price and decide whether to
pursue the job.Schedule the jobC 2
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Job Order Production Activities Goods in
ProcessLaborMaterialsIndirectIndirectFactory
OverheadDirectDirectAllocateC 2
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Job Cost SheetC 3
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Materials RequisitionC. LutherC. LutherM. BatemanP1
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Materials Ledger CardP1
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Job Cost SheetP1
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Job Cost SheetP2
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Labor Time TicketC. LutherP2
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Job Cost SheetP2
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Job Cost SheetP3
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Job Cost SheetP3
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Predetermined OverheadAllocation Rate Formula Road Warriors uses
a predetermined overhead rate (POHR) based on direct labor cost to
apply overhead to jobs.P3
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Materials Ledger CardsMaterials Ledger CardsMaterials Ledger
CardsMaterials RequisitionDirect materialsThe materials requisition
indicates the cost of direct materials to charge to jobs and the
cost of indirect materials to charge to overhead.Indirect
materialsCost Flows and DocumentsP1
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Employee time tickets indicate the cost of direct labor to
charge to jobs and the cost of indirect labor to charge to
overhead.Job Cost SheetsFactory Overhead AccountJob Cost SheetsJob
Cost SheetsJob Cost SheetsDirect LaborIndirect LaborEmployee Time
TicketEmployee Time TicketEmployee Time TicketEmployee Time
TicketP3Cost Flows and Documents
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MaterialPurchasesP3Summary of Cost FlowsDrCrDrCrDrCr
Larson
Raw MaterialsCompany NameJan. 1Accounts receivable. . . . . . .
.1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
Larson
Goods in ProcessCompany NameJan. 1Accounts receivable. . . . . .
. .1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
Larson
Factory OverheadCompany NameJan. 1Accounts receivable. . . . . .
. .1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
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IncurredDirect MaterialP4Summary of Cost Flows
Larson
Goods in ProcessCompany NameJan. 1Accounts receivable. . . . . .
. .1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
Larson
Factory PayrollCompany NameJan. 1Accounts receivable. . . . . .
. .1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
Larson
Factory OverheadCompany NameJan. 1Accounts receivable. . . . . .
. .1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
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Direct Material Direct Labor OverheadP4Summary of Cost Flows
Larson
Goods in ProcessCompany NameJan. 1Accounts receivable. . . . . .
. .1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
Larson
Finished GoodsCompany NameJan. 1Accounts receivable. . . . . . .
.1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
Larson
Cost of Goods SoldCompany NameJan. 1Accounts receivable. . . . .
. . .1,000
Financial StatementSales revenue. . . . . . . .1,000
Date
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Overhead ApplicationP4
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Overhead ApplicationReasons for using a predetermined overhead
rateP4
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Adjusting of Overapplied or Underapplied OverheadP4
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Adjusting of Overapplied and Underapplied OverheadP4
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Adjusting of Overapplied and Underapplied OverheadP4
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Adjusting of Overapplied and Underapplied OverheadAdjusting Cost
of Goods Sold for underapplied or overapplied overheadP4
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Job Order CostingTypical Accounting EntriesP1
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Job Order CostingTypical Accounting EntriesP1
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Job Order CostingTypical Accounting EntriesP2
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Job Order CostingTypical Accounting EntriesP2
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Job Order CostingTypical Accounting EntriesP3
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Job Order CostingTypical Accounting EntriesP3
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Job Order CostingTypical Accounting EntriesP3
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Job Order CostingTypical Accounting EntriesP3
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End of Chapter 2
In presentations for each chapter in this text, we will provide
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Good luck and we hope you enjoy this new format.
We begin this chapter by describing a cost accounting system. We
then explain the procedures used to determine costs using a job
order costing system. We conclude with a discussion of over and
underapplied overhead.
In this chapter, you will learn the following conceptual
objectives:C1: Explain the cost accounting system.C2: Describe
important features of job order production.C3: Explain job cost
sheets and how they are used in job order cost accounting.
In this chapter, you will learn the following analytical
objectives:A1: Apply job order costing in pricing services.
In this chapter, you will learn the following procedural
objectives:P1: Describe and record the flow of materials costs in
job order cost accounting.P2: Describe and record the flow of labor
costs in job order cost accounting. P3: Describe and record the
flow of overhead costs in job order cost accounting. P4: Determine
adjustments for overapplied and underapplied factory overhead.
Job order costing is typically used by manufacturers of custom
products or providers of custom services. The jobs must be large
enough in scope and value to justify the accounting effort to trace
costs to the jobs. Job order production can apply to both
manufacturing and service companies.Here you see some examples
where job order costing is used. Another example familiar to many
of us is an automobile repair shop. When you take your car in for
an inexpensive job like an oil change, you expect to be charged the
cost of an oil change instead of an expensive engine repair. The
shops accounting system must be able to handle multiple jobs with
differing amounts of materials and labor costs that are incurred
each day.The initial event in a job order system is receipt of a
customer order. A less common case is to begin work on a job before
the company has a signed contract. This is referred to as jobs
produced on speculation. The sales price of the job may be a
cost-plus, such as with a government contract, or may be determined
by market factors. The company may then decide whether the price
will provide a reasonable profit.The job is then scheduled,
necessary materials are obtained, and the work is begun. Direct
materials and direct labor are traced directly to jobs in the goods
in process inventory account. Indirect materials and indirect
labor, along with flow through the factory overhead account into
goods in process. Completed jobs are transferred from the goods in
process inventory account to the finished goods inventory account.
When the finished jobs are delivered to customers, the cost of
these jobs becomes an expense on the income statement called cost
of goods sold.A job cost sheet is a separate record maintained for
each job that is used to account for material, labor, and factory
overhead costs for each job. The job cost sheet may be a paper
record, but most likely it is a computerized file.Heres an example
of a job cost sheet showing customer identification, job number,
relevant dates, along with materials, labor, and overhead
expenditures for the job.When materials are need for a job, the
production manager, C. Luther, prepares a materials requisition and
sends it to the materials manager. The materials manager, M.
Bateman, will not release materials from the materials storage
facility without this authorization. In addition to the proper
signature authorizing the transfer of materials, the job number of
the job where the material is to be used is noted on the
requisition.
Materials requisitions are sequentially numbered just like
checks in a checkbook This feature enhances the control of
materials use. The requisition also contains a description of the
material along with the inventory stock number. When material is
transferred from the materials storage facility, an accounting
entry is made to reduce the material inventory balance. The
materials requisition is the source document supporting the
accounting entry, which we will see in a subsequent slide.
The materials ledger card is a perpetual inventory record of the
material M-347. This record may be a paper record, but most likely
it is a computerized file. Here we see that two hundred twenty five
dollars of material M-347 has been issued on materials requisition
R4705. This entry on the ledger card reduces the inventory balance
from six hundred seventy five dollars to four hundred fifty
dollars.Here we see the summary information for the material used
on job B15 entered on the job cost sheet. If additional information
about this material is needed, it can be found on materials
requisition R4705.Labor cost entered on the job cost sheet is
summarized from an employees time ticket.Production managers use
labor time tickets to assign labor costs to individual jobs. In
addition to the proper signature authorizing the labor cost
assignment, the time ticket includes labor time, rate, job number,
date, and employee identification. Labor time tickets are the
source documents supporting the payroll accounting entries.
Here we see the summary information for the labor cost of job
B15 entered on the job cost sheet. If additional information about
the labor cost is needed, it can be found on time ticket L3479.
This will generate an accounting entry (to be shown later).
Overhead is an indirect manufacturing cost that includes all
production costs other than direct materials and direct labor.
Entries for various overhead items will be shown on a subsequent
slide. Unlike labor and materials, overhead cannot be traced
directly to individual jobs. We must use a predetermined overhead
rate to allocate overhead to jobs. The predetermined overhead rate
may be based on such production factors as direct labor hours,
direct labor cost, or machine hoursRoad Warriors assigns overhead
to jobs using a predetermined overhead rate of one hundred sixty
percent of direct labor cost. In other words, for each dollar of
direct labor incurred on a job, one dollar and sixty cents of
overhead will be charged to the job. For job B15, the labor cost
was sixty dollars; so multiplying one dollar and sixty cents times
sixty dollars yields ninety six dollars of overhead assigned to the
job.The term predetermined means that the overhead rate is computed
before the operating period begins. Overhead costs and labor costs
are estimated for the coming period as a part of the companys
budgeting process. The activity chosen for the denominator is known
as an allocation base. Overhead and the allocation base are linked
such that as the allocation base increases, overhead increases. For
Road Warriors, we could say that overhead supports direct labor
costs, or that incurrence of direct labor costs causes additional
overhead costs.Lets look at two flow diagrams that will help us put
job order document flows into perspective. Materials used are
classified as either direct or indirect. We place direct materials
costs on the job cost sheet. We place indirect materials costs in
the factory overhead account. Later the overhead will be applied to
the job using a predetermined overhead rate.Labor costs are also
classified as either direct or indirect. We place direct labor
costs on the job cost sheet. We place indirect labor costs in the
factory overhead account. Later, factory overhead will be applied
to the job using a predetermined overhead rate.
T-accounts for a job order system are helpful in visualizing the
cost flows. Material purchases are entered as debits (left side) in
the raw materials inventory account. A credit entry (right side) in
the materials inventory account is recorded when material is
withdrawn. Direct materials usage is recorded in the goods in
process inventory account and on the job cost sheet for an
individual job. Indirect material usage is recorded in the factory
overhead account. Direct labor and applied factory overhead are the
remaining product costs that we must record. Direct labor cost is
recorded in the goods in process inventory account and on the job
cost sheet for an individual job. Indirect labor cost is recorded
in the factory overhead account. Factory overhead is applied to
jobs in the goods in process inventory account using a
predetermined overhead rate. Because of the estimating process used
in calculating the predetermined overhead rate, the amount of
overhead assigned to all jobs in an operating period may differ
from the actual overhead costs incurred in the same period. Direct
material, direct labor, and factory overhead are combined in goods
in process. As jobs are completed, they are transferred to finished
goods and then sold (delivered to customers). The dollar amount of
the transfer from the goods in process inventory account to the
finished goods inventory account is called cost of goods
manufactured.Overhead is an indirect manufacturing cost. Unlike
labor and material, overhead cannot be traced directly to
individual jobs. We must use a predetermined overhead rate to
assign overhead to jobs. Road Warriors uses an overhead rate of one
hundred sixty percent of direct labor cost. For each dollar of
direct labor incurred on a job, Road Warriors will assign one
dollar and sixty cents of overhead to the job.
We cannot wait until the end of the period when all actual
overhead costs are known to charge overhead costs to jobs. Jobs are
completed continually during the year. Perpetual inventory records
must be updated in a timely manner, not at the end of the period.
Customers expect to know the total cost of jobs at the time jobs
are delivered, not at the end of the period. Using a predetermined
overhead rate allows us to assign overhead in a timely and
consistent fashion to accomplish these objectives.Because of the
estimating process used in calculating the predetermined overhead
rate, the amount of overhead assigned to all jobs in an operating
period may differ from the actual overhead costs incurred in the
same period. The difference between actual and applied overhead is
referred to as either overapplied or underapplied overhead. Cost of
goods sold is adjusted for these amounts at the end of the
period..When the amount of overhead applied to all jobs in a period
is greater than the actual amount of overhead incurred, overhead is
overapplied.When the amount of overhead applied to all jobs in a
period is less than the actual amount of overhead incurred,
overhead is underapplied.If overhead is underapplied, the cost of
goods sold does not include all production costs incurred.
Therefore, the end-of-period adjustment for underapplied overhead
increases cost of goods sold. If overhead is overapplied, the cost
of goods sold includes more costs than were incurred. The
end-of-period adjustment for overapplied overhead decreases cost of
goods sold.The following journal entries illustrate the recording
process for a job order cost system.To record material purchased on
account, we increase the raw materials inventory account with a
debit entry and we increase accounts payable with a credit
entry.When direct material is used, we decrease the raw materials
inventory account with a credit entry. If the materials used are
direct materials, we increase the goods in process inventory
account with a debit entry. If the materials used are indirect
materials, we increase factory overhead with a debit entry. When
salaries and wages are paid, we record the amount in the factory
payroll account with a debit entry and we reduce cash with a credit
entry.The portion of factory payroll that is classified as direct
labor increases the goods in process inventory account while the
portion that is indirect labor increases the factory overhead
account. We record the increases to goods in process and to factory
overhead with debit entries.Other actual costs for factory overhead
items are recorded with a debit entry to the factory overhead
account. Prepaid insurance is an asset account that is reduced with
a credit as the insurance coverage is used. Accrued liabilities
payable is a liability account that is increased with a credit.
Cash is an asset account that is reduced with a credit indicating
that cash has been paid. Accumulated depreciation is an contra
asset account that is increased with a credit to reflect the
adjusting entry for depreciation on factory buildings and
equipment..Factory overhead is applied to jobs using a
predetermined overhead rate, resulting in an increase in the goods
in process inventory account. Completed goods are transferred from
the goods in process inventory account to the finished goods
inventory account. We record the increase in finished goods with a
debit entry and we record the decrease in goods in process with a
credit entry.When the goods are sold, we reduce the finished goods
inventory account with a credit entry. Cost of goods sold is an
expense account that is recorded with a debit entry.Now that we
have mastered some of the basic concepts of Job Order Cost
Accounting, we are ready to move on to the next chapter.
