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Job Order Cost Accounting


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Title: Job Order Cost Accounting

Chapter 2
Managerial Accounting Weygandt, Kieso, Kimmel
  • Job Order Cost Accounting

Cost Accounting Systems
  • Cost Accounting involves the measuring,
    recording, and reporting of product costs.
  • A cost accounting system consists of
    manufacturing cost accounts that are fully
    integrated into the general ledger of a company.

Cost Accounting Systems
  • An important feature of a cost accounting system
    is the use of a perpetual inventory system that
    provides information immediately on the cost of a
  • There are two basics types of cost accounting
  • a job order cost system, and
  • a process cost system.

Job Order Cost System
  • Under a job order cost system, costs are assigned
    to each job or batch of goods.
  • An important feature of job order costing is that
    each job (or batch) has its own distinguishing
  • The objective of job order costing is to
    calculate the cost per job, rather than for a
    time period.

Job Order Cost System
Illustration 2-1
Process Cost System
  • A process cost system is used when a series of
    connected manufacturing processes or departments
    produce a large volume of uniform or relatively
    homogeneous products. Production is continuous.
  • Process costing accounts for and accumulates
    product-related costs for a period of time, as
    opposed to assigning costs to specific products
    or jobs.

Cost Accounting Systems
  • Cost accounting systems differ widely from
    company to company. A company may use both types
    of cost systems.
  • The objective of both systems is to provide unit
    cost information for product pricing, cost
    control, inventory valuation, and financial
    statement presentation.

Flow of Costs in Job Order Cost Accounting
Materials Labor Overhead
  • The flow of costs parallels the physical flow of
    the materials as they are converted into finished

Job Order Cost Flow
  • There are 2 major steps in the flow of costs
  • Manufacturing costs incurred are accumulated in
    entries by debits to Raw Materials Inventory,
    Factory Labor, and Manufacturing Overhead.
  • The remaining entries pertain to the assignment
    of manufacturing costs incurred.

Job Order Cost Accounting System
Flow of Costs
Illustration 2-4
Accumulating Manufacturing Costs
  • In a job order cost system, manufacturing costs
    are recorded in the period in which they are
  • The costs of raw materials purchased are debited
    to Raw Materials Inventory when materials are
  • Wallace Manufacturing Company, which makes tools
    and dies, purchases handles and 800 modules for a
    total cost of 42,000.

Materials Inventory Card
  • Raw Materials Inventory is a control account.
    The subsidiary ledger consists of individual
    records for each item of raw materials in the
    form of
  • mechanically or manually prepared accounts (or
    cards) or
  • computer data files.
  • The inventory card for Stock No. AA2746 following
    the purchase is shown below.

Accumulating Manufacturing Costs
  • In a manufacturing company, the cost of factory
    labor consists of
  • gross earnings of factory workers,
  • employer payroll taxes on such earnings, and
  • fringe benefits incurred by the employer.
  • Labor costs are debited to Factory Labor when
    they are incurred.
  • Wallace Manufacturing incurs 32,000 of factory
    labor costs, of which 27,000 relates to wages
    payable and 5,000 relates to payroll taxes
    payable in January. The entry is

Accumulating Manufacturing Costs
  • The accumulation of overhead costs may be
    recognized daily, as in the case of machinery
    repairs and the use of indirect materials and
    indirect labor.
  • Overhead costs may also be recorded periodically
    through adjusting entries, as in the case of
    property taxes, depreciation, and insurance.
  • A summary entry for overhead in Wallace
    Manufacturing Company is

Assigning Manufacturing Costs to Work in Process
  • Assigning manufacturing costs to Work in Process
    results in debits to Work in Process Inventory
    and credits to Raw Materials Inventory, Factory
    Labor, and Manufacturing Overhead.
  • An indispensable accounting record used in
    assigning costs to jobs is the job cost sheet.

Job Cost Sheet
  • A job cost sheet is a form used to record the
    costs chargeable to a specific job and to
    determine the total and unit cost of the
    completed job. Postings to job cost sheets are
    made daily.

Illustration 2-6
Job Cost Sheet
  • A separate job cost sheet is kept for each job.
    Job cost sheets constitute the subsidiary ledger
    for the Work in Process Inventory account.
  • Each entry to Work in Process Inventory must be
    accompanied by a corresponding posting to one or
    more job cost sheets.

Assigning Manufacturing Costs to Work in Process
  • Raw materials costs are assigned to jobs when the
    materials are issued by the storeroom.

Materials Requisition Slip
  • The authorization for issuing raw materials is
    made on a prenumbered materials requisition slip
    signed by an authorized employee such as a
    department supervisor. The requisition should
    indicate the quantity and type of materials
    (direct or indirect) withdrawn and the account to
    be charged.

Illustration 2-7
Materials Journalizing and Posting
  • Requisitions for direct materials are posted
    daily to the individual job cost sheets.
  • Periodically, the requisitions are sorted,
    totaled, and journalized.
  • If 24,000 of direct materials and 6,000 of
    indirect materials are used in Wallace
    Manufacturing in January, the entry is a shown

Assigning Manufacturing Costs to Work in Process
  • Factory Labor costs are assigned to jobs when the
    work is performed by the employees.

Time Ticket
  • Labor costs are assigned to jobs on the basis of
    time tickets. The time ticket should indicate
    the employee, the hours worked, the account
    and job to be charged, and the total labor cost.

Illustration 2-10
Factory Labor Journalizing and Posting
  • Direct costs are debited to Work in Process and
    indirect costs are debited to Manufacturing
  • If the total factory labor cost incurred of
    32,000 consists of 28,000 of direct labor and
    4,000 of indirect labor, the entry is as shown

Assigning Manufacturing Costs to Work in Process
  • Manufacturing Overhead costs are assigned to work
    in process and to specific jobs on an estimated
    basis through the use of a predetermined overhead

Predetermined Overhead Rate
  • The formula to compute a predetermined overhead
    rate is shown below.
  • The predetermined overhead rate is established at
    the beginning of the year and is based on the
    relationship between estimated annual overhead
    costs and expected annual operating activity,
    expressed in terms of a common activity base.

Using Predetermined Overhead Rates
is assigned to
Illustration 2-13
Manufacturing Overhead Journalizing
  • At Wallace Manufacturing Company, direct labor
    cost is the activity base.
  • Annual overhead costs are expected to be
    280,000, and 350,000 of direct labor costs are
  • Thus, the overhead rate is 80 (280,000
  • Overhead applied for January is 22,400 (28,000
    X 80), and the application is recorded through
    the entry shown below.

Proof of Job Cost Sheets to Work in Process
  • At the end of each month, the balance in Work in
    Process Inventory should equal the sum of the
    costs shown on the job cost sheets of unfinished
  • Assuming that all jobs are unfinished, proof of
    the agreement of the control and subsidiary
    accounts in Wallace Manufacturing Company is
    shown below.

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Assigning Manufacturing Costs to Finished Goods
  • When a job is finished, an entry is made to
    transfer its total cost from Work in Process
    Inventory to Finished Goods Inventory.

Completed Job Cost Sheet
Journalizing Finished Goods
  • The entry to transfer the cost of the completed
    job from Work in Process Inventory to Finished
    Goods Inventory is

Assigning Manufacturing Costs to Cost of Goods
  • Recognition of Cost of Goods Sold is made when
    each sale occurs.

JournalizingCost of Goods Sold
  • On January 31 Wallace Manufacturing Company sells
    Job No. 101 (costing 39,000) for 50,000 on
    account. The entries are

JournalizingCost of Goods Sold
  • What if only 300 units from Job No. 101 are sold?
    The entries are
  • 300 x 50 15,000
  • 300 x 39 11,700

Job Order Cost System Flow Of Costs
Flow of Costs
Illustration 2-18a
Job Order Cost System Flow Of Documents
Illustration 2-18b
Cost of Goods Manufactured
  • At the end of a period, financial statements are
    prepared. The Cost of Goods Manufactured
    Schedule in job order costing is prepared the
    same as in Chapter 1 except that manufacturing
    overhead applied, rather than actual overhead
    costs is added to direct materials and direct
    labor in determining total manufacturing costs.

Cost Of Goods Manufactured Schedule
  • Note that the cost of goods manufactured
    (39,000) agrees with the amount transferred from
    Work in Process to Finished Goods.

Under- or Overapplied Manufacturing Overhead
  • When Manufacturing Overhead has a debit balance,
    overhead is said to be underapplied.
  • When Manufacturing Overhead has a credit balance,
    overhead is said to be overapplied.

Manufacturing Overhead
Applied (costs assigned)
Actual (costs incurred)
Under- or Overapplied Manufacturing Overhead
  • The existence of under- or overapplied overhead
    at the end of a month (or other interim period)
    usually does not require corrective action by
    management. It is reported on the interim
    Balance Sheet as follows
  • underapplied is a prepaid expense (current
    asset), and
  • overapplied is unearned revenue (current
  • At the end of the year, there is no further
    opportunity for offsetting events to occur so the
    Manufacturing Overhead balance must be eliminated
    with an adjusting entry.

Elimination of Under- or Overapplied
Manufacturing Overhead
  • Under- or overapplied overhead is usually
    considered to be an adjustment to cost of goods
    sold. Thus, underapplied overhead is debited to
    Cost of Goods Sold, and overapplied overhead is
    credited to Cost of Goods Sold.
  • Wallace Manufacturing Company has a 2,500 credit
    balance in Manufacturing Overhead at December 31.
    The adjusting entry for the overapplied overhead
    is shown below. After this entry is posted,
    Manufacturing Overhead will have a zero balance.

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