Assignment On Job Order Costing Sheet

Chapter 15 Job Order Costing and Analysis QUESTIONS 1. Factory overhead is not identified with specific units (jobs) or batches (job lots). Therefore, to assign costs, estimates of the relation between factory overhead cost and job or job lot are necessary. Also, since job order cost accounting is a perpetual system, we need to estimate a predetermined overhead rate to compute (perpetual) inventory costs. This estimated amount also helps job order companies determine prices on a timely basis. 2. Several other factors (allocation bases) are possible and reasonable. These common factors often include direct materials or machine hours. 3. The job order cost sheet captures information on cost and quantity of direct material and direct labor, and on the amount of factory overhead applied to the respective job or job lot. Management and employees use this information to monitor costs during production and to estimate total cost of production. 4. Each job is assigned a subsidiary ledger account. This account serves as the “posting account” (accumulates all increases and decreases) during production for direct material, direct labor, and applied factory overhead. The collection of job cost sheets for all of the jobs in process make up a subsidiary ledger controlled by the Goods in Process Inventory account in the general ledger. When a job is finished, its job cost sheet is completed and moved from the file of jobs in process to the file of finished jobs awaiting delivery to customers. This latter file acts as a subsidiary ledger controlled by the Finished Goods Inventory account. In this way, management and employees can obtain the costs, direct and indirect, associated with any job or job lot at any time. 5. A debit (increase) to Goods in Process Inventory for direct materials, a debit (increase) to Factory Overhead for indirect materials, and a credit (decrease) to Raw Materials Inventory. 6. The materials requisition slip is designed to track the movement of materials from raw materials to production. It also serves as an internal control document because without the slip the inventory department should not release inventory to production. 7. The clock card is used to record the number of hours each employee works and is used to compute total payroll. The time ticket is used to record how much time an employee spends on each job. Time tickets are also used to determine the amount of overhead to charge to jobs when overhead is based on direct labor.

Job order costing is a cost accounting system in which direct costs are traced and indirect costs are allocated to unique and distinct jobs instead of departments. It is appropriate for businesses that provide non-uniform customized products and services.

Job order costing is one of the two main cost accounting systems, the other being the process costing in which costs are traced and allocated first to different processes carried out in different departments and then to products and services. Many companies use costing systems that are a blend of features of both job-order costing and process costing systems.

Companies that use job-order costing

Some of the companies that use job-order costing include:

  • Accounting, consulting and legal firms
  • Architects
  • Manufacturers of ships and airplanes
  • Book publishers
  • Movie producers

The nature of their work is such that they are interested in finding profitability of different jobs and hence they accumulate costs with reference to different jobs like audit engagement, consulting projects, books, movies, etc.

Steps in job-order costing process

In a job-order costing system, jobs are accounted for using the job-order cost sheet. The process involves the following steps:

  1. Identification of the job
  2. Tracing direct costs to the job
  3. Identifying the indirect costs i.e. manufacturing overheads and finding the cost allocation base for each cost.
  4. Applying the indirect costs to the job using the pre-determined allocation rate.
  5. Finding total cost by summing up all the cost components.
  6. Closing the under/over-applied manufacturing overheads to cost of goods sold/income statement.
  7. Calculating revenue and profit.

Journal entries: example

Dynamic Systems Inc. (DS) received an order to manufacture a customized airplane for the official use of the president of Pakistan. DS will charge an amount equal to the cost of the airplane plus a 30% profit margin on cost to the government of Pakistan. The job code is PK03.

Since the manufacture of the airplane is a one-off project, job-order costing is the most appropriate cost accumulation system. Let us post the required journal entries in the DS costing system.

1. DS purchased raw materials (such as aluminum, fiber, etc.) at a cost of $4 million.

Material inventory$4,000,000
Accounts payable$4,000,000

2. $2.8 million worth of raw materials were used in the project as direct materials.

Work in process—PK03$2,800,000

3. $0.4 million worth of raw materials were used as indirect materials.

Manufacturing overheads$400,000

4. Total direct labor hours consumed on the job cost $3 million. The amount is already paid.

Work in process—PK03$3,000,000

5. Indirect labor hours relevant to the project cost $1 million.

Manufacturing overheads$1,000,000

6. Other indirect costs yet to be paid were $2.5 million.

Manufacturing overheads$2,500,000
Accounts payable$2,500,000

7. Manufacturing overheads are charged to jobs at 100% of direct labor cost i.e. $3,000,000.

Work in process—PK03$3,000,000
Manufacturing overheads$3,000,000

8. The cost of PK03 is transferred from work in progress to finished goods on its completion at total cost of $8,800,000 (=direct materials cost of $2,800,000 plus direct labor cost of $3,000,000 and applied manufacturing overheads of $3,000,000).

Finished goods$8,800,000
Work in process—PK03$8,800,000

9. Revenue is recorded at $11,440,000 [= $8,800,000 × 1.3].

Accounts receivable$11,440,000

10. Actual manufacturing overheads are $3,900,000 (=indirect materials of $400,000 plus indirect labor of $1,000,000 and other overheads of $2,500,000). Applied manufacturing overheads are $3,000,000. The $900,000 worth of manufacturing overheads under-applied is taken to the cost of goods sold or income statement.

Cost of goods sold$900,000
Manufacturing overheads$900,000

Profit on PK03 is $1,700,000 (=revenue of $11,440,000 minus finished goods of $8,800,000 and under-applied overheads adjustment of $900,000).

Written by Obaidullah Jan, ACA, CFAhire me at


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