Job Costing

1. Job Order Costing: What is it and why do we use it?

  • A cost accounting system accumulates manufacturing costs (DM, DL, OH) and assigns them to cost objects (products, services, jobs).

  • Process Costing: Costs averaged over similar products, mass‑produced in continuous flow (e.g., oil refineries, cereal manufacturers, Lego).

  • Job Order Costing: Costs assigned to individual jobs for specific customers (e.g., custom jewelry, wedding invitations, tattoos, health care, audits, vehicle customization).

2. Job Order vs. Process Operations

  • Job Order: Custom orders, diverse products/services, low volume, high flexibility, low standardization.

  • Process: Repetitive procedures, similar products/services, high volume, low flexibility, high standardization.

3. Cost Flows in Job Order Costing

  • Work in Process (WIP) Inventory → Finished Goods Inventory → Cost of Goods Sold (COGS).

  • Direct Materials (DM), Direct Labor (DL), and Applied Overhead (OH) flow into WIP.

  • Overhead includes indirect materials, indirect labor, and other indirect costs.

4. Direct Materials

  • Recorded in Raw Materials Inventory → transferred to WIP when used.

  • Tracked on Job Cost Sheets for each job.

5. Direct Labor

  • Recorded in Factory Wages Payable → transferred to WIP when incurred.

  • Also tracked on Job Cost Sheets.

6. Applied Overhead

  • Overhead cannot be traced directly to jobs; applied using estimates for timely information.

  • Predetermined Overhead Rate (PDOH):

PDOH=Budgeted Total OH CostsBudgeted Level of Cost Driver\text{PDOH} = \frac{\text{Budgeted Total OH Costs}}{\text{Budgeted Level of Cost Driver}}

  • Applied OH:

Applied OH=PDOH×Actual Level of Cost Driver\text{Applied OH} = \text{PDOH} \times \text{Actual Level of Cost Driver}

  • Cost driver examples: direct labor hours, machine hours.

7. Demo Problem – Aggie Company

  • Budgeted OH: $450,000; Budgeted Machine Hours: 50,000 → PDOH = $9/machine hour.

  • Job: 500 bats × 3 machine hours each = 1,500 hours.

  • Applied OH = $9 × 1,500 = $13,500.

8. Overhead Variance

  • Difference between Actual OH and Applied OH.

  • Underapplied: Actual OH > Applied OH.

  • Overapplied: Actual OH < Applied OH.

  • Disposition:

    • If insignificant → close to COGS.

    • If significant → prorate to WIP, FG, and COGS based on ending balances.

9. Demo Problem – Aggie Company (Variance)

  • Actual OH: $15,000; Applied OH: $13,500 → $1,500 underapplied.

  • If insignificant:

    • Dr COGS 1,500; Cr OH 1,500.

  • If significant (WIP $18k, FG $42k, COGS $60k):

    • Allocate proportionally: WIP $225, FG $525, COGS $750.

10. Group Problem – Harris Company

  • Budgeted OH: $600,000; Budgeted DLHs: 200,000 → PDOH = $3/DLH.

  • Actual DLHs: 190,000 → Applied OH = $570,000.

  • Actual OH: $562,000 → $8,000 overapplied.

  • If not material:

    • Dr OH 8,000; Cr COGS 8,000