Job Order Costing Principles and Accounting Flows

Cost Accounting Systems: Companies generally utilize one of two primary systems to track product or service costs: Job Order Costing or Process Costing.
Job Order Costing Characteristics:
- Customization: Designed for businesses that produce custom orders or diverse products and services.
- Volume and Flexibility: Characterized by low production volumes but high flexibility in product specifications.
- Standardization: Exhibits low standardization as each job or batch is unique.
- Examples: Professional services like medical consultations (doctors), custom manufacturing, or specialized repair work.
Process Costing Characteristics:
- Repetition: Focuses on repetitive procedures for similar products.
- Volume and Flexibility: Characterized by high production volumes and low flexibility.
- Standardization: Exhibits high standardization, such as a beverage bottling line.

Job Cost Sheet: A primary document used in job order costing to record the accumulation of costs for a specific job. It serves as a subsidiary record for the Work in Process Inventory account.
Key Data Points on a Job Cost Sheet:
- Header Information: Includes the customer name (e.g., Anita Gupta), job description (e.g., Alarm System and Paint on Ford Expedition), Job Number (e.g., B15), and the dates the job was started and completed (March 8 to March 12).
- Direct Materials: Recorded via material requisitions (e.g., Requisition $R-46$ for $700$ ).
- Direct Labor: Recorded via time tickets (e.g., Time Ticket $T-33$ for $1,000$ ).
- Overhead: Applied based on a predetermined rate (e.g., $160\%$ of direct labor cost, totaling $1,600$ ).
- Summary Section: Aggregates the three cost components to calculate the total job cost (e.g., 700 + $1,000 + $1,600 = $3,300).

Materials Acquisition:
- When materials are purchased, they are recorded in the Raw Materials Inventory.
- Source Document: A receiving report is generated when materials arrive.
- Ledger Maintenance: Materials ledger cards are updated for every purchase and issuance.
- Journal Entry for Purchase:
  - Debit: Raw Materials Inventory ( $2,750$ )
  - Credit: Accounts Payable ( $2,750$ )
Materials Issuance:
- Direct Materials: Traced directly to a specific job (e.g., Jobs B15, B16, B17). Requisitions $R-46, R-47, R-48$ totaled $1,800$ at the Road Warriors company.
- Indirect Materials: Materials not easily traced to a specific job are charged to Factory Overhead.
- Journal Entry for Direct Materials:
  - Debit: Work in Process Inventory ( $1,800$ )
  - Credit: Raw Materials Inventory ( $1,800$ )
- Journal Entry for Indirect Materials:
  - Debit: Factory Overhead ( $550$ )
  - Credit: Raw Materials Inventory ( $550$ )

Labor Tracking:
- Time Tickets: Source documents where employees record the time spent on specific jobs. For example, employee T. Zeller (Employee No. $69$ ) worked on Job B15 for $20$ hours at a rate of $50\,per\,hour$ .
- Direct Labor: Traced to specific jobs and added to Work in Process Inventory. Total direct labor for Jobs B15 ( $1,000$ ), B16 ( $2,000$ ), and B17 ( $1,200$ ) equaled $4,200$ .
- Indirect Labor: Labor costs that support production but are not traceable to a specific job (e.g., maintenance or supervision) are charged to Factory Overhead.
- Journal Entry for Direct Labor:
  - Debit: Work in Process Inventory ( $4,200$ )
  - Credit: Factory Wages Payable ( $4,200$ )
- Journal Entry for Indirect Labor:
  - Debit: Factory Overhead ( $1,100$ )
  - Credit: Factory Wages Payable ( $1,100$ )

Predetermined Overhead Rate (POHR): Established at the start of a period to assign estimated overhead to jobs.
- Formula: $\text{POHR} = \frac{\text{Estimated Overhead Costs}}{\text{Estimated Activity Base}}$
Applying Overhead: During the period, overhead is applied to jobs using the POHR and the actual amount of activity base used.
- Applied Overhead Formula: $\text{Applied Overhead} = \text{POHR} \times \text{Actual Amount of Activity Base Used}$
- Example Application: Road Warriors applied overhead at $160\%$ of direct labor cost. For total direct labor of $4,200$ , the applied overhead was $6,720$ ( $4,200 \times 1.6$ ).
- Journal Entry for Applied Overhead:
  - Debit: Work in Process Inventory ( $6,720$ )
  - Credit: Factory Overhead ( $6,720$ )
Recording Actual Overhead: Actual costs are debited to the Factory Overhead account as they occur.
- Other Overhead Costs: Includes items such as accumulated depreciation ( $2,400$ ), rent ( $1,620$ ), utilities ( $250$ ), and insurance ( $1,000$ ), totaling $5,270$ .
- Journal Entry for Actual Costs:
  - Debit: Factory Overhead ( $5,270$ )
  - Credit: Various accounts (Accumulated Depreciation, Rent Payable, etc.)

Inventory Flow: Costs move from Raw Materials, Direct Labor, and Applied Overhead into Work in Process Inventory. Upon job completion, costs move to Finished Goods Inventory. When sold, they move to Cost of Goods Sold (COGS).
Completion of Jobs: For Road Warriors, Jobs B15 and B16 were completed, totaling $9,300$ ( $3,300$ for B15 and $6,000$ for B16).
- Journal Entry:
  - Debit: Finished Goods Inventory ( $9,300$ )
  - Credit: Work in Process Inventory ( $9,300$ )
Sale of Jobs: Job B15 was sold for $5,500$ .
- Journal Entry (Cost):
  - Debit: Cost of Goods Sold ( $3,300$ )
  - Credit: Finished Goods Inventory ( $3,300$ )
- Journal Entry (Revenue):
  - Debit: Accounts Receivable ( $5,500$ )
  - Credit: Sales ( $5,500$ )
Schedule of Cost of Goods Manufactured: Summarizes the manufacturing costs.
- Direct Materials Used: $1,800$
- Direct Labor: $4,200$
- Factory Overhead Applied: $6,720$
- Total Manufacturing Costs: $12,720$
- Less Ending Work in Process (Job B17): $3,420$
- Cost of Goods Manufactured: $9,300$

Underapplied Overhead: Occurs when Actual Overhead > Applied Overhead. This means jobs were undercosted.
- Closing Entry:
  - Debit: Cost of Goods Sold
  - Credit: Factory Overhead
Overapplied Overhead: Occurs when Actual Overhead < Applied Overhead. This means jobs were overcosted.
- Closing Entry:
  - Debit: Factory Overhead
  - Credit: Cost of Goods Sold
Road Warriors Example: Total actual overhead was $6,920$ (550 + $1,100 + $5,270) while applied overhead was $6,720$ , resulting in $200$ underapplied overhead.
- Journal Entry:
  - Debit: Cost of Goods Sold ( $200$ )
  - Credit: Factory Overhead ( $200$ )

Application in Service Firms: Service companies use job order costing to track the costs of individual client projects or "jobs."
Key Differences:
- Inventory Accounts: Service firms usually lack Raw Materials or Finished Goods. They use accounts like "Services in Process Inventory."
- Cost Components: Primary costs are direct labor and overhead.
Service Pricing Example:
- Estimated Direct Labor: $5,845$ (based on specific hours for designers and staff).
- Estimated Overhead: $11,232$ (calculated at $108\,per\,hour$ for $104\,hours$ ).
- Total Estimated Job Cost: $17,077$ .
- Markup Calculation: A markup (e.g., $18\%$ ) is added to the total cost to determine the price quote ( $20,151$ for this example).