Ch 2. Job Order Costing Study Notes
Chapter 2: Job Order Costing
Learning Objectives
Objective 2-1: Describe the key differences between job order costing and process costing.
Objective 2-2: Describe the source documents used to track direct materials and direct labor costs to the job cost sheet.
Objective 2-3: Calculate a predetermined overhead rate and use it to apply manufacturing overhead cost to jobs.
Objective 2-4: Describe how costs flow through the accounting system in job order costing.
Objective 2-5: Calculate and dispose of overapplied or underapplied manufacturing overhead.
Objective 2-6: Calculate the cost of goods manufactured and cost of goods sold.
Objective 2-7: Apply job order costing to a service setting.
Objective 2-8: Prepare journal entries to record manufacturing and non-manufacturing costs in a job order cost system.
Job Order Costing vs. Process Costing
Key Differences
Type of Product:
Job Order Costing: Unique products and services, such as custom construction projects.
Process Costing: Homogeneous products and services, such as mass-produced items like cans of soft drinks.
Approach:
Job Order Costing: Customized to meet the specific needs of customers or clients.
Process Costing: Utilizes a series of standardized processes for production.
Cost Accumulation:
Job Order Costing: Accumulates costs by job, project, or customer.
Process Costing: Accumulates costs by process.
Major Cost Report:
Job Order Costing: Each unique job has a corresponding job cost sheet.
Process Costing: Each major production process has a production report.
Process Costing
Overview: Costs are traced to the process involved in product creation and divided by the number of units produced to achieve an average unit cost.
Manufacturing Cost Categories
Direct Materials: Raw materials used in production.
Direct Labor: Labor costs directly attributed to the production of goods.
Manufacturing Overhead: Indirect costs associated with production that cannot be directly traced to a specific job.
Assigning Manufacturing Costs to Jobs
Source Documents
Direct Materials: Tracked using a Materials Requisition Form.
Direct Labor: Tracked with Direct Labor Time Tickets.
Predetermined Overhead Rate (POHR)
Definition: A predetermined overhead rate is calculated to allocate manufacturing overhead costs to jobs throughout the period.
Purpose:
To apply overhead when actual overhead costs cannot be easily traced to specific jobs.
Manufacturing overhead encompasses various items, including small tools and labor costs.
Actual overhead for the period may only be known at the period's end.
Steps to Calculate POHR
Estimation: Predetermined overhead rate is estimated before the start of the period.
Cost Drivers: The allocation base should ideally be a cost driver, such as total direct labor hours, direct labor costs, or machine hours.
Example of POHR Calculation
Total estimated manufacturing overhead cost for the year = 150,000.
Estimated direct labor hours = 10,000.
Calculation:
ext{POHR} = rac{ ext{Estimated Manufacturing Overhead}}{ ext{Estimated Direct Labor Hours}} = rac{150,000}{10,000} = 15.
Interpretation: For each direct labor hour worked, apply 15.00 of manufacturing overhead cost to the job.
Cost Flow in Job Order Costing
Overview of Cost Flow
Start: Costs originate from Raw Materials Inventory.
Actual Direct Materials: Flow into Work in Process (WIP) Inventory.
Indirect Materials: Flow into Manufacturing Overhead.
Applied Overhead Costs: Calculated based on the predetermined overhead rate and total costs incurred.
Transfer of Costs: Once jobs are completed:
Costs transfer from Work in Process Inventory to Finished Goods Inventory.
When jobs are sold, costs transfer to Cost of Goods Sold, encompassing applied and underapplied overhead.
Recording Purchase and Issue of Materials
Example: House-flipping Company
Beginning Inventory: Raw Materials Inventory - 10,000.
Purchases: Total material purchased = 25,000.
Material Distribution:
Job 27: 15,000 direct materials.
Job 28: 10,000 direct materials.
Additional indirect materials: 500.
Recording Labor Costs
Total Labor Costs: 7,500 divided among jobs as follows:
Job 27: 4,000
Job 28: 2,000
General Contractor Costs: 1,500
Recording Manufacturing Overhead Costs
Details of Costs
Additional manufacturing overhead:
Property taxes: 1,700 (owed but unpaid).
Expired insurance premium: 1,000.
Depreciation on construction tools & equipment: 800.
Transferring to Finished Goods and Cost of Goods Sold
Flow of Costs:
Jobs in WIP transferred to Finished Goods Inventory upon completion.
When sold, costs are recorded as Cost of Goods Sold.
Record any overapplied or underapplied overhead:
Overapplied overhead decreases Cost of Goods Sold.
Underapplied overhead increases Cost of Goods Sold.
Non-Manufacturing Costs
Categories of Non-Manufacturing Costs
Commissions to Sales Agent: 8,000.
Advertising Expense: 5,000.
Staging Expense: 6,000.
Administrative Expense: 2,000.
Disposing of Overapplied and Underapplied Overhead
Method: Commonly managed by adjusting the Cost of Goods Sold account.
Overapplied Overhead: Reflects a credit balance and reduces Cost of Goods Sold.
Underapplied Overhead: Indicates a debit balance and increases Cost of Goods Sold.
Summary of Cost Flows
Cost of Goods Manufactured Report: Should include applied manufacturing overhead and other incurred costs.
Job Order Costing in a Service Setting
Utilization: Common in various professional service firms including:
Types of Firms:
Accounting firms
Law firms
Advertising and PR firms
Architectural firms
Engineering firms
Healthcare providers
Cost Assignment:
Labor-intensive, thus billable hours serve as the primary driver for cost assignment.
Indirect Costs:
Examples include non-billable activities, salaries for administrative personnel, rent and utilities, and infrastructure costs.
These are allocated based on relevant cost drivers similar to manufacturing overhead.