Job Order Costing

• Cost accounting systems measure, record, and report product costs.\

• Knowing unit costs helps managers:

  • Determine which products to produce.

  • Set sales prices that will lead to profits.

  • Determine how many products to produce.

  • Compute cost of goods sold for the income statement.

  • Compute the cost of inventory for the balance sheet.

• A job order costing system is an accounting system that accumulates costs by job.

  • A job is the production of a unique product or specialized service. It may be one unit or a batch of units.

• A process costing system is an accounting system that accumulates costs by process.

  • It is used when companies manufacture identical units.

MATERIALS:

• Purchasing materials:

  • Often stored for later usage

• Using materials in production

  • Direct materials

  • Indirect materials

• ***Materials purchased and materials used in production are usually different amounts.

• When materials are received on the production floor, the direct materials are recorded on the job cost record.

LABOUR

• Most companies use electronic labor/time to track labor costs.

• If a manual system is used, each employee completes a labor time record to track and assign direct labor to jobs

MOH

• Transactions 4–7—Actual Overhead Costs Incurred: In addition to indirect materials and indirect labor, other overhead costs are incurred:

  • Depreciation on manufacturing plant and equipment of $20,000

  • Plant utilities of $7,000

  • Plant insurance of $6,000

  • Plant property taxes incurred but not yet paid of $5,000

• Actual manufacturing overhead costs are not known until the end of the period.

• Managers use a predetermined overhead allocation rate to allocate costs to jobs before the end of the period.

• An allocation base links the overhead costs to jobs.

• The primary cost driver causes an increase or a decrease in the cost.

  • Common manufacturing company cost drivers are:

    • Direct labor hours (for labor-intensive production environments)

    • Direct labor cost (for labor-intensive production environments)

    • Machine hours (for machine-intensive production environments)

Record the completion and sales of finished goods

• After accumulating, assigning, and allocating the costs of direct materials, direct labor, and overhead to jobs, a company:

  • Accounts for the completion of jobs

  • Accounts for the sale of jobs

  • Adjusts Manufacturing Overhead at the end of the period

Adjust for overallocated and underallocated overhead

• Companies must adjust the Manufacturing Overhead account for any over or under allocation of overhead.

  • Underallocated overhead occurs when actual manufacturing overhead costs are more than allocated manufacturing overhead costs.

  • Overallocated overhead costs occur when the actual manufacturing overhead costs are less than allocated manufacturing overhead costs.

  

DATA ANALYTICS

• For manufacturing companies, knowing the cost of production is vital to their success.

  • Managers can use the job order costing system to accumulate large quantities of data.

  • The data can then be used in decision making.

SERVICE CO & JOB ORDER COSTING SYSTEMS

• Service companies do not have inventory or manufacturing costs.

• They trace direct labor to jobs.

• They allocate overhead costs to jobs:

  • Computing the predetermined overhead allocation rate

  • Allocating indirect costs to jobs, using the predetermined overhead allocation rate

• They use the costing information to make pricing decisions.