01 job order costing

JOB ORDER COSTING

Defined

A cost accumulation system used by companies that make relatively small quantities of distinct products or perform unique services that conform to specifications designed by the purchaser

Used by producers of heterogeneous and custom outputs

Production costs are accumulated for each separate job

Examples of Firms that Used JOC

Cobbler making custom shoes and boots

Publishing company producing educational textbooks

Accountant preparing tax returns Architectural firm designing

commercial buildings

Documents Used

Job Order Cost Sheet The source document that provides virtually

all financial information about a particular job.

Includes information such as the job order number, job description, customer identification, scheduling information, delivery instructions and contract price as well as details regarding actual costs for direct materials, direct labor and applied overhead.

Materials Stockcard

Records the perpetual book inventory of costs and quantities of materials on hand

File of materials stock cards of unused materials constitute the subsidiary record for Raw Materials Inventory account

Also known as Materials Ledger

Materials Requisition

Prepared so material can be released from inventory and sent to production area

Indicates the types and quantities of materials to be issued to production or used to perform a service job

When a material is issued, the cost indicated on the materials requisition will be entered to the job order cost sheet

Employee Time Sheets

Indicates the jobs on which each employee worked and the direct labor time consumed

To get the labor cost to be included on the job order cost sheet, the time spent will be multiplied to the corresponding employee wage rate

Job Order Cost Sheet

Cost sheets for uncompleted jobs constitutes subsidiary record for Work in Process account

Cost sheets for completed jobs constituted subsidiary record for Finished Goods Inventory account

Cost sheets for delivered or sold jobs constitutes subsidiary record for Cost of Goods Sold

Job Order Costing Journal Entries

Similar with the previously discussed topics however with variation in the use of Work in Process account since we will be accumulating costs for separate jobs

Materials Losses/Errors

Defective Units Resulted from production errors

which can be reworked to meet quality specifications and be sold

Spoiled Units Resulted from production errors which cannot be reworked to meet quality specifications and be sold

Accounting Treatment for Losses

Determine first the reason of the loss Is the loss generally incurred for most jobs?

(Internal Failure) Is the loss specifically identified to a job?

(Product Specifications)

Determine the magnitude of the loss Is the loss normal? Is the loss abnormal?

Defective Units

If the reason of the defect is the job itself, the additional costs incurred will be charged to all units in the job.

Proforma Entry:Work In Process xx

Raw Materials Inventory xxPayroll xxFactory Overhead Applied xx

Defective Units

If the defect is normal to the process and the number of defects do not exceed the normal limit, the additional costs incurred will be charged to all units being processed during the period

Proforma Entry:Factory Overhead Control xx

Raw Materials Inventory xxPayroll xxFactory Overhead Applied xx

Illustration

Job 2308 called for making of 4,000 units with these unit costs:

Direct Materials Php 15Direct Labor 13FOH (includes Php 1 allowance fordefective units) __ 12 Php 40

During processing, 300 units were found to be defective and required the following additional costs: Materials – Php 2,000; Labor – Php 4,000 and Overhead – Php 2,000

Spoiled Units

If the reason of the spoilage is the job itself, like exacting specifications or a difficult or complicated manufacturing process, the loss will be charged to the specific job and will increase the unit cost of the remaining perfect finished goods

Proforma Entry:Spoiled Goods xx

Work In Process xxNote: The amount to be debited and credited is equal to the

number of spoiled units multiplied by the estimated selling price for these spoiled goods

Spoiled Units

If the reason of the spoilage is normal to the process or due to internal failure and the number of spoiled goods do not exceed the normal limit, the unit cost of the remaining perfect finished goods will not increase

Proforma Entry:Spoiled Goods xxFactory Overhead ControlxxWork In Process xx

Note: The amount to be debited in Spoiled Goods is equal to the estimated selling price; the amount credited to WIP is equal to the total costs charged to the spoiled goods and the difference or loss will be charge to FOHC.

Illustration

Job 2308 called for making of 4,000 units with these unit costs:

Direct Materials Php 15

Direct Labor 13

FOH (includes Php 1 allowance forspoiled units) __

12 Php 40

During processing, 200 rejected units, a normal number, were estimated to be sold at Php 18 each.