Job Order Costing Overview

Job Order Costing

• Job order costing is used by companies that produce custom orders and diverse products or services.
• These businesses often have low production volume and high product flexibility.
• Job order costing involves tracking costs for each specific job.
• Job cost sheets are used to record the cost of each job.

Learning Objectives

• C1: Explain job order costing and job cost sheets.
• A1: Apply job order costing in pricing services.
• P1: Describe and record the flow of materials costs in job order costing.
• P2: Describe and record the flow of labor costs in job order costing.
• P3: Describe and record the flow of overhead costs in job order costing.
• P4: Close overapplied and underapplied factory overhead.

Cost Accounting Systems

• Process costing vs. Job order costing: Process costing is used for repetitive procedures and high production volume, while job order costing is used for custom orders and diverse products/services.
• Job order operations - diverse products and services, low production volume, high product flexibility, low standardization.
• Process operations - repetitive procedures, similar products, high production volume, low product flexibility, high standardization.

Production Activities

• In job order costing, costs are tracked though Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.
• Raw materials are first recorded as Raw Materials Inventory and then transferred to Work in Process Inventory as needed.
• Direct labor costs related to a specific job are included in Work in Process Inventory.
• Overhead costs are applied to jobs using an estimated overhead rate.
• Completed products are moved to Finished Goods Inventory and then to Cost of Goods Sold after being sold..

Cost Flows

• Manufacturing costs flow through raw materials, work in process, finished goods, and cost of goods sold.
• Subsidiary records hold specific cost data about manufacturing costs for each job.

Job Cost Sheet

• Job cost sheets record the cost of each specific job.

Materials and Labor Costs

• Materials are recorded on receiving reports, materials ledger cards track materials used, then updated with material requisitions used for production.
• Labor costs are recorded on time tickets, which are used to track direct labor hours and wages; these are important for applying overhead costs.

Materials Requisition

• Materials requisitions are documents that authorize the removal of materials from inventory for specific jobs.
• These documents track both the quantity and cost of materials used for each job.

Materials Requisition Journal Entry, and Labor Time Ticket Journal Entry

• Journal entries record the flow of materials and labor costs into Work-in-Process.

Overhead Costs

• Predetermined overhead rate: Estimated overhead costs divided by estimated activity base.
• Overhead costs are applied to jobs based on a predetermined overhead rate.
• Actual overhead costs are recorded.
• Overapplied or underapplied overhead requires adjustment and closes to cost of goods sold.

Record Actual Overhead costs

• Indirect Material
• Indirect Labor
• Other Overhead Costs are recorded, these are not directly attributable to a specific job.

Record Actual Overhead Journal Entry

• Journal entries record the flow of overhead costs into Work-in-Process with factory overhead, indirect materials, and indirect labor costs included.

Cost Flows to Financial Statements

• Costs flow through raw materials, work in process, ending inventory, and cost of goods sold.
• The cost of Goods Sold is calculated to determine profit.

Accounting for Cost Flows

• The flow of cost information is linked to the accounts in the balance sheet and income statement.

Schedule of Cost of Goods Manufactured

• This schedule calculates the total manufacturing costs and the cost of goods manufactured.

Financial Statements

• Financial statements, including the income statement (sales, cost of goods sold, gross profit, etc.) and balance sheet (current assets, inventory, total inventory), show the results of the accounting for cost flows.

Adjusting Factory Overhead

• Overapplied or underapplied overhead needs to be adjusted, debiting or crediting cost of goods sold to correct any errors.

Job Order Costing for Services

• Service companies use job order costing, but there's no raw materials inventory. Direct labor and overhead costs are tracked in special service accounts.
• Different account titles (like Services in Process Inventory and Services Overhead) are used compared to manufacturing companies.

Pricing for Services

• Service providers must calculate total costs for each job (including labor and overhead) to determine pricing.

Gross Profit Ratio for Service Companies

• This ratio is calculated to ensure profitability within service-based business models.