CHAPTER 5: JOB ORDER COSTING

LEARNING OBJECTIVES
Upon completion of this chapter, you should be able to
 Define job order costing and identify the types of industries that would be most to use this system.
 Demonstrate the mechanics of a job order costing system.
 Differentiate among the forms used in the purchase and issuance of materials such as a purchase requisition,
a purchase order, a receiving report, and a materials requisition.
 Distinguish between the periodic and perpetual cost accumulation systems used to account for materials
issued to production and for ending materials inventory.
 Prepare a job order cost sheet.

The job order cost procedure helps the cost of various jobs or contracts separate during their manufacture or
construction. The method is applicable to job order work in factories, workshops, and repair shops as well as to
work by builders, construction engineers, shipbuilders, and printers. The cost unit is the job, the work order, or
the contract; and the records will show the cost of each. The method presupposes the possibility of physically
identifying the jobs produced and of charging each with its own cost.

A variation of the job order cost method is that of costing order by lots. A lot is the quantity of product that can
conveniently and economically be produced and costed. For example, in the shoe manufacturing industry, a
contract is divided into lots, each lot being from 100 to 250 pairs of one size and style of shoe. The costs are then
accumulated for each lot.

In job order costing, each job is an accounting unit to which materials, labor and factory overhead costs are
assigned by means of job order numbers. The cost of each order produced for a given customer or the cost of
each lot to be placed in stock is recorded on a summary sheet called a job order cost sheet, or merely a cost sheet.
This mater sheet is designed to collect the costs of materials, labor, and factory overhead applicable to a specific
job, Cost sheets differ in form, content, and arrangement in each business. In each for the upper section provides
space for the job number, the name of the customer, a description of the items to be produced, the quantity the
date started, and the date completed. The main portion shows the cost of materials, labor, and factory overhead
applied in each department or cost center. An example of a job-cost sheet is shown below.

EXAMPLE OF A JOB
ORDER COST SHEET
Several jobs or orders may be going through a factory at the same time. Each cost sheet I s given a job number which
is placed on each material requisition and labor time ticket used in connection with the job. These forms used for
materials and labor, numbered for the job to which they apply, are totaled daily or weekly and entered on the cost
sheets. The cost sheet eventually becomes a summary of all the costs, including factory overhead, involved in
completing a job. The cost sheets are subsidiary records and are controlled by the work in process account. Jobs
performed on the basis of customer specifications allow the computation of a profit or loss on each order. If jobs
constitute production of a specific quantity for inventory, job order costing permits computation of a unit cost for
inventory costing purposes.

MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING:

1. JOB ORDER COST SHEET
a) These records accumulate product costs of specific units or small batches of units for both product
costing and control purposes.
b) The file of job-order sheets for uncompleted jobs serves as a perpetual book inventory and the
subsidiary ledger for Work in Process Control.
c) A separate cost sheet is prepared for each job.
2. MATERIALS STOCKCARD
a) These records are the perpetual book inventory of costs and quantities of materials on hand.
b) The file of materials stock cards for unused materials is the subsidiary ledger for Materials Control.
c) A separate stock card is prepared for each type of material on hand.
3. FINISHED GOODS STOCKCARD
a) These records are the perpetual book inventory of costs and quantities of completed goods held for
sale.
b) The file of finished goods stock cards for unsold goods is the subsidiary ledger of Finished Goods
Control.
4. FACTORY OVERHEAD CONTROL COST RECORD
a) These records accumulate detailed manufacturing overhead costs by department.
b) The file of these records for the accounting period is the subsidiary ledger for Factory Overhead
Control.
5. MATERIALS REQUISITION< TIME TICKET AND CLOCK CARD
a) As the source documents for charging costs to jobs and department.
b) To aid in fixing responsibility for control and usage of materials and labor.
c)
ACCOUNTING PROCEDURES FOR MATERIALS

In manufacturing enterprises, the common practice is to record all materials and supplies in one control account,
Materials or Stores. Procedures that affect the materials account involves the:
1. Purchase of materials and supplies.
2. Issuance of materials and supplies
a) Direct materials
b) Indirect materials and supplies

Recording the purchase of materials

The account debited when materials are purchased is Materials or Stores (instead of Purchases for periodic) and the
account credited is Accounts Payable or Vouchers Payable. As materials are purchased, the amount is posted on the
Material control account and at the same time the purchase is also entered on an individual materials ledger card/
stockcard (a separate card is used for each material item) showing quantity received, unit cost, and total amount.

The entry to record the purchase of materials is:

Materials xxxx
 Accounts Payable xxxx
An entry is made on the stock card under the Received section.

The entry to record the return of materials to vendor is:

Accounts Payable xxxx

Materials xxxx

An entry is made on the stock card under the Received section enclosed in parenthesis to indicate reduction in
quantity.

Recording the issuance of materials.

When a job is started, the materials needed for the job are issued based on the materials requisitions prepared by the
employees. A copy of the requisition is given to the storekeeper, which will serve as the basis for the materials to be
issued. The job order number is shown on the materials requisition together with the specifics on type and quantity
of materials required by each job. The quantity, unit cost, and total cost of each of the materials are entered on the
issued section of the stock card.

The entry to record the issuance of direct materials is

Work in process xxxx
Materials xxxx

An entry is made on the stock card under the Issued section and also on the cost sheet – Materials

The entry to record the issuance of indirect materials is

Factory overhead control xxxx
Materials xxxx

An entry is made on the stock under the Issued section and also on the overhead analysis sheet.

Shown
below
is an

illustration of material stock card.

Show below is an illustration of a material requisition slip.

The material control account may be summarized as follows:

MATERIALS
1. Inventory beginning 1. Cost of direct materials issued
2. Purchase of materials 2. Cost of indirect materials issued
3. Freight-in (using direct Charging) 3. Cost of materials returned to suppliers
4. Cost of excess materials
Returned from factory

The balance of the Materials account represents the Materials inventory at the end of the period under consideration.
The amount should be equal to the total of the balances of all the material stock cards.
ACCOUNTING PROCEDURES FOR LABOR

The accounting procedures for labor may be divided into two distinct phases:

1. Collection of payroll data, computation of earnings, calculation of payroll taxes, and payment of wages.

2. Distribution and allocation of labor costs to jobs, departments, and other cost classifications

In most factories, clock cards/time records are used to record the days or hours worked by each employee. These
clock cards/ time records are used as the basis in computing the gross earnings of employees who are paud hourly
wages. In addition to these clock cards, time tickets are prepared for each worker to determine the time spent for each
job as basis in determining the amount to be charged to direct labor cost and indirect labor cost. The time tickets for
various jobs are sorted, priced, and summarized, and the time ticket hours should be reconciled with the clock card
hours.

Shown below is an illustration of a job time ticket.

At regular intervals, usually daily or weekly, the labor time and labor cost for each job are entered on the job order
cost sheets. For each payroll period – weekly, every two weeks, or monthly – the summary of employees’ earnings
and the liability for payment is journalized and posted to the general ledger

The entry to record the payroll and the incurrence of liability is

Payroll xxxx
Withholding Tax Payable xxxx
SSS Premium Payable xxxx
Phil Health Contribution Payable xxxx
Accrued Factory Payroll xxxx

The entry to record the distribution of payroll is

Work in process xxxx
Factory Overhead Control xxxx
Payroll xxxx

An entry is made on the cost sheet under the labor section

The entry to record the payment of payroll is

 Accrued Factory Payroll xxxx
Cash xxxx

The work in process account is used to charge the jobs with the direct labor cost. Factory overhead control is charged
for the indirect labor cost incurred. The tax withheld is computed based on the table provided by the Bureau of
Internal Revenue. For the SSS Premium and Phil Health Contributions, the table is provided by the Social System.

The clearing account for the total wages due to the factory personnel is the payroll account summarized as follows:

PAYROLL
1. Total wages and salaries earned by factory personnel 1. Total payroll during the payroll period at the same
during the payroll period time debiting work in process for direct labor and
overhead for indirect labor.

The account used to accumulate the liability for payroll or factory overhead is the Accrued Factory Payroll
summarized as follows:

PAYROLL
1. Total amount of wages paid to factory personnel at 1. Balancing beginning
the same time crediting accounts payable or cash 2. Total amount of wages and salaries due to factory
personnel at the same time debuting payroll.

ACCOUNTING FOR FACTORY OVERHEAD

There are two accounts used- factory overhead control and factory overhead applied. Factory overhead control is
used to accumulate actual overhead incurred while factory overhead applied is used to accumulate estimated factory
overhead applied to production. For factory overhead applied to production, a predetermined rate is used and this is
computed using any of the following as a base:

1. Units of production
2. Direct material cost
3. Direct labor hours
4. Direct labor cost.
5. Machine hours

The predetermined factory overhead rate computed may be used for all departments in the company (blanket rate)
or a rate may be computed for each department to fit the nature of the operations of the department
(departmentalized rate).

Estimated factory overhead (Factory overhead applied) is used even if there is actual factory overhead because at the
time the overhead is needed for costing of jobs completed, the actual overhead is not yet available (the actual will be
known only at the end of the month). The computation of the cost of each job will be done upon the completion of the
job and this may be during the first week, the second week, or third week of the month, and at this time, the actual
overhead is not yet available because some of the items included in the actual overhead will be known only at the
end of the month.

As items in the factory in the factory overhead control account are incurred, the Factory Overhead Control account is
debited. The applied factory overhead entered on the job order cost sheet for each job is that basis for the following
entry:

Work in process xxxx

 Applied Factory Overhead xxxx

Some actual overhead costs, such as indirect materials, indirect labor, and payroll taxes, are debited to Factory
Overhead Control as they are incurred. Other overhead costs, such as depreciation and expired insurance are debited
to Factory Overhead Control when adjusting entries are recorded.

The controlling account for accumulating the indirect charges incurred in production is:

MANUFACTURING OVERHEAD CONTROL

1. Cost of indirect materials and supplies issued from 1. Total debit footing at the end of the accounting period
the warehouse at the same time crediting materials. when closing the books.
2. Cost of indirect labor at the same time crediting
payroll.
3. Cost of indirect expense purchased front outsiders.
4. Cost of other indirect expense incurred by the
company.

Manufacturing overhead applied – account used for accumulating the total overhead charged to production during
period.

MANUFACTURING OVERHEAD APPLIED

1. Total credit footings at the end of the accounting 1. Cost of overhead allocated to production and
period upon closing the books. computed by multiplying the actual factor being used
during the period by predetermined rate, at the same
time debiting work in progress.

Over/under applied overhead – the difference between the actual overhead incurred and the applied overhead.

OVER/UNDER APPLIED OVERHEAD

1. Difference between the actual manufacturing 1. Difference between actual manufacturing overhead
overhead and the applied overhead when actual is and the applied overhead when the applied is more than
applied the actual.

The closing of the Factory Overhead Control account and the Factory Overhead Applied account may be done at the
end of the month or at the end of the year. If the closing is to be done monthly, the following are the entries:

End of the month;

Factory Overhead Applied xx
Under/over-applied overhead xx
Factory Overhead Control xx
End of the year:
Cost of Goods Sold xx
Under/over-applied overhead xx

If the closing is to be done yearly, the entry will be at the end of the year only. The entry is shown on the next page.

End of the year;

Factory Overhead Applied xx
Under/over-applied overhead xx
Factory Overhead Control xx

The variance is computed as follows:

 Actual factory overhead xxx
Less: Applied factory overhead xxx
Variance xxx

If actual is bigger than applied, the variance is called under-applied factory overhead (unfavorable), and this is taken
as an addition to the Cost of Goods Sold in the statement. If applied is bigger than actual, the variance is called over-
applied factory overhead (favorable) and this is taken as deduction from the Cost of Goods Sold in the statement.
Whatever method of closing the control and applied account is used, the statement is always adjusted for the uner-
applied/(over-applied) on the statement. For purposes of preparing the Cost of Goods Sold statement, factory
overhead applied is used because this is the amount charged to work in process account. As stated above, the Cost of
Goods Sold will be adjusted for the variance only at the end of the year. If the Cost of Goods Sold is stated in the
problem, then it must be taken as normal, prior to the adjustment for the variance.

Work in process – controlling account used to record the flow of the elements of cost through the factory during a
given period.
WORK IN PROCESS
1. Cost of beginning inventory 1. Cost of materials, labor, and factory overhead applied
2. Cost of direct materials issued to production at the to jobs completed during the period at the same time
same time crediting materials debiting finished goods.
3. Cost of direct labor applied to production during 2. Cost of direct materials returned to the warehouse at
period at the same time crediting the payroll account. the same time debiting materials
4. Amount of overhead applied to production at the
same time crediting applied overhead.

The work in process account is used to accumulate during the month the total cost of materials placed in process,
labor used, and factory overhead applied. The amounts entered on the cost sheet should be equal the amounts
debited to the work in process account dung the month. As jobs are completed, the cost sheets for the corresponding
jobs are totaled and the amount is now transferred to the finished goods account. The journal entry to record the cost
of the jobs completed is:

Finished goods xxxx

Work in process xxxx

When the finished goods are delivered to customers, the sales and the cost of goods sold are recorded as follows:

Accounts receivable xxxx

Sales xxxx

Cost of goods sold xxxx

Finished goods xxxx

If a job is delivered directly to a customer, the entries to record the completion of the job and the delivery to the
customer may be merged into one as follows:

Cost of goods sold xxxx

Work in process xxxx
Finished goods- a controlling account used to record the flow of the cost of goods completed and transferred to the
finished goods storeroom during the period.

FINISHED GOODS
1. Cost of inventory at the beginning 1. Cost of finished goods sold during the period at the
2. Factory cost of job of order completed at the same same debiting cost of goods sold.
time crediting work in process
3. Cost of goods returned by the customer at the same
time crediting cost of goods sold

Cost of goods sold- an account used to accumulate the cost of finished goods disposed through sale to customers.

COST OF GOODS SOLD

1. Cost of finished goods disposed through sale to 1. Cost of finished goods returned by customers at the
customers at the same time crediting finished goods. same time debiting the finished goods account.
2. Adjustment for under-applied factory overhead. 2. Adjustment of over-applied factory overhead.
3. Balance of the account at the end of the period at the
same debiting income summary.

ILLUSTRATIVE PROBLEM:
The Northern Consolidated Company has the following balances as of January 1, 2019.
Materials P 4,900
Work in process 4,600
Finished goods 6,000
Accrued factory payroll 200

Details of the three inventories are:

Finished goods
Commodity x – 2,000 units at P 3.00 P6,000
Work in process – Job No. 1
Materials:
A - 200 units at P5.00 P 1,000
B - 175 units at P 4.00 700 P 1,700
Direct labor:
290 hours at P 5.00 1,450
Factory overhead – applied at
100% of direct labor cost 1,450 4,600

Materials
Material A – 600 units at P 5.00 P 3,000
Material B – 350 units at P 4.00 1,400
Indirect materials 500
P 4,900

The transactions for the month of January, 2019 are as follows:

1. Purchases for the month of January – Material A – 600 units at P5.50; Material B – 800 units at P 5.00; Indirect
materials – P 700.

2. Materials requisitioned and issued on a fifo basis amounted to P 7,000. Material A, 200 units (charged to Job 101);
Material A, 600 units and Material B, 225 units (charged to Job 101); Material A, 600 units and Material B, 225 units
(charged to Job 102; Material B, 425 units (charged to Job 103). Indirect materials amounted to P 1,000.

3. Material B returned to vendors, 70 units at P 5.00.

4. Payroll during January amounted to P 10,300 of which P 2,000 is for Job 101; P 4,000 is for Job 102; P 2,000 for Job
103, and P 2,300 is indirect labor. Deductions are as follows:
 SSS Premium - P 412
Medicare Contributions - 225
Withholding taxes - 1,050

5. Factory overhead is applied on the basis of 100% of diriect labor cost.

6. Jobs completed during the month – Job 101 for 3,000 units of Commodity X and Job 102 for 5,000 units of
Commodity Y.

7. Sales during January on FIFO basis – 4,000 units of Commodity X at P 6.00 per unit and 4,000 units of Commodity
Y at P 4.00 per unit.

8. Cash collection from customers P 35,000.

9. Recorded the following liabilities: Factory overhead, P 4,800; Selling expenses, P 2,100; General expenses, P 1,500.

10. Paid accounts – P 9,500; payroll – P 8,500

Requirements
1. Journal entries to record the above transactions.
2. Job Order Cost Sheets.
3. Stock cards for materials and finished goods.
4. Cost of goods sold statements for the month of January.

Journal entries:
1. Materials 8,000
Accounts Payable 8,000
Materials purchased computed as follows:
Mat. A – 600 units at P 5.50 - P 3,300
Mat. B – 800 units at P 5.00 - 4,000
Indirect materials 700
8,000

2. Work in process 7,000

Factory Overhead Control 1,000
Materials 8,000
Materials issued to production.
Job 101
Mat. A – 200 units at P 5.00 - 1,000
Job 102
Mat. A – 400 units at P 5.00 – 2,000
200 units at P 5.50 – 1,100
Mat. B– 225 units at P 4.00 - 900 4,000
Job 103
Mat. B – 125 units at P 4.00 - 500
300 units at P 5.00 - 1,500 2,000
7,000
3. Accounts Payable 350
Materials 350
Materials returned to vendors.
4. Payroll 10,300
SSS Premium Payable 422
Medicare Contributions Payable 225
 Withholding Taxes Payable 1,050
Accrued Factory Payroll 8,663
Payroll for the month.
Work in process 8,000
Factory overhead Control 2,300
Payroll 10,300
Classification of payroll.
5. Work in Process 8,000
Factory Overhead Applied 8,000
Factory overhead applied to production.

6. Finished goods 21,000

Work in Process 21,600
Cost of jobs completed computed as follows:

Job 101 Job 102

Materials - P 2,700 P 4,000
Labor - 3,450 4,000
Overhead - 3,450 4,000
P 9,600 P 12,000

7. Accounts Receivable 40,000

Sales 40,000
Sales computed as follows:
X – 4,000 at P 6.00 – P 24,000
Y – 4,000 at P 4.00 – 16,000

Cost of goods sold 22,000

Finished Goods 22,000
Cost of units sold for the month:
X – 2,000 at P 3.00 – P 6,000
2,000 at P 3.20 - 6,400
Y – 4,000 at P 2.40 - 9,600

8. Cash 35,000
Accounts Receivable 35,000
Collection of accounts.

9. Factory Overhead Control 4,800

Selling Expense Control 2,100
General Expense Control 1,500
Accounts Payable 8,400

10. Accounts Payable 9,500

Accrued Factory Payroll 8,500
Cash 18,000

Materials
1/1 4,900 2) 8,000
1) 8,000 3) 350
1/31 4,550
 Work in Process
1/1 4,600 6) 21,600
2) 7,000
4) 8,000
5) 8,000 1/31 6,000

Finished Goods
1/1 6,000 7) 22,000
8) 21,600 1/31 5,600

Factory OH Control

2) 1,000
4) 2,300
9) 4,800

Costs of Goods Sold

7) 22,000

Factory OH Applied

5) 8,000
STOCKCARDS
 NORTHERN CONSOLIDATED COMPANY
Cost of Goods Sold Statement

For the month ended January 31, 2019

Direct materials:
Materials, January 1 P 4,900
Purchases P 8,000
Less: Purchase returns 350 7,650
Total available for use 12,550
Less: Materials, January 31 4,550
Indirect Materials 1,000 5,550 7,000
Direct labor 8,000
Factory Overhead 8,000
Total manufacturing cost 23,000
Add: Work in process, January 1 4,600
Cost of goods put into process 27,600
Less: Work in process, January 31 6,000
Cost of goods manufactured 21,600
Add: Finished goods, January 1 6,000
Total goods available for sale 27,600
Less: Finished goods, January 31 5,600
Cost of goods sold – normal 22,000
Add: Underapplied factory overhead 100
Cost of goods sold – actual 22,100

The under applied factory overhead is computed as follows:

Actual factory overhead P 8,100

Less; Applied factory overhead 8,000
Underapplied factory overhead P 100

The closing of the Factory Overhead Control account and the Factory Overhead Applied account maybe done on a
monthly basis or an annual basis. Whatever method is used, the statement is always adjusted for the underapplied
(unfavorable) or the overapplied (favorable) factory overhead. Underapplied factory overhead is considered
unfavorable because the effect is an increase in the cost of goods sold, thereby decreasing the gross profit. On the
other hand, the overapplied overhead is considered unfavorable because the effect is an increase in the cost of goods
sold thereby increasing the gross profit.

If the closing is done on a monthly basis a special account, Under-and Overapplied Factory Overhead, will
accumulate the differences period-to-period. At the end of the calendar or fiscal year, the balance of the under-and
overapplied account will be closed to Cost of Goods Sold or allocated on a pro-rata basis to Work in Process, Finished
Goods and Cost of Goods Sold. The remaining balance should be pro-rated if the amount of the balance would
materially distort net income if it were charged entirely to Cost of Goods Sold. If a small balance remains in the
Under-and Overapplied Factory Overhead at year-end, it may be closed directly to Cost of Goods sold because it will
not materially affect net income.