Topic X Job Order

Costing
3
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the terms used in the job order costing process;
2. Discuss the basic characteristics of job order costing;
3. Analyse the steps to conduct job order costing;
4. Review the source documents in job order costing; and
5. Apply the procedures in the recording of materials, labour and
manufacturing overheads in job order costing.
1

X INTRODUCTION
How much cost is incurred in producing a product? How much cost did Proton
incur to produce its new car model? What was the cost incurred by Price
Waterhouse Coopers to provide audit services to its different clients? Cost
information is needed by management for planning purposes that are related to
pricing, development of new products, external reporting requirements and
other production activities. In order to assist management in making these
decisions, we must understand the related costing methods.

In this topic, we will be introduced to the job order costing system, its basic
characteristics and the documents involved. The accounting for materials, labour
and manufacturing overheads for the purpose of this costing system will also be
explained.
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3.1 TYPES OF COST

Before we explore further on the costing method, try to remember the types of
cost involved in producing a product. What are the costs and its examples?

In costing, there are several terms that you must know. Among these are:

(a) Cost Object

Cost object is something that requires a separate cost measurement. For
example, a product (example, computer and car) or a service (example, cost
to repair the air-conditioner and medical cost).

(b) Direct Cost for the Cost Object

Direct cost for the cost object is the cost related to the cost object and can be
traced directly with the cost object economically. For example, if the cost
object is a wooden table, the cost of wood is the direct cost to the cost object.

(c) Indirect Cost for the Cost Object

Indirect cost for the cost object is the cost that is related to the cost object
but cannot be directly traced to the cost object economically. The
depreciation of a car factory used in the manufacturing of various car
models is an example of an indirect cost. The factory's depreciation cannot
be traced directly to the individual cost objects, which are the various car
models.

(d) Cost Pool

Cost pool is the cost of individual items that are pooled together.

(e) Basis for Cost Allocation

The basis for cost allocation is related to how the cost is allocated to the
product. It has a systematic relationship with the indirect costs and the cost
object. Among the basis that can be used for the purpose of cost allocation
is the allocation according to machine hours and direct labour cost. As an
example, the factory's rental is allocated according to the area that is used
for the production of each product.

Figure 3.1 shows a relationship between the types of cost and cost object.
26 X TOPIC 3 JOB ORDER COSTING

Figure 3.1: Relationship between the types of cost and cost object

3.2 JOB ORDER COSTING AND PROCESS

COSTING
There are two costing systems that can be used to charge costs to the product or
service (refer to Figure 3.2).

Figure 3.2: Costing system

3.2.1 Basic Characteristics of Job Order Costing

Job order costing system is used when services or products produced at the same
time are distinct from each other. For example, a job order costing is used when a
big construction company builds different buildings with different specifications
according to the needs of each individual customer. Job order costing system is
 TOPIC 3 JOB ORDER COSTING W 27

not only used in the manufacturing industry, but also in the service industry, for
example:
x A boutique that accepts orders to make clothes for its customers will
produce clothes of different sizes and designs according to customers'
orders.
x A law firm that has several cases where each case is unique and different.
x A doctor who treats the patients at the clinic for different illnesses.

As the products or services produced or provided are different, the cost of each
one is also different. Therefore, the recording of cost for each of the jobs must be
kept separately.

In summary, the basic characteristics of job order costing are:

(a) Comprises of products or services that are different from each other.
(b) Costs are pooled according to the job.
(c) Unit cost is calculated by dividing the total job cost with the unit produced
for that particular job.

Steps to implement the job order costing are as shown in Figure 3.3.

Figure 3.3: Steps in job order costing

28 X TOPIC 3 JOB ORDER COSTING

3.3 SOURCE DOCUMENTS FOR JOB ORDER

COSTING
Information to be used for the purposes of costing must be obtained from related
source documents. The source documents are the original records that support
the journal entries in the accounting system. The three important source
documents for a job order costing process are:

(a) Job Cost Record

A job cost record records all the chargeable costs to a particular job.

The following is a sample of a job cost record:

Item description : DS14 Job Order No : 16A

Completed quantity : 100 Start date : 21/01/2009
Completion date : 31/01/2009

Direct Raw Materials Direct Labour Overheads

Request Total Ticket No. of Rate Total No. of Rate Total
No. (RM) No Hours (RM) (RM) Hours (RM) (RM)
23A-1 900 52 50 10 500 50 1.50 75
35A-5 600 75 10 15 150 10 2.00 20

Cost Summary
Direct Raw Materials : RM1,500 Total Cost : RM2,245
Direct Labour : RM650 Unit cost : RM22.45
Overheads : RM95

(b) Material Requisition Record

Material requisition record contains information about the direct raw
material costs used in a job.

The following is a sample of a material requisition record:

 TOPIC 3 JOB ORDER COSTING W 29

Request No. : 23A-1

Date : 21/01/2009 Department: Assembly Job No: 16A

Cost Description Quantity Cost/unit Total (RM)

Iron AX 100 9 900

Sent by: Farid Received by: Mohan

(c) Labour Time Record

Labour time record contains information on the labour time used in a job.

The following is a sample of the labour time record:

Ticket No. : 007

Worker No : 316
Time started work Time Total Rate Per Total
ended Time Hour (RM)
10.00am 6.00pm 8 10 80

Approved by : Aiman Nordin

Before we proceed further with this discussion, test your understanding via the
following exercise.

SELF-CHECK 3.1

What is the reference or source that supports the recording of

business transactions in the accounting system?
30 X TOPIC 3 JOB ORDER COSTING

EXERCISE 3.1

1. What are the basic characteristics of job order costing?

2. What are the source documents involved in job order costing?
Explain the use of these documents.

3.4 ILLUSTRATION OF JOB ORDER COSTING

Nikol Sdn Bhd processes and produces various sports equipment according to
customersÊ orders. The company intends to sell 25 units of health bicycles Model
XY (Job 250) to Ulu Semperit District Sports Corporation at a total price of
RM104,800.

Nikol must first determine the cost of doing the job before it can estimate the
profit.

Step 1: Cost object is Job 250

Step 2: Identify the direct cost that is related to Job 250.

x Direct raw materials

The direct costs that are related to Job 250 are:

x Direct labour
: RM45,000
: RM14,000

x Nikol selected machine hours as the basis to allocate its indirect cost
Step 3: Select the method to allocate the indirect cost to the job.

x Job 250 used 500 machine hours.

to Job 250.

x 2,480 machine hours were used for all jobs, including Job 250.

x Actual total manufacturing overhead cost is RM65,100.

Step 4: Identify all the related indirect costs.

Step 5: Calculate the unit cost rate using the method in Step 3 above (machine
hours) to allocate the indirect costs to the job.

Actual Manufacturing Overhead Cost

Unit Cost Rate =
Actual Normal Hours
= RM65,100/ 2,480
= RM26.25 per machine hour
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Step 6: Calculate the indirect costs that is allocated to Job 250.

Indirect cost = RM26.25 for each machine hour x 500 hours
= RM13,125

Step 7: Add the total direct costs and indirect costs that are involved for the job
to obtain the cost for Job 250.

Cost for Job 250 = Direct costs + Indirect costs

= Direct raw materials + Direct labour + Factory
Overheads
= RM45,000 + RM14,000 + RM13,125
= RM72,125

Based on the information obtained, how much is the gross profit from Job 250 if
the bicycles are sold at a price of RM104,800?

Sales RM104,800
Cost of goods sold RM 72,125
Gross profit RM 32,675

What is the gross profit margin?

Gross profit margin = RM 32,675

RM104,800
= 31.2%
32 X TOPIC 3 JOB ORDER COSTING

Try the following exercise to test your understanding on the calculation of costs
in job order costing.

EXERCISE 3.2

Kinrana Sdn Bhd has two departments, which are the Assembly and
Packaging Departments. The company uses the job order costing
system to calculate the overhead allocation rate for both the
departments. The Assembly Department uses the machine hour rate
and the Packaging Department uses the direct labour rate. In the
beginning of the year, the company estimates the following:

Department
Assembly Packaging
Direct labour hours (hours) 6,000 30,000
Machine hours (hours) 48,000 5,000
Manufacturing overhead costs (RM) 360,000 486,000
Direct labour costs (RM) 50,000 270,000

1. Calculate the overhead allocation rate for each department.

2. Assume that the rate you calculated in (1) has been accepted. Job
590 was started and completed in that year with the following
data:

Department
Assembly Packaging
Direct labour hours (hours) 60 200
Machine hours (hours) 800 40
Direct materials (RM) 5,000 3,100
Direct labour (RM) 700 1,500

Based on the information given in (2), calculate:

(a) Total overhead cost charged to Job 590.
(b) Total cost charged to Job 590.
 TOPIC 3 JOB ORDER COSTING W 33

3.5 ACCOUNTING FOR MATERIALS

Knowledge on recording procedures for raw materials and documents involved
can increase the understanding on the journal entry and basic information
included in the selected costing method.

The raw material recording procedures are as follows:

(a) Receipt of Raw Materials
When raw material is received, it must be checked to ensure the quantity
and quality is correct as ordered. This receipt detail will be recorded in the
goods received note. This goods received note will become the source
document to update stock account.

(b) Issue of Raw Materials

Thereafter, the stock will be taken out from the store if there is request for
the stock. Requisitions can be made using the store requisition form. This
form will list the types of goods/stocks requested together with the
quantities. Besides that, it also includes information on the job number,
product code and overhead account involved. This document will then be
used as the basis for stock account recording. At the end of the period, the
balance of each raw material will be calculated.

(c) Charge of Raw Materials Cost to the Job/Process

Thereafter, the raw material cost will be charged to the job or process as
shown in the store requisition form.

See the following example to help your understanding.

Example 3.1

Transaction 1: Receipt and purchase of raw materials (direct and indirect) on

credit amounted to RM79,000 in January 2009.

The raw materials control account will increase (debited) by RM79,000 and
accounts payable control account will also increase (credited) by RM79,000. Both
of these accounts are control accounts as the detailed records for each transaction
are found in the smaller ledger/subsidiary.

The raw materials control account includes all the purchased raw materials
whether direct or indirect.
34 X TOPIC 3 JOB ORDER COSTING

Journal entry:
Raw Materials (Control) 79,000
Accounts Payable (Control) 79,000

Posting to the general ledger:

Raw Materials (Control) Accounts Payable (Control)

c 79,000 c 79,000

Transaction 2: The issue of raw materials from the store to the production line.
The direct raw materials taken are RM71,000 and indirect raw
materials are RM3,000.

This transaction will cause the work in process control account to increase
(debited) by RM71,000 and manufacturing overhead control account to increase
(debited) by RM3,000. Meanwhile, the raw materials control account will reduce
(credited) by RM74,000.

Journal entry:
Work in Process (Control) 71,000
Manufacturing Overhead 3,000
Raw Materials (Control) 74,000

Posting to general ledger:

Raw Materials (Control) Work in Process (Control)

c 79,000 d 74,000 d 71,000

Manufacturing Overhead
d 3,000

3.6 ACCOUNTING FOR LABOUR

It is important to record the labour working hours to calculate the wages and
salary for the purpose of costing as well as planning and controlling.

The gross salaries can be calculated based on the information from the
employeesÊ personnel records, for example, the attendance records and
production records. Each employeeÊs record is kept separately, and shows their
salary history, current pay rate and deductions allowable (for example,
deductions for Inland Revenue Board, tithe, loans, Employees Provident Fund).
 TOPIC 3 JOB ORDER COSTING W 35

The time card (also known as punch card) will provide information on the
working hours, time in and out and overtime work done by an employee. If
payment is made based on the number of products produced, then the product
ticket will be analysed to determine the employees' wages. The gross salary will
then be deducted with the deductions allowable to obtain net salary.

Thereafter, this labour cost must be charged to the related product.

Transaction 3: The total direct labour cost and indirect labour cost for January
are RM30,000 and RM15,000.

This transaction will cause the work in process control account to increase
(debited) by RM30,000 and the manufacturing overhead control account to
increase (debited) by RM15,000. Meanwhile, the liability account, which is the
salaries payable account will increase (credited) by RM45,000.

Journal entry:
Work in Process (Control) 30,000
Manufacturing Overhead 15,000
Salaries Payable 45,000

Posting to general journal:

Salaries Payable Work in Process (Control)

e 45,000 d 71,000
e 30,000

Manufacturing Overhead
d 3,000
e 15,000

3.7 ACCOUNTING FOR OVERHEADS

Overheads are indirect costs. They include for example, the indirect materials
(glue used in making chairs) and indirect labour (factory supervisor's salary).
Indirect costs cannot be traced directly to the product. Therefore, it must be
allocated to the product based on the most appropriate allocation method.
Examples of methods that can be used to allocate the manufacturing overheads
are allocations based on the area used (factory rental) and machine hours (factory
machines' maintenance expenses).
36 X TOPIC 3 JOB ORDER COSTING

Transaction 4: Other manufacturing overhead costs in January are as follows:

machine maintenance, RM21,000 and machine depreciation
RM13,000.

These transactions will cause the manufacturing overhead control account to

increase (debited) by RM34,000. Meanwhile, the liability account, which is the
accounts payable control account will increase (credited) by RM21,000 and the
accumulated depreciation account of the machine will increase (credited) by
RM13,000.

Journal entry:
Manufacturing Overhead 34,000
Accounts Payable (Control) 21,000
Accumulated Depreciation ă Machine 13,000

Posting to general ledger:

Accumulated Depreciation ă Machine Accounts Payable (Control)

f 13,000 c 79,000
f 21,000

Manufacturing Overhead Account

d 3,000
e 15,000
f 34,000

Transaction 5: Allocation of overhead cost to the job, RM50,000.

This transaction will cause the work in process control account to increase
(debited) by RM50,000 and manufacturing overhead control account to reduce
(credited) by RM50,000. However, the decrease in the manufacturing overhead
control account will be shown in its contra account, which is the Allocated
Manufacturing Overhead account. This allocated manufacturing overhead
account will show the overhead amount allocated to each job or product based
on the allocation method used by the entity.

Journal entry:
Work in Process (Control) 50,000
Allocated Manufacturing Overhead 50,000
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Posting to general ledger:

Allocated Manufacturing Overhead Work in Process (Control)

g 50,000 d 71,000
e 30,000
g 50,000

Transaction 6: The process of completing and transferring to finished goods

account of RM130,000.

This transaction will cause the Finished Goods Control account to increase
(debited) by RM130,000 and Work in Process Control account to decrease
(credited) by RM130,000 to denote the completed jobs.

Journal entry:
Finished Goods (Control) 130,000
Work in Process (Control) 130,000

Posting to general ledger:

Finished Goods Control Account Work in Process (Control)

h 130,000 d h 130,000
e
71,000

g
30,000
50,000
Balance: 21,000

The debit balance of RM21,000 in the Work in Process Control Account is the
total uncompleted job at the end of January 2009.
38 X TOPIC 3 JOB ORDER COSTING

EXERCISE 3.3
Dadidu Sdn Bhd is a company producing car fibre. The following
transactions were incurred in February 2009:

1. The business purchases direct raw materials worth RM30,000

from Supplier Selamat.
2. Raw materials of RM25,000 were issued from the store to the
production line.
3. The production operators' salaries for February 2009 were
RM15,000.
4. Salaries for the factory supervisor and factory manager were
RM21,000.
5. The machine's insurance expense for February was RM6,000.
6. Factory rental for February was RM8,000.
7. The overhead cost allocated to the job was RM10,000.

Required:
(a) Provide the journal entry for each transaction above.
(b) Calculate the amount issued to the work in process control
account.

x Job order costing system is used when various services or products produced
at the same time are different from each other.
x The job order costing system has three main characteristics - the products or
services produced are different, the costs are pooled according to the job and
unit cost is obtained by dividing the total job cost with the total units
produced.
x Costs will be pooled according to the job.
x Indirect costs will be allocated to the job using the most appropriate method.
x Seven main steps to carry out the job order costing are: identify the cost
object, identify the direct cost, select the method to allocate the indirect cost,
 TOPIC 3 JOB ORDER COSTING W 39

identify the related indirect cost, calculate the unit cost rate, calculate the
indirect cost that is allocated to the job and finally, add up all the direct costs
and indirect costs for the job.
x The information used for job order costing is obtained from three main
sources, which are the job cost record, the raw material requisition record and
labour time record.

Cost object Job order costing

Cost pool Labour time record
Cost tracing Material requisition record
Goods received note Time (punch) card
Job cost record