Job Order Costing
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In a Job Order Costing System, costs are accumulated by job. Firms operating in job-order industries produce a wide variety of products or jobs that are usually quite different from each other. Customized or built-to-order products fit into this category, as do services that vary from customer to customer. The key feature of job-order costing is that the cost of one job differs from another job and must be monitored separately. Once any given job is completed, the unit cost can be computed by dividing total job costs by the number of units produced on that job. It is important to understand that the different documents used in a job-order costing system. The document that identifies each job and accumulates its manufacturing costs in the job-order cost sheet. The job-order cost sheet reflects:
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Direct Materials,
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Direct Labor, and
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Overhead Costs
Materials Requisitions
The cost of direct materials is traced to each job through the use of a materials requisition form. When direct materials are issued to production, the materials requisition form identifies the job, the quantity and type of direct materials, and the cost of direct materials.
Job Time Sheet
Job time sheet or ticket is the source documents used to assign direct labor costs to jobs. When a direct laborer works on a job, he or she fills out a time ticket indicating the time spent on the job, along with the wage rate.
Overhead Application
Overhead is assigned to jobs using predetermined rates or Overhead Absorption Rate (OAR). If the rate is based on direct labor hours, then the predetermined rate and the information from the time tickets are used to assign overhead to jobs.
Example # 1:
A Furniture Mart received an order to manufacture furniture for a school the order was assigned a job code FS-6. FS-6 job was priced at Rs. 400,000 and selling & admin cost allocated to the job was 10% of selling price.
Material Requisition
Job Time Sheet
FOH cost is applied at Rs. 180 per direct labor hour (OAR)
Requirement: Make a Job Order Cost Sheet for FS-6
Solution:
Overhead Amount = Actual Activity Level * Overhead Absorption Rate
Overhead Amount = 1,000 * 180 = Rs. 180,000
>> Practice Product Costing Systems MCCQs.
Video Lecture: Costing Concepts in Urdu & Hindi-Workbook Practice
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Click Here To Download Workbook Used in Video
Job Pricing
- Since each job is different , there will be no set price for each job
- Pricing is based on Cost-Plus Pricing also known as markup pricing
- In this method first calculates the cost of the product and then adds a proportion markup
Example # 2:
A company carries out small building work for domestic customers. A customer asked the company to quote a price for building an extension at the back of his house. The company’s estimator has come up with the following estimated costs:
Direct Material Rs. 2,500
Direct Labor Rs. 4,000
Direct Expenses Rs. 500
OAR 100% of Direct Labor Cost
Office Overheads 20% of Production Cost
Profit Mark-up 25% of Total Cost
Solution:
>> Practice more problems Process Costing Problems and Solutions.
Accounting Entries for Job Order Costing
Following are accounting procedure used for job order costing
Example # 3:
Pass journal entries for the year for Company appear below:
Jan 3, 2011. Raw materials were purchased on account for Rs. 200,000.
Jan 6, 2011. Raw materials that cost Rs. 160,000 were issued from the storeroom for use in production. Of this total, Rs. 136,000 was for direct materials and Rs. 24,000 for indirect materials.
Jan 9, 2011. The following costs were incurred for employee services: direct labor, Rs. 200,000; indirect labor, Rs. 85,000; selling and administrative wages and salaries, Rs. 90,000.
Jan 12, 2011. Supplies costs of Rs. 40,000 were incurred in the factory.
Jan 15, 2011. Prepaid insurance of Rs. 20,000 expired during the year (80% related to factory operations and 20% to selling and admin).
Jan 18, 2011. Advertising costs of Rs. 10,000 were paid during the year.
Jan 20, 2011. Depreciation was Rs. 145,000 for the year on factory assets and Rs. 15,000 on selling and admin assets.
Jan 22, 2011. Manufacturing overhead was applied to jobs. The company’s predetermined overhead rate was based on the following estimates: manufacturing overhead, Rs. 315,000; direct labor cost, Rs. 210,000. Since the total direct labor cost incurred was Rs. 200,000.
Jan 22, 2011. Goods that cost Rs. 650,000 to manufacture according to their job cost sheets were completed and transferred to the finished goods warehouse.
Jan 25, 2011. Sales (all on credit) were Rs. 900,000.
Jan 25, 2011.The goods that were sold had cost Rs. 600,000 to manufacture according to their job cost sheets.
Example # 4:
The following information related to XYZ Company:
| Direct Materials: | |
| House #1 | Rs. 90,000 |
| House #2 | 100,000 |
| House #3 | 30,000 |
| Total Direct Materials | Rs. 220,000 |
| Direct Labor: | |
| House #1 | Rs. 65,000 |
| House #2 | 70,000 |
| House #3 | 15,000 |
| Total Direct Labor | Rs. 150,000 |
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Overhead is applied at 50 percent of direct labor costs.
Requirement: (a) Prepare Job Cost Sheet for three houses. (b) Pass combine journal Entries for this business assuming that Houses #1 and #2 are completed during the period and House #1 is sold for Rs. 200,000 cash. (c) Make T account for Work in Process account, Finished Goods Account and Cost of Goods Sold Account. |
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Solution (a):
Solution (b):
Solution (c):
>> Practice Product Costing Systems MCCQs.
Related Topics
Factory Overhead Problems
References
Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.
Sehgal, A., & Sehgal, D. (n.d.). Advanced Accountancy (Vol. I & II). New Delhi: Taxmann Publication Pvt. Ltd.
Shukla, M. C., Grewal, T. S., & Gupta, S. C. (2008). Advanced Accountancy (Vol. I & II). New Delhi: S Chand & Co.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2012). Accounting Principles (10th ed.). Hoboken: John Wiley & Sons, Inc.
Williams, M., & Bettner, H. (1999). Accounting (The basic for business decisions). (11th, Ed.) USA: Irwin McGraw- Hill.
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