CHAPTER 17Job Order Costing

Chapter Objectives:

1. Describe cost accounting systems used by manufacturing businesses.

2. Describe and illustrate a job order cost accounting system.

3. Describe the use of job order cost information for decision making.

4. Describe the flow of costs for a service business that uses a job order cost accounting system.

Cost Accounting Systems

FOCUS1.Information to manage manufacturing operations

INFORMATION PROVIDED

1.Product costs to be used for pricing and other management decisions.

2.Inventory and Cost of Goods Sold balances to be reported on financial statements.

3.Costs incurred by each manufacturing department or process to be used for cost control.

TYPES OF SYSTEMSJob Order1.Provides product costs for each quantity of product that is manufactured or job.

2.Used by companies that manufacture custom products for customers or batches of similar products.

3.Examples:1. New construction homes

2. Replacement windows

3. Class rings

4. Business cards

5. Wedding invitations

6. Apparel

Process Cost1.Provides product costs for each manufacturing department or process.

2.Used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous product process.

3.Examples:1. Oil refineries

2. Paper producers

3. Chemical processors

4. Food processors

Search the Internet for 3 companies that fit into the two categories.

Apply It!

State whether a job order costing system or a process costing system would typically be used to account for the costs of the following:

a.Manufacturing golf tees

b.Manufacturing custom-designed fencing for a specific golf course

c.Providing pet grooming

d.Manufacturing golf balls

e.Manufacturing dog food

f.Providing private golf lessons

Information Needed in a Job Order System: Documents• What types of manufacturing information would be

important to track for a company that makes fine jewelry?

Information Document

Amount of each type of material on hand Material Ledger

Quantity of material used on each order Materials Requisition

Labor cost used on each order Time Tickets

Total cost of making order Job Cost sheet

Cost incurred on jobs in process Cost Ledger

Total cost of all completed jobs Finished Goods Ledger

Materials Ledger

Materials Requisition

Time Tickets

Shows a record of the amount of each material on hand.

Provides authorization for materials to be released from the inventory storage area.

Filled out by employees, shows amount of time spent working on each job and labor cost.

Job Cost Sheet

Cost Ledger (in process)

Finished Goods Ledger

Lists materials from requisition form, labor costs from time tickets and overhead used on each job.

Job cost sheets for all orders in process.

Job cost sheets for all finished orders.

Role Play in a Job Order System• Assume the following positions in the customs order

division of a manufacturer of fine jewelry:

• Production Scheduler• Purchasing Agent• Receiving Department• Storeroom Supervisor• Skilled Craftsman• Accountant

You are to answer questions concerning procedures and documents they would use in your jobs.

The goal of this assignment is to understand the information needed by various manufacturing personnel and then attach a name to documents that report that information.

Production Scheduler: whenever you receive a customer order you are to schedule when the item will be made. The company has just received an order to make World Series rings.

Name the steps that would need to be taken to schedule the job.A. Look at other jobs scheduled to see when workers will have time to start this job.

B. Determine whether the materials are on hand to make the rings.

Purchasing Agent• What would you do after receiving the purchase

requisition?

• Fill out a purchase order and transmit it to the vendor.

Receiving Department

What would you do when goods are received?

Inspect and count the items

Fill out a receiving report

Take the materials to the storeroom

Storeroom Supervisor

What would you do when the materials are received?

Put them away where they are locked up.

Skilled Craftsman

What will be the labor cost of all orders?

What information do you need?

The time spent working on the order would be recorded on a time ticket.

AccountantDetermine the cost to make the rings.

Describe how to get the information to determine the cost.

How could you determine the costs spent on jobs that have been completed?

How could you determine the costs spent on all jobs that are till being worked on?

Take materials used from the materials requisition and labor costs from the time tickets along with overhead from the job cost sheet.

Add up job cost sheets for all finished jobs

Add up the job cost sheets for the jobs still in process

Allocation of Overhead• Assume you are responsible for planning a banquet for

your school’s accounting club. The banquet will feature a dinner, followed by a speaker. The cost associated with the banquet are as follows:• Meals $10 per person traceable cost• Beverages $ 1 per person traceable cost• Use of Banquet Room $50 allocated cost• Speaker’s Fee $100 allocated cost

Now assume that 50 students will attend the banquet. If you want to break even on this event, how much do you need to charge for a ticket?

How much per ticket?

Meals + beverages = $11 per person

Allocate room and fee: 50 + 100 = 150/50 students = $3

Ticket cost to break even will be

$11 + $3 = $14 per person

Allocation of Pre-determined Overhead

• Costs of manufacturing a product that cannot be traced to a specific job are called overhead. You must allocate these costs to determine what each product costs.

• $1million in overhead expenses• Machine hours will be a reasonable way to allocate o/h• Run machines for 40,000 hours during the year.• Formula to calculate overhead rate is:

Estimated total factory overhead costs

Estimated Activity Base (hours)

Allocation of pre-determined overhead costs

$1,000,000

40,000 hours = $25/hour of machine time

Now calculate the overhead that would be allocated to a product that uses 3.5 hours of machine time.

$25 * 3.5 hours = $87.50 This cost will be added to the product’s materials and labor costs.

Practice Problem

Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?

Traceable costs are: $200 direct materials

10 hours @ $15 = $150

$760,000 = $38/hour = $380

20,000 hrs

200150380730

Job Order Costing for Decision Making

• Accumulates and records product costs by jobs.• Resulting total and unit product costs can be compared to

similar jobs.• Compare over time• Compare to expected costs• Used for cost evaluation and control.

• Let’s view Exhibit 10 and make some decisions.

1. Same type & number of guitars so direct materials cost per unit should be about the same.

2. Used more materials for Job 54 than Job 63.

Possible Explanations for Differences1. A new employee not properly trained cut wood for Job

63; thereby causing excess waste and scrap.

2. Wood used for Job 63 was purchased from a new supplier. Poor quality, creating excessive waste and scrap.

3. Cutting tools needed repair and were not properly maintained resulting in excessive waste and scrap.

4. Instructions attached to the job were incorrect. Wood was cut according to instructions. Result: wood had to be recut and initial cuttings scrapped.

Flow of Costs for a Service Business• Can be applied to any organization that needs to

determine the cost of its product.• The product is the service provided.• Use by an advertising agency to determine the cost to

produce an ad for a customer• Used by an accountant to determine the cost of preparing

a tax return.• Used by a plumber to determine the cost to clean a drain.