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Chapter 3
Costing Systems:
Job Order Costing
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Product Cost Information and the Management Process
• Objective 1– Discuss the role that information about costs plays
in the management process, and explain why unit cost is important.
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Planning
• Manufacturing Companies– Develop budgets
– Establish product prices
– Plan production volumes
• Service Organizations– Develop budgets
– Establish prices
– Set sales goals
– Determine human resource needs
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Performing
• In manufacturing companies, managers make decisions about:– Whether to drop a product line– Adding a production shift– Outsourcing manufacture of a subassembly– Bidding on a special order– Negotiating a selling price
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Performing (cont’d)
In service organizations, managers make decisions about:– Bidding on jobs– Dropping a current service– Outsourcing a task– Adding staff– Negotiating a price
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EvaluatingManufacturing Companies
– To determine the source of a quality problem, managers study
• The design
• Materials purchasing
• Manufacturing processes
– Once the problem is identified, changes can be made to ensure the product’s quality.
Service Organizations
– To determine the source of increased operating costs, managers may break the unit cost of a service into its components.
– This will help determine where costs can be cut or how the service can be performed more efficiently.
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Communicating Manufacturing Companies
– Use product unit costs to determine inventory balances for the company’s balance sheet and the cost of goods sold for its income statement
Service Organizations
– Use unit costs of services to determine cost of sales for the income statement
Managers in both environments prepare performance evaluation reports:
Compare actual unit costs and targeted costs, as well as actual and targeted nonfinancial measures of performance
Analyze the data in the performance evaluation reports to determine whether they are achieving cost goals for their products or services
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Stop & Review
Q. How do managers in a manufacturing company use cost information in the planning stage of the management process?
A. Managers use cost information to develop budgets, establish product prices, and plan production volumes.
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Job Order Versus Process Costing
• Objective 2– Distinguish between the two basic types of product
costing systems, and identify the information that each provides.
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Product Costing System
Set of procedures used to account for an organization’s product costs
Provides timely and accurate unit cost information for:
Pricing Cost planning and control Inventory valuation Financial statement preparation
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Two Basic Types of Product Costing Systems
Job Order Costing
Used by companies that make unique or special-order products
Process Costing
Used by companies that produce large amounts of similar products or liquid
products or that have long, continuous production runs
of identical products
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Job Order Costing System
The costs of direct materials, direct labor, and overhead are traced to and assigned to a specific job order or batch
of products.
Uses a single Work in Process Inventory account
Costs are traced using a subsidiary ledger of job order cost cards.
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Job Order Cost Card
A document on which all costs incurred in the production of a
particular job order are recorded
These costs are used to measure the cost of each completed unit.
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Process Costing System
• A process costing system uses several Work in Process Inventory accounts—one for each process, department, or work cell
• Costs of direct materials, direct labor, and overhead are first traced to processes, departments, or work cells.
• Costs are then assigned to the products manufactured by these processes, departments, or work cells during a specific period.
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Characteristics of Job Order Costing and Process Costing Systems
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Job Order Versus Process Costing
• Few production processes are a perfect match for either system.– The typical product costing system is a hybrid of
both job order costing and process costing.
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Stop & Review
Q. What are the main differences between a job order costing system and a process costing system?
A. Job order costing system
• Used by companies that produce large, unique, or special-order items
• Uses a single Work in Process Inventory account
Process costing system
• Used by companies that produce large amounts of similar products or liquid products that have long, continuous production runs
• Uses several Work in Process Inventory accounts
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Job Order Costing in a Manufacturing Company
• Objective 3– Explain the cost flow in a manufacturer’s job order
costing system.
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Job Order Costing System
• Traces the costs of a specific order or batch of products to– Provide timely, accurate cost information– Facilitate smooth and continuous flow of that
information
The core of a job order costing system is the job order cost cards and subsidiary
ledgers.
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Cost Flow in a Job Order Costing System for a Manufacturing Company
• Direct materials costs– Cart frame– Wheels– Upholstered seats– Windshield– Motor– Rechargeable battery
• Direct labor costs– Wages of two production
workers
• Overhead costs– Indirect materials cost for
• Upholstery zippers
• Cloth straps
• Wheel lubricants
• Screws and fasteners
• Silicon
– Indirect labor costs for
• Moving and inspection
– Depreciation on manufacturing plant and equipment
– Utilities, insurance, and property taxes
Augusta, Inc., builds customized and general-purpose golf carts.
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Cost Flow in a Job Order Costing System for a Manufacturing Company (cont’d)
Three inventory accounts are used. All have subsidiary ledgers backing up their totals.
Augusta, Inc., builds customized and general-purpose golf carts.
Materials Inventory • Materials Ledger
Work in Process Inventory• Job Order Cost Cards
Finished Goods Inventory • Finished Goods Ledger
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Cost Flow in a Job Order Costing System for a Manufacturing Company (cont’d)
Wheels
Materials Ledger
Cart Frames
Indirect MaterialsBeg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830Job CC
Finished Goods Ledger
Beg. Bal. —Job CC
Job JB
Job Order Cost Cards
Costs from the previous period 400
Materials InventoryWork in Process
InventoryFinished Goods
InventoryBeg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Subsidiary Ledgers
General Ledger
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MaterialsMaterials Inventory
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
912
1. Purchased cart frames costing $572 and wheels costing $340, for a total purchase of $912.
This purchase increases the balances in the Materials Inventory account and the corresponding accounts in the materials ledger.
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Materials (cont’d)Materials Inventory
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
2. Purchased indirect materials costing $82.
This purchase also increases the balance in the Materials Inventory account, as well as the balance in the Indirect Materials account in the materials ledger.
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Materials (cont’d)Materials Inventory
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
1,8801,880
3. Production requested cart frames costing $1,240 and wheels costing $640, totaling $1,880.
The Materials Inventory account is decreased and the Work in Process Inventory account is increased by
$1,880.
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Materials (cont’d)Materials Inventory
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
1,8801,880
1,240
640
3. Production requested cart frames costing $1,240 and wheels costing $640, totaling $1,880.
The corresponding accounts in the materials ledger must also be decreased by the appropriate amounts.
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Materials (cont’d)Materials Inventory
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
3. Of the $1,880 of direct materials, $1,038 was used for Job CC and $842 was used for Job JB.
These amounts must be recorded on the job order cost cards for each job.
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Overhead
Materials (cont’d)Materials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
3. Production also requested $96 of indirect materials.
The Materials Inventory account is decreased and the Overhead account is increased. The corresponding account in the materials ledger must be decreased.
96
96
Indirect materials costs flow to the Overhead account rather than to specific jobs..
96
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Overhead
LaborMaterials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
96
2,400
4. Production employees earned $2,400 of wages during the period.
The Factory Payroll account is increased and the Wages Payable account (not shown) is also increased.
Factory Payroll is a clearing account (holds cost only until they are distributed to the various production accounts).
96
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Overhead
Labor (cont’d)Materials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
96
2,400 1,640
1,640
4. Of this amount, $1,640 was direct labor and $760 was indirect labor.
The Factory Payroll account is decreased; the Work in Process Inventory account and the Overhead account are affected. 96
760
760
Indirect labor costs flow to the Overhead account rather than to specific jobs.
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These amounts must be recorded on the job order cost cards for each job.
Overhead
Labor (cont’d)Materials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
96
2,400 1,640
1,640
760
760
Direct labor 1,320
Direct labor 320
5. Job CC required $1,320 of direct labor and Job JB required $320.
Direct labor costs for Job CC and Job JB total $1,640, the amount recorded in the Work in Process Inventory account.
96
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Overhead
6. Other indirect costs totaling $295 were paid during the period.
OverheadMaterials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
912
The Overhead account is increased.
82
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
96
2,400 1,640
1,640
760
760
Direct labor 1,320
Direct labor 320
295
96
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240
Overhead
7. A $240 adjustment was made for factory-related depreciation.
Overhead (cont’d)Materials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
912
The Overhead account is increased.
82
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
96
2,400 1,640
1,640
760
760
Direct labor 1,320
Direct labor 320
295
96
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240
Overhead
8. Total overhead of $1,394 is applied, with $1,122 (85% of $1,320) going to Job CC and $272 (85% of $320) going to Job JB.
Overhead (cont’d)Materials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
912
The Overhead account is decreased and the Work in Process Inventory account is increased by $1,394 ($1,320 + $320). Overhead must be recorded on the job order cost cards for each job.
82
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
96
2,400 1,640
1,640
760
760
Direct labor 1,320
Direct labor 320
295
1,394
1,394
96
Overhead 1,122
Overhead 272
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240
Overhead
9. Job CC was completed and moved to the finished goods storeroom. Its completed cost was $3,880.
Completed UnitsMaterials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
912
The Work in Process Inventory account is decreased and the Finished Goods Inventory account is increased. The job order cost card is also completed and transferred to the finished goods file.
82
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
96
2,400 1,640
1,640
760
760
Direct labor 1,320
Direct labor 320
295
1,394
1,394
Overhead 1,122
3,8803,880
96Overhead 272
Completed cost 3,880
3,880
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240
Overhead
10. One general-purpose golf cart was sold.
Sold UnitsMaterials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Materials Ledger Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
912
The Finished Goods Inventory account is decreased and the Cost of Goods Sold account is increased. The finished goods ledger is decreased by the cost of the unit sold.
82
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
96
2,400 1,640
1,640
760
760
Direct labor 1,320
Direct labor 320
295
1,394
1,394
Overhead 1,122Completed cost 3,880
3,8803,880
3,880
Two units were completed in Job CC. The cost of each was $1,940 ($3,880 ÷ 2).
1,940 1,940
96Overhead 272
1,940
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96
240
Overhead
11. The Overhead account is closed.
Reconciliation of Overhead CostsMaterials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
912
The ending balance of the Overhead account is transferred to the Cost of Goods Sold account.
82
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
2,400 1,640
1,640
760
760
Direct labor 1,320
Direct labor 320
295
1,394
1,394
Overhead 1,122Completed cost 3,880
3,8803,880
3,880
To prepare financial statements at the end of the period, actual and applied overhead must be reconciled.
1,940 1,940
1,940
31,394
—
1,391
3
End Bal. 1,937End Bal. 1,940
End Bal. 1,940
96Overhead 272
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End. Bal. 1,434
96
240
Overhead
Reconciliation of Overhead Costs (cont’d)Materials Inventory
Factory Payroll
Cart Frames
Wheels
Indirect Materials
Work in Process Inventory
Finished Goods Inventory
Job CCJob CC
Job JB
Cost of Goods Sold
Job Order Cost Cards Finished Goods Ledger
Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400
Beg. Bal. 30
Beg. Bal. 370
Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572
340
91282
82
1,8801,880
1,240
640
Direct materials 1,038
Direct materials 842
96
2,400 1,640
1,640
760
760
Direct labor 1,320
Direct labor 320
295
1,394
1,394
Overhead 1,122Completed cost 3,880
3,8803,880
3,880
1,940 1,940
1,940
31,394
—
1,391
3
End. Bal. 1,937
End of period account balances are determined for all permanent accounts.
End. Bal. 1,940
End. Bal. 1,940
End. Bal. 1,434
These balances will now be carried over to the beginning of the next accounting
period.
End. Bal. 16
End. Bal. 70
End. Bal. 162
End. Bal. 248
96Overhead 272
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Stop & ReviewQ. What accounts are increased and decreased
when materials are requested for the production process?
A. Materials Inventory is decreased and Work
in Process Inventory is increased.
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Stop & Review (cont’d)
Q. Why must overhead costs be reconciled at the end of the accounting period?
A. The balance of the Cost of Goods Sold account must reflect actual product costs, which includes actual overhead costs.
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Manufacturer’s Job Order Cost Card and Computation of Product Unit Cost • Objective 4
– Prepare a job order cost card, and compute a job order’s product unit cost.
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Job Order Cost Cards and the Job Order Costing System
• In a job order costing system, all costs are accumulated in one Work in Process Inventory account.– A subsidiary ledger of job order cost cards is used
to trace these costs to specific jobs.– As costs are incurred, they are classified by job
and recorded on the appropriate card.
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Job Order Cost Card
• A document on which all costs incurred in the production of a particular job order are recorded– These costs are used to measure the cost of each
completed unit.
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Job Order Cost Card (cont’d)
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Job Order Cost Card and Computation of Product Unit Cost
Job order cost cards are used to record:• Direct materials, direct labor, and overhead
costs– Direct materials and direct labor costs are recorded
as incurred.– Overhead is applied at the predetermined rate.
• Job order number, product specifications, name of customer, date of the order, projected completion date, and cost summary
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Job Order Cost Card and Computation of Product Unit Cost (cont’d)
• Job order cost cards for incomplete jobs make up the subsidiary ledger for the Work in Process Inventory account.– The ending balance in the Work in Process
Inventory account should equal the total of the costs shown on the job order cost cards.
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Job Order Cost Card and Computation of Product Unit Cost (cont’d)
• When a job is completed, the costs on the job order cost card are totaled.– The product unit cost is computed by dividing the
total costs for the job by the number of units produced.
• This amount is entered on the job order cost card and will be used to value items in inventory.
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Stop & Review
Q. Which costs are recorded as incurred on the job order cost card?
A. Direct materials and direct labor costs
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Job Order Costing in a Service Organization
• Objective 5– Apply job order costing to a service
organization.
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Job Order Costing in a Service Organization
• The most important cost is labor.– Accounted for using time cards
• The cost flow of services is similar to that of manufactured products.
• Many service organizations base jobs on cost-plus contracts.– The customer pays all costs incurred on the job
plus a predetermined amount of profit.
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Job Order Costing in a Service Organization Illustrated
Gartner Landscaping Service employs 15 people. The service overhead cost for landscape design is 40 percent of design labor cost, and service overhead cost for landscape installation is 50 percent of installation labor cost.
Gartner has a 15 percent cost-plus contract with Rico Corporation.
Total costs incurred for Rico job $5,400
Profit margin ($5,400 x .15) 810
Total contract revenue $6,210
Rico Corporation is billed for $6,210.
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Job Order Cost Card in a Service Organization
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Stop & Review
Q. Which accounts are affected when direct labor is charged to production?
A. The Factory Payroll account is decreased and the Work in Process Inventory account is increased by the amount of direct labor charged to production.
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Job Order Costing Versus Project Costing
• Objective 6– Distinguish between job order costing and project
costing.
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Projects
• Take a long time to complete
• Require the talents of many departments, consultants, and subcontractors
• Complex jobs– Made up of many tasks– Take a broad, multidisciplinary approach to the
production of goods or services
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Job Order Costing Versus Project Costing
Project Costing
• Links many different job orders and processes
• Transfers costs from one job or process to another
• Collects and summarizes costs in a variety of ways
• Provides appropriate internal controls to manage complicated projects
Job Order Costing
• Focuses on individual products or customer requests
• Accumulates costs on the job order cost card
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Stop & Review
Q. Is a job order costing system a type of project costing system?
A. No. A project costing system is a type of job order costing system. It is a complex costing system that uses the concepts of job order costing (collecting the costs of direct materials, direct labor, and overhead) for complex projects such as building skyscrapers and developing software programs.
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Chapter Review
1. Discuss the role that information about costs plays in the management process, and explain why unit cost is important.
2. Distinguish between the two basic types of product costing systems, and identify the information that each provides.
3. Explain the cost flow in manufacturer’s job order costing system.
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Chapter Review (cont’d)
4. Prepare a job order cost card, and compute a job order’s product unit cost.
5. Apply job order costing to a service organization.
6. Distinguish between job order costing and project costing.
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