Chapter: 5Job Order Costing

Product Costing:Product costing is the process of assigning manufacturing costs (i.e. direct material, direct labor and Factory overhead to the products produced by the company. Product costing system is necessary for fixation of their products’ prices.

Two types of systems may be used in manufacturing and service industries for determining the product’s costs, but which system to be used, it depends on the types of products/ Industries.These two systems are as under:

1. Job order Costing system2. Process Costing system

1. Job order costing systemA Job orders costing system is used in such situations where heterogeneous or much different type of products are produced simultaneously in each period. Each one must have a separate identification in terms of unit’s type or Job in each period. Moreover costs are accumulated for each job/product as the work performs.

In a job order costing system, costs are traced to the each job by allotting an order number to each job as soon as its production starts and then the costs are accumulated against this order number till the end. Total accumulated costs of the job are divided by the number of units in the job to arrive at an average cost per unit. The manufacturing industries that commonly use Job order costing systems are, Air craft, automobile, furniture, textile, shipbuilders, Construction Company, etc.

The service sectors may also use Job order costing system. Such as, hospitals, law firms, movie studios, accounting firms, advertising agencies and repair shops, etc.

2. Process Costing systemA process costing system is used in situations where the company produces homogeneous products or identical products in bulk quantities on continuous basis for a long period of time. Process costing is basically used in companies that convert basic raw materials into homogenous products (Liquid or Powder) or identical products. In process costing system the costs are accumulated departmental/ process wise for the period rather Job order wise. Job order wise cost accumulation is not possible in process costing system, as products are produced homogeneous or identical in nature. The industries that commonly use process costing systems are as under: Oils, Chemicals, cement, petroleum, beverage, paper etc industries.

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Differentiation between job order costing and process costingJob order costing Process Costing

1.Production is started against specific order 1.Continues or mass production of homogeneous products

2.Costs are collected and accumulated for each job separately

2. Costs are collected and accumulated process - wise or department - wise.

3. Job Cost are calculated only when job is completed 3. Process costs are calculated at the end of each month.

4.Example are repair shop, printing press, Air craft, law firms, advertising agencies, etc.

4.Examples are Sugar, cement, chemicals, oil, beverage, etc.

→ In this chapter we will discuss only job order costing system in detail

1. Job order costing system

Documents used in Job order costing system: Following documents are used in job order costing system:i). Material Requisition Formii). Time Ticketiii). Job order Cost sheet

i). Material Requisition FormA material requisition form is a document that specifies the type and quantity of material to be drawn from the store. It also indicates the job number that will be charged with the cost of material. ii). Time TicketThe time ticket is a document that specifies hour by hour summary of the direct worker’s activities through out the day.

iii). Job order Cost sheetA job order cost sheet is a form prepared for each job. We record in job order cost sheet date wise direct material consumption, direct labor and factory overhead applied through material requisition form and time ticket. This control document serves two purposes:a). Job order wise cost sheet.b). It is subsidiary ledger for control account (Departmental total expenses) -- > See format on page: 94 of prescribed book.

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Entries in job order costing system:The following accounting entries are necessarily required to run successfully job order costing system. These are as under:

1. Journal entries for materials (direct and indirect materials).

2. Journal entries for labor (direct and indirect labor).

3. Journal entries for factory overhead [Other than indirect material and indirect labor (Actual and applied).

4. Journal entries for finished goods inventory

5. Closing entries to close factory overhead control account at month end.

1. Journal entries for materials (direct and indirect materials). When direct or indirect material is purchased

Materials inventory ……………………… xx Accounts payable …..………………………… xx

[To record purchase of raw materials on account]

When direct and as well as indirect material is issued to productionWork in process inventory …………………. xx Factory overhead control ………………….. xx Materials Inventory …………………….. xx

[To record issuance of direct and indirect material issued to production)

2. Journal entries for labor cost for both direct and indirect labor When payroll is recorded:

Payroll ……………………………… xx Accrued payroll ……………………… xx Income tax payable (if any) …………. xx[To record payroll for the month]

When direct and as well as indirect labor is used/charged to production:

Work in process Inventory …………….. xxFactory overhead control ……………… xx Payroll ………………………………. xx

[To charge direct and indirect labor cost to production]

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3. Journal entries for factory overhead Entries for factory overhead are made in two phases:

When actual factory over head is recorded (Other than indirect material and indirect labor)

Factory overhead control ……… xxA/C payable or Cash…………… xxAccumulated depreciation……… xx

(To record actual factory over head incurred)

When factory overhead is applied to production Work in process inventory …………. xx Factory overhead control …………. xx

(To record applied Factory overhead)

Or, above (b) entry may be made alternatively, in case factory overhead applied account is also maintained along with the factory overhead control account

Work in process Inventory …………. xx Factory overhead applied … xx

(To record applied Factory overhead)

Factory overhead applied …………. xx Factory overhead control … xx

(To record transfer of Factory overhead Applied to Factory overhead control)

4. Journal entries for finished goods inventory

General entries for finished goods completed: Finished goods Inventory …………. xx Work in process Inventory ………. xx

(To record finished goods inventory completed)

Journal entries for finished goods inventory sold:

Cost of goods sold ……. xx Finished goods Inventory ………. xx

[To record cost of goods sold]

Journal entries when sale of above is recorded, if detail ( mark up) is given

Accounts Receivable or Cash ……… xx Sale ………………………………… xx

[To record sales]

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5. Closing entries to close factory overhead control account at month end

Case #1: If factory overhead is under applied

Cost of goods sold ……… xx Factory overhead head control … xx

Case ≠ 2: If factory overhead is over applied

Factory overhead head control xx Cost of goods sold ……….. xx

…………………………

-----The end -----

Prepared by: S.Zulfiqar Jafar – ACMA, ACIS, APFA, and M.Com.

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