NAGA

COLLEGE

FOUNDATION, INC.
M.T. Villanueva Avenue, Naga City
College of Accountancy and Finance

COST ACCOUNTING AND CONTROL (CAC)

JOB ORDER COSTING

OVERVIEW

Most business are implementing Product Costing System especially for manufacturing firms.
This system is used to assign production or performance costs to products or services for
internal and external reporting purposes. These systems may range from simple to complex
depending on the needs of the business. The more complex the operation the higher the cost.
However, management should keep in mind that the benefits to be received is higher than the
cost of employing it (Cost-benefit analysis).

There are two (2) most commonly used product costing system: Job Order and Process Costing.
In this lesson, we will discuss in detail for Job order costing only since process costing is
discussed in separate lesson.

OBJECTIVES

At the end of this lesson, the students will be able to:

1. Learn what is job order costing and know the industries that commonly used this system
2. Demonstrate the mechanics of a job order costing system
3. Differentiate among the forms used job order costing system
4. Know how to prepare the Job Cost Sheet

DISCUSSION

…before we go on to the discussion of job order costing, let us first be familiarize on the
methods attached to the Product Costing

There are two systems / methods that must be present or be determined in order a product
cost be computed:

1. Cost Accumulation System – this defines the cost object and method of assigning the
costs to production
2. Valuation Method – it specifies how products are to be measured
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COST ACCUMULATION SYSTEM

There are three things that is concerned in product costing: (1) cost identification (2) cost
measurement (3) product cost assignment.

The two (2) commonly is used cost accumulation system are:

1. Job Order Costing

• companies employing this make relatively small quantities of distinct products or

perform unique services that conforms from the customers’ specifications. • Some
examples are workshops, repair shops, builder construction engineers and
shipbuilders
• Cost is measured per job which is synonymous with client, engagement, project, or
contract.
• This system is also used for costing orders by lots or batch like for factory of shoes
where contract is per lot and each lot has different specifications compared to
other lots.
2. Process Costing
• Employed by company producing large quantity of products with the same
features such as candy bars, cereals, bricks, detergent or gasoline
• Discussed in the next lesson

VALUATION METHODS

There are three existing valuation methods and for each of the method they differ on how they
will measure the cost of the product as to manufacturing costs.
1) Actual Cost System – inventory cost is measured from all the actual costs of materials,
labor and factory overhead. This is mostly employed with low volume or low customer
entities
2) Normal Cost System - inventory cost is measured from all the actual costs of materials,
labor and pre-determined rate of factory overhead. (This is discussed in this semester) 3)
Standard Cost System - inventory cost is measured from all the standard costs of materials,
labor and pre-determined rate of factory overhead. Standards are set for both materials
and labor. (Standard Costing is discussed in separate chapter)
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…Let’s now discuss how the Job Order Cost System works

JOB ORDER COST SYSTEM

The accumulation of cost under job order costing is checked per job may it have single unit or
multiple units (by batch). For a job with multiple units (by batch), computation of per unit cost
must be made. Each job is treated as cost object and each job has its separate subsidiary ledger
accounts for recording purposes.

Job order costing helps in managing profitability and setting prices of the products. There are
two (2) typical methods to set the price of the product.
1) Cost-plus Contract
• The management set the price by covering all actual costs, even indirect costs,
incurred plus additional profit margin

2) Bidding Technique
• This is about estimation of cost associated with the contract. This is risky if the
management will not accurately estimate the cost and might incur losses.
Through technological advancements, record keeping may now be automated to avoid errors
and also for easy access on the information for future purposes like understanding the
purchasing patterns of the entity and how to estimate profit.
 Page 3 of 16
…Since this is a costing system, it is expected that there will be documents to help facilitate
the costing process. With that, let us list down all the necessary source documents.

There are three stages of production when employing job order costing. For each of the stage,
there are source documents to support the job and journal entries to be made. 1) Contracted
but not yet started
2) In-process
3) Completed

The following are some of the common documents seen under job order costing system:

JOB COST SHEET

• This record accumulates product costs of specific units or small batches of units for both
product costing and control purposes.
• The file of job-order sheets for uncompleted jobs serves as a perpetual book inventory
and the subsidiary ledger for Work-in-Process Control
• A separate cost sheet is prepared for each job

JOB COST SHEET

Job Number Description

Date Started Date Completed
No. of Completed
Units
 DIRECT MATERIALS

Date Requisition Quantity Unit Price Cost

No.

DIRECT LABOR

Date Time Card Hours Rate Cost

No.

FACTORY OVERHEAD

Date Activity Base Quantity Application Rate Cost

COST SUMMARY

Direct Materials
Direct Labor
Factory
Overhead
Total Cost

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MATERIALS STOCKCARD
• This records the perpetual book inventory of costs and quantities of materials on hand •
the file of material stock cards for unused materials is the subsidiary ledger for Materials
Control account
• a separate stock card is prepared for each type of material on hand
 MATERIAL STOCKCARD

Location in Store
Description
Room
Maximum Stores Ledger Acct No.
Minimum

RECEIVED ISSUED BALANCE

Date
Unit
Unit
Qty
Price Amount Qty Unit Price Amount Qty
Price Amount

MATERIALS REQUISITION
• This is prepared so that material from inventory (warehouse) can be released to the
factory for production
• This document indicates the types of and quantity of materials to be issued

MATERIALS REQUISITION

Date No.
To

Unit
Quantity Description
Price Amount

Approved By:
Received By:

Issued By:

Charge to Job/ Dept.

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CLOCK CARDS / TIME RECORDS
• this document records the days or hours worked by each employee.

• This will be the basis in computing the gross earnings of employees

JOB TIME TICKETS

• This is prepared for each worker to determine the time spent for each job as basis in
determining the amount to charge as direct labor or indirect labor cost.
 • This should be reconciled against clock cards / time records

JOB TIME TICKET

Employee Name: Date

Employee No. Department

Time Started Time Stopped Job No.

FINISHED GOODS STOCKCARD

• this record are the perpetual book inventory of costs and quantities of completed goods
held for sale
• the file of finished goods stock cards for unsold goods is the subsidiary ledger of Finished
Goods Control
FINISHED GOODS STOCKCARD

Product

Completed Sold Balance

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FACTORY OVERHEAD CONTROL COST RECORD
• this record accumulated detailed manufacturing overhead costs by department • the file of
this records for the accounting period is the subsidiary ledger for Factory Overhead Control
FACTORY OVERHEAD CONTROL COST RECORD

Department

Date Particulars Cost

TOTAL

…Let’s answer the question: how does Job Order Costing affects management decision making?

In management decision making, Job Order Costing

 ✓ assists managers in their planning, controlling, decision making, and performance
evaluation
✓ allows managers to trace costs associated with specific current jobs to better estimates
costs for future jobs
✓ provides a means by which the managers can better control the costs associated with

current production, especially if comparisons with budgets or standards are used ✓ allows

costs to be gathered correctly for jobs that are contracted on a cost-plus basis ✓ highlights
those jobs or types of jobs that are most profitable to the organization.

…Let’s have some illustration to apply our knowledge from this lesson and from previous
chapter

The Northern Consolidated Company has the following balances as of January 1, 2019:

Materials P4,900
Work-In Process P4,600
Finished Goods P6,000
Accrued Factory Payroll P 200

Details of the three inventories are:

Finished Goods (Commodity X = 2,000 units @ P3.00) P6,000 Work-in Process
(Job No. 101)
Materials:
A = 200 units @ P5.00 P1,000
B = 175 units @ P4.00 700 P1,700

Direct Labor
290 hours @ P5.00 P1,450

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Factory Overhead Applied
@ 100% of Direct Labor Cost P1,450 P4,600
Materials:
A = 600 units @ P5.00 P3,000
B = 350 units @ P4.00 1,400
Indirect Materials 500 P4,900 The transactions for the month of January

2019 are as follows:

1) Purchases for the month of January – Material A – 600 units at P5.50; Material B – 800
units at P5.00; Indirect Materials – P700

Materials 8,000
Accounts Payable 8,000

Mat A = 600 * P5.50 = P3,300

Mat B = 800 * P5.00 = P4,000
Indirect Materials = P 700
 P8,000

2) Materials requisitioned and issued on a FIFO basis amounted to P7,000. Material A, 200
units (charged to Job 101); Material A, 600 units and Materials B, 225 units (Charged to
Job 102); Materials B, 425 units (charged to Job 103). Indirect materials amounted to
P1,000.

Work-In Process 7,000

Factory Overhead Control 1,000
Materials 8,000

Job 101
Mat A (200 * P5) P1,000
Job 102
Mat A (400 * P5) P2,000
(200 * P5.50) 1,100
Mat B (225 * P4) 900 P4,000
Job 103
Mat B (125 * P4) P500
(300 * P5) 1,500 P2,000
P8,000

3) Material B returned to vendors, 70 units at P5.00

Accounts Payable 350

Materials 350

Check Material Stock Card B

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4) Payroll during January amounted to P10,300, of which P2,000 is for Job 101; P4,000 is for Job
102; P2,000 for Job 103, and P2,300 is indirect labor. Deductions are as follows: SSS
Premiums P412
Medicare Contributions 225
Withholding Taxes 1,050

Payroll for the month:

Payroll 10,300
SSS Premium Payable 412
Medicare Contributions Payable 225
Withholding Taxes Payable 1,050
Accrued Factory Payroll 8,613

Distribution of Payroll
Work-In Process 8,000
Factory Overhead Control 2,300
Payroll 10,300
5) Factory overhead is applied on the basis of 100% of direct labor cost.

Work-In Process 8,000

Factory Overhead Applied 8,000

P8,000 DL * 100% = P8,000

6) Jobs completed during the month – Job 101 for 3,000 units of Commodity X and Job 102
for 5,000 units of Commodity Y

Finished Goods 21,600

Work-In Process 21,600

Based from Job Cost Sheet:

Job 101 Job 102
Materials P2,700 P4,000
Labor 3,450 4,000
Overhead (100% DL) 3,450 4,000
P9,600 P12,000

7) Sales during January of FIFO basis – 4,000 units of Commodity X at P6.00 per unit and
4,000 units of Commodity Y at P4.00 per unit

Accounts Receivable 40,000

Sales 40,000

X = 4,000 * P6 = P24,000
Y = 4,000 * P4 = P16,000
P40,000

Cost of Goods Sold 22,000

Finished Goods 22,000

FIFO Basis based from FG Stockcards:

X = 2,000 units * P3.00 = P6,000
2,000 units * P3.20 = P6,400 P12,400
Y = 4,000 units * P2.40 = P9,600 P9,600
P22,000

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8) Cash collections from customers, P35,000

Cash 35,000
Accounts Receivable 35,000

9) Recorded the following liabilities; Factory overhead, P4,800; Selling expenses, P2,100;
General expense, P1,500.

Factory Overhead Control 4,800

Selling Expense Control 2,100
General Expense Control 1,500
Accounts Payable 8,400

10) Paid accounts – P9,500; payroll -P8,500

Accounts Payable 9,500

Accrued Factory Payroll 8,500
 Cash 18,000

Closing Entries:

Closing of FOC and FO Applied:

Factory Overhead Applied 8,000
Under-applied Factory Overhead 100
Factory Overhead Control 8,100

Closing of Under-applied factory overhead

Cost of Goods Sold 100
Under-applied Factory Overhead 100

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Materials Stockcards
MATERIAL A
RECEIVED ISSUED BALANCE
Unit
Unit
Unit
Qty
Price Amount Qty
Price Amount Qty
Price Amount
600 P5.00 P3,000.00
P5.00
P3,000.00
1
600 P5.50 P3,300.00 600
P5.50
 P3,300.00
600
P5.00
P3,000
2
200
P5.50
P1,100 400 P5.50 P2,200

MATERIAL B
RECEIVED ISSUED BALANCE
Unit
Unit
Unit
Qty
Price Amount Qty
Price Amount Qty
Price Amount
350 P4.00 P1,400
350
P4.00
P1,400
1
800 P5.00 P4,000
800
P5.00
P4,000
350
P4.00
P1,400
2
300
P5.00
P1,500 500 P5.00 P2,500
3
(70) P5.00 (P350) 430 P5.00 P2,150

Indirect Materials
RECEIVED ISSUED BALANCE
Unit
Unit
Unit
Qty
Price Amount Qty
Price Amount Qty
Price Amount
P500
P700 P1200
P1,000 P200

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Finished Goods Stockcards
 Commodity X

Completed Sold Balance

2,000 * P3.00 = P6,000
2,000 * P3.00 = P6,000
6
3,000 @ P3.20 = P9,600
3,000 @ P3.20 = P9,600
2,000 @ P3,000 = P6,000
7
2,000 @ P3.20 = P6,400 1,000 @ P3.20 = P3,200

Commodity Y

Completed Sold Balance

5,000 @ P2.40 =
5,000 @ P2.40 =
6
P12,000
P12,000
4,000 @ P2.40 =
1,000 @ P2.40 =
7
P9,600
P2,400
 Job Cost Sheets

2
2

4
4

55

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 2

NORTHERN CONSOLIDATED COMPANY

Cost of Goods Sold Statement
For the month ended January 31, 2019

Direct Materials
Materials, Jan 1 P 5,900
Purchases P 8,000
Less: Purchase Returns (350) 7,650
Total Materials Available for Use P 12,550
Less: Materials, Jan 31 P 4,550
Indirect Materials 1,000 ( 5,550) P 7,000

Direct Labor 8,000 Applied Factory Overhead 8,000 Total Manufacturing Cost P 23,000
Add: Work-In Process, Jan 1 4,600 Cost of Goods Put into process P 27,600 Les: Work-In
Process, Jan 31 (6,000) Cost of Goods Manufactured (CGM) P 21,600 Add: Finished
Goods, Jan 1 6,000 Total Goods Available for Sale (TGAFS) P 27,600 Less: Finished Goods,
Jan 31 (5,600) Cost of Goods Sold – NORMAL P 22,000 Add: Under-applied factory
overhead 100 Cost of Goods Sold – ACTUAL P 22,100

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TREATMENT FOR DEFECTS AND SPOILAGES
Defective Units Spoiled Units

Description Those than can be corrected Partially or fully completed units

by reprocessing that are not correctable either
because it is not possible to
correct them or because it is not
economical to correct them

Treatment Reprocessing incurs additional a. Disposed

 processing cost (DM + DL + b. Inventoried at nominal
FOH) value c. Sold immediately as
seconds

Main Issues (Charging of)

a. Additional costs in defective products
b. Unrecovered costs resulting from spoilages
Customer’s Fault Internal Failure

Description/ Reason Due to customer’s complex Due to error by workers,

specifications/ design defective products, and/or
defective equipment

Treatment of Loss Charged to WIP Charged to FOC

(added to the Cost of Product) (as if expense)

WIP XXX FOC XXX

Materials XXX Materials XXX
Payroll XXX FO Applied Payroll XXX
XXX FO Applied XXX

Unit Costs after Increases unit cost (before Remains the same (before and
the treatment of and after charging of loss) after charging of loss)
loss

Illustrative Problem:
Microtech Company received an order for 50 automatic mixing machines. The material cost per
unit is P240, labor P582, and factory overhead cost is charged at 100% of direct labor cost.
During production, 10 units were found to be defective and required the following total
additional costs: materials, P291 and labor, P375.

On final inspection, 4 units were classified as spoiled and sold as seconds for P1,200 each, the
proceeds being credited to the order. The customer has agreed to accept the remaining good
machines, although fewer than the number ordered.

Required:
1. Total and unit costs of the completed units.
2. Journal entries to record the given transactions under the following assumptions:
a. The customer is at fault for the production imperfections.
b. The company is liable due to internal failure in operation.

Page 14 of 16
Transaction Customer’s Fault Internal Failure
 Record manufacturing of WIP 70,200 WIP 70,200
50 machines Materials 12,000 Payroll Materials 12,000 Payroll
29,100 FO Applied 29,100 FO Applied
29,100 29,100

Mat = 50 * 240 Mat = 50 * 240

Payroll = 50 * 582 Payroll = 50 * 582
FOA = (50 * 582) * 100% FOA = (50 * 582) * 100%

Unit Cost Unit Cost

= P72,000 / 50 units = P1,404 = P72,000 / 50 units = P1,404

Record the loss from WIP 1,041 FOC 1,041

spoiled units Materials 291 Materials 291
Payroll 375 Payroll 375 FO
FO Applied 375 Applied 375

Mat = 291 given Mat = 291 given

Payroll = 375 given Payroll = 375 given
FOA = 375 DL * 100% FOA = 375 DL * 100%

Unit Cost Unit Cost

= (P72,000 + 1,401) / 50 units = P72,000 / 50 units
= P1,424.82 = P1,404

Record the sale of Cash 4,800 Cash 4,800

spoiled units WIP 4,800 FOC 816
WIP 5,616
Cash/Sales = 4 * P1,200 = P4,800 Cash/Sales = 4 * P1,200 = P4,800 Cost
Cost of Sold Spoiled Units = 4 * 1,404 = of Sold Spoiled Units = 4 * 1,404 =
5,616 5,616

Loss = 4,818 – 5,616 = 816 Loss = 4,818 – 5,616 = 816

P816 loss remains in the WIP P816 loss is treated as actual FOH

Record completed units FG 66,441 FG 64,584

WIP 66,441 WIP 64,584

Completed (WIP) Completed (WIP)

= 70,200 + 1,041 – 4,800 = 66,441 = 70,200 – 5,616 = 64,584

Unit Cost Unit Cost

= 66,441 / 46 units = 1,444.37* = 64,584 / 46 units = 1,404*

*the unit cost increases from P1,404 *the unit cost remains the same
to P1,444.37 before and after treatment of loss

SCRAPS AND WASTE MATERIALS

SCRAP Description: Left over from the production process that cannot be put back to
production for the same purpose, but may be
a. usable for a different purpose or
b. may be sold to outsiders at nominal amount

Traceable to a specific job: Not traceable to Recovered from

specific job: factory supplies:

Scrap Mat. XXX Scrap Mat. XXX Scrap Mat. XXX

WIP XXX Misc. Income XXX FOC XXX
 Page 15 of 16
WASTE Description: Left over from the production process that
a. has no further use / resale value
b. requires incurrence of disposal cost

Disposal cost allocated to ALL jobs: Disposal cost allocated to

SPECIFIC jobs:

FOC XXX WIP XXX

Accounts Payable XXX Accounts Payable XXX

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