Rationality

• Managers need to assign costs to products to

facilitate external financial reporting and
internal decision making.

• This session illustrates an absorption costing

approach to calculating product costs known
as job-order costing.

1
 Job-Order Costing System
• Job-Order Costing Systems – a product-
costing system in which costs are assigned
to batches or job orders of production.
• Finished Product can be individually
identified
 Job Order Costing (JOC)
 Method of costing applied in industries where
production is measured in completed jobs.
 Cost is compiled for a job or work order- not for
units i.e. printing of 5000 ledger sheets, repairs of
50 computers.
 Production is against the customers order- not
for stock.
 Application- Printing press, automobile garage,
ship building, repair workshop, Foundry, and other
similar manufacturing units which manufacture to
customers specific requirements. 3
Costing Systems Used to Determine Product Costs

Process Job-order
Costing Costing

Chapter 8
 Many different jobs are worked on during each period.
 Products are manufactured to order. (customer satisfaction)
 Unit costs are computed by job
Costs accumulated by using job cost sheet
 Cost records must be maintained for each distinct
product or job. (JOB ORDER SHEET)
Each job assigned number
 Types of Organisations Using
Job Costing
Process Job-order
Costing Costing

• A cost accounting system where costs are

assigned to each job or batch of goods.
• Custom built factory
 Typical job order cost applications:
• Production of movie
 Special-order printing
• Batch of menus  Building construction
• Audit engagement  Also used in the service industry
 Hospitals
 Law firms
 Comparison of Job-Order and
Process Costing
Job-Order Costing Process Costing
1. Wide variety of distinct 1. Homogeneous products
products
2. Cost accumulated by job 2. Costs accumulated by
process or department
3. Unit cost computed by 3. Unit cost computed by
dividing total job costs dividing process costs of
by units produced on that the period by the units
job produced in the period
BEAT
SOUTH
HIGH
 Exxon oil refinery Process
Process
Process or
or
Process
job-order
job-order Coca Cola plant
Custom home builder Job order
costing?
costing?
Shop for customizing vans Job order
Television repair shop Job order
Campbell soup plant Process
Advertising agency Job order
Law firm Job order
 Job-Order
Job-Order Costing
Costing

Job 425 Job 426 Job 427 Total

Beginning balance $58,600 $51,300 $ 0 $109,900
Current costs:
Direct materials 4,800 3,600 23,500 31,900
Direct labor 6,000 9,000 10,000 25,000
Applied overhead 2,400 3,600 4,000 10,000
Total $71,800 $67,500 $37,500 $176,800

This information is used to determine the total

cost of goods manufactured.
 Sequence of Events in a Job-
Order Costing System
Receive Begin
orders from production
customers

Schedule Order
jobs materials
 Job Order Cost Flow
Cost treatment

Tra
ced
t o e d ir ec Two Major Steps in Cost Flow
ach tly
jo b • Accumulating the manufacturing costs
Traced
directly
incurred
–
t o e ac h
job THE JOB Raw materials inventory
– Factory Labor
– Manufacturing Overhead
e ach
d to a • Assigning the accumulated costs to the
i e g
pl in ed
Ap ob us rmin work done
j ete
d e
pre rat  Prime cost ( DM, DL, and DE) directly charged
to the particular job.
 Overhead charged to a job is apportioned at
predetermined departmental absorption rates and
recorded in the cost sheet.
 Sequence of Events in a Job-Order Costing
System
Material Inventory Record
Each individual item of raw materials has a
card or record.
Item: Handles Part No: AA2746
Receipts Issues Balance
Date Units Cost Total Units Cost Total Units Cost Total
1/4 2,000 $5 $10,000 2,000 $5 $10,000

The sum of the balances of all these

records should equal raw materials in
the general ledger.

Charge
Charge
Direct
DirectMaterials
Materials Job
JobNo.
No.11 direct
direct
material
material and
and
Direct
DirectLabor
Labor direct
direct labor
labor
Job
JobNo.
No.22
costs
costs to
to
each
each job
job as
as
Manufacturing
Manufacturing Job
JobNo.
No.33 work
work isis
Overhead
Overhead
performed.
performed.
 Sequence of Events in a Job-Order Costing
Direct Materials
System
Direct Materials
Apply
Applyoverhead
overheadto to
Job
JobNo.
No.11 each job using a
each job using a
predeter-mined
predeter-mined
rate.
rate.
Direct
DirectLabor
Labor
Job
JobNo.
No.22 The predetermined
overhead rate
(POHR) used to apply
Manufacturing overhead to jobs is
ManufacturingOverhead
Overhead Job
JobNo.
No.33 determined before the
period begins.

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Ideally, the allocation base is a cost driver

that causes overhead.
Job Order Cost Accounting
 Materials Requisition Form
A document authorizing the issuance of raw
materials from the store to production.
Job-Order Cost Accounting
 Documents
1. Production order/ manufacturing order: work
order- authorizing the production department
to produce a specified quantity of a product.
2. Cost sheet – For recording costs- statement of
cost.
3. Other document: documents used as control
mechanism: material requisition, tool orders,
inspection order etc.

16
 Job Cost Accounting Procedure
Cost Source

1. Direct material Copies of material requisition maintained

by Stores Accounting section.

2. Direct wages Time tickets costed by payroll department

3. Direct expenses Concerned department

Note: Manufacturing overheads are then

applied at predetermined departmental
17
absorption rates and recorded in the cost