Chapter (2): Job Costing System

52
Costing systems:
There are two costing systems commonly used in manufacturing and in many
service companies to determine the product cost; these two systems are known
as process costing and job order costing.

1-A process costing system:

A process costing system is used in situations where the company produces
many units of a single product for long periods. Examples include producing
paper at Weyerhaeuser and mixing and bottling beverages at Coca-Cola. All of
these industries are characterized by an essentially homogeneous product that
flows through the production process on a continuous basis. Process costing
systems accumulate costs in a particular operation or department for an entire
period (month, quarter, year) and then divide this total cost by the number of
units produced during the period.

The basic formula for process costing is:

Unit product cost = Total manufacturing cost ÷ Total units produced

Since one unit of product is indistinguishable from any other unit of product,
each unit produced during the period is assigned the same average cost.

2- Job-Order Costing:
Job-order costing systems are used when:
1. Many different products are produced each period.
2. Products are manufactured to order, so products are unique to
customer needs
3. The unique nature of each order requires tracing or allocating costs to
each job, and maintaining cost records for each job.

Examples of companies that would use job-order costing include:

- Mffco helwan produces living rooms based on customers' orders.
- Computer repair jobs done by Compu me.
- Construction of ships.
- Movies produced by universal Studios.

The record-keeping and cost assignment problems are more complex when a
company sells many different products and services than when it has only a
single product. Since the products are different, the costs are typically
different.

In this chapter, we focus on the design of a job-order costing system.

52
Before we begin our discussion, recall from the previous chapter that companies
generally classify manufacturing costs or product costs into three broad
categories:
(1) direct materials, (2) direct labor, and (3) manufacturing overhead.

As we study the operation of a job-order costing system, we will see how each
of these three types of costs is recorded and accumulated.

Job Cost Sheet

After being notified that the production order has been issued, the Accounting
Department prepares a job cost sheet. Like the one presented in the following
table. A job cost sheet is a form prepared for a job that records the materials,
labor, and manufacturing overhead costs charged to that job.

Job 101 Job 102 Job 103

Direct material xx xx xx
Direct labor xx xx xx
Applied Manufacturing overhead xx xx xx
Total cost xx xx xx

1-Measuring Direct Materials Cost:

Once a sales order has been received and a production order issued, the
Production Department prepares a materials requisition form to specify the
type, quantity, and total cost of materials to be drawn from the storeroom, and
the job number to which the cost of the materials is to be charged.

The Accounting Department records the total direct material cost on the
appropriate job cost sheet.

2- Measuring Direct Labor Cost:

Workers use time tickets to record the amount of time that they spent on each
job and the total cost assigned to each job.

The Accounting Department records the labor costs from the time tickets on to
the job cost sheet.

The daily time tickets are source documents that are used as the basis for labor
cost entries into the accounting records.

3- Application of Manufacturing Overhead (MOH):

Recall that product costs include manufacturing overhead as well as direct
materials and direct labor. Therefore, manufacturing overhead also needs to be
recorded on the job cost sheet. However, assigning manufacturing overhead to a
specific job involves some difficulties.

52
There are three reasons for this:
1. Manufacturing overhead is an indirect cost. This means that it is either
impossible or difficult to trace these costs to a particular product or job.

2. Manufacturing overhead consists of many different items ranging from the

grease used in machines to the annual salary of the production manager.

3. Many types of manufacturing overhead costs are fixed even though output
may fluctuate during the year due to seasonal or other factors.

Given these problems, overhead costs are usually assigned to products using
an allocation process. This allocation of overhead costs is accomplished by
selecting an allocation base that is common to all of the company’s products and
services.

The most widely used allocation bases are direct labor-hours and direct labor
cost, with machine-hours and even units of product (where a company has only a
single product) also used to some extent.

Manufacturing overhead is commonly applied to products using predetermined

overhead rate. The Predetermined overhead rate (POHR) is computed by
dividing the total budget (estimated) manufacturing overhead cost for the
coming period by the budget (estimated) total amount of the allocation base the
coming period as follows:

POHR = Budget MOH cost ÷ Budget allocation base

Note that the predetermined overhead rate is based on estimates rather than
actual results. This is because actual overhead costs for the period are not
known until the end of the period, thus inhibiting the ability to estimate job
costs during the period.

The process of assigning overhead cost to jobs is called overhead allocation.

The formula for determining the amount of overhead cost to apply to a
particular job is:

Applied MOH to the job = POHR X actual allocation base for the job

Using the Predetermined Overhead Rate To illustrate the steps involved in

computing and using a budget overhead rate, assumes that ABC Company has
estimated its total manufacturing overhead costs will be $320,000 for the year

52
and its total direct labor-hours will be 40,000. Its budget overhead rate for the
year would be $8 per direct labor-hour, as shown below:

POHR =
Budget MOH cost $320,000
÷
Budget allocation base 40,000

$ 8 per direct labor-hour

If the job cost sheet indicates that 27 direct labor-hours (i.e., DLHs) were
charged to Job No 1. Therefore, a total of $216 of manufacturing overhead
cost would be allocated to the job:

Applied MOH to job No 1=

POHR X actual allocation base for the job

= $8 X 27 hours = $216

We can summarize the previous discussion as follows:

-Total cost of job =

DM cost Actual
DL cost Actual
Applied MOH (POHR X actual base)

 POHR = budget MOH cost ÷ budget allocation base

 The cost of any job can be determined at any time and this help in
making pricing decision.
 When we know the actual MOH at the end of the year, we must
adjust the difference between actual and applied MOH.

52
 Example(1):
Job 153 at Alex, Co. 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 153?
Answer
- POHR = $760,000 ÷ 20,000 hours = $38 per hour
- Applied MOH = $38 x 10 hours = $380
Job cost sheet:
Direct material $200
Direct labor = 10 hours x $15 $150
Applied MOH $380
Total cost $730

Note:
At the end of the period we should compare between applied and actual
overhead. The difference between applied and actual overhead of a period is
termed either underapplied or overapplied overhead as follows.

Over-under applied MOH = Applied MOH – Actual MOH

If applied MOH > Actual MOH If applied MOH < Actual MOH

"The result is positive" "The result is negative"

This is called This is called
Over applied overhead Under applied overhead

It should be deducted from cost of goods sold It should be added to cost of goods sold

Example (2)
Alex manufacturing uses job costing. The company started operations at 1-1-2020.
1- Budget manufacturing overhead for the year $70,000.
2- Budget direct labor hours 7,000 hours.
3- Direct labor hours are used as the allocation base for manufacturing overhead.
4- During 2020 the company worked on 3 jobs 100,101 and 102 as follows:
Job 100 Job 101 Job 102
Direct material 105,000 40,000 70,000
Direct labor 40,000 60,000 40,000
Direct labor hours 1,000 1,500 1,000
5- By the end of 2020 job 100,101 were completed while job 102 was still in
process.
6- Job 100 was sold for $250,000.
7- The actual manufacturing overhead incurred $39,000.

03
Required:
1. Prepare the job cost sheet.
2. What is the cost of completed jobs?
3. What is the cost of goods sold?
4. Compute over-under applied manufacturing overhead.
5. What is the cost of goods sold after adjustment?

Answer
1- The job cost sheet
- POHR = Budget OH ÷ Budget direct labor hours
= $70,000 ÷ 7,000 hours = $10 per hour

- Applied MOH to job = POHR X Actual base (DL hours)

Job 100 = 10 X 1,000 hours = $10,000
Job 101 = 10 X 1,500 hours = $15,000
Job 102 = 10 X 1,000 hours = $10,000

- Job cost sheet

Job 100 Job 101 Job 102 Total
Direct material 105,000 40,000 70,000 215,000
Direct labor 40,000 60,000 40,000 140,000
Applied MOH 10,000 15,000 10,000 35,000
Total cost 155,000 115,000 120,000 390,000

2- The cost of completed jobs = Cost of job 100 + 101

=155,000 + 115,000 =$270,000

3- The cost of goods sold = cost of job 100 = $155,000

4-Over-under applied MOH = applied MOH – actual MOH

=$35,000 - $39,000 = - $4,000 Under applied

It should be added to cost of goods sold

5-The cost of goods sold after adjustment = $155,000+ $4,000= $159,000

03
Choose the correct answer
1- ABC Company uses a predetermined overhead rate based on machine-hours to
apply manufacturing overhead to jobs. The company manufactures tools
to customer specifications. The following data pertain to Job 1501:

Direct materials used ....................................................... $4,200

Direct labor-hours worked .............................................. 300
Direct labor rate per hour............................................... $8.00
Machine-hours used .......................................................... 200
Predetermined overhead rate per machine-hour......... $15.00

What is the total manufacturing cost recorded on Job 1501?

A) $8,800
B) $9,600
C) $10,300
D) $11,100
Ans: B
Direct materials used ....................................................................... $4,200
Direct labor (300 hours × $8.00 per hour) ................................... 2,400
applied Manufacturing overhead (200 hours × $15.00 per hour) 3,000
Total manufacturing cost for job 1501.......................................... $9,600

2- Alex Co. uses a predetermined overhead rate based on direct labor-hours to

apply manufacturing overhead to jobs. For the month of October, Alex's
estimated manufacturing overhead cost was $300,000 based on an
estimated activity level of 100,000 direct labor-hours. Actual overhead
amounted to $325,000 with actual direct labor-hours totaling 110,000
for the month. How much was the over or under applied overhead?
A) $25,000 over applied
B) $25,000 under applied
C) $5,000 over applied
D) $5,000 under applied

Ans: C
Predetermined overhead rate = $300,000 ÷ 100,000 direct labor-hours
= $3 per direct labor-hour

 Applied manufacturing overhead = $3 per DLH* × 110,000 DLHs

=$330,000
 Over-under applied MOH = applied MOH – actual MOH
=$330,000 - $325,000 = + $5,000 Over applied

05
 Job-order costing system
Journal entries

Journal entries are made at each step of the production process. The purpose is
to have the accounting system closely reflect the actual state of the business,
its inventories and its production process.

Flow of Costs: A Conceptual Overview

Direct Material Direct Labor Applied manufacturing

overhead

Work in Process Inventory

Finished Goods Inventory Over or under

applied

Cost of Goods Sold

Actual manufacturing
overhead

Selling and Administrative Expenses

Journal entries

Raw material
1. Purchasing material
Raw materials purchases are recorded in the Raw Materials inventory account as
follows:
Raw Materials Inventory xx
Cash or Accounts payable xx

2. Sending material to the plant (Direct & indirect)

When raw materials are used in production, their costs are transferred to the
Work in Process inventory account as direct materials and to MOH account as
indirect cost.
Work in Process Inventory (direct material) xx
Manufacturing overhead (indirect material) xx
Raw Materials Inventory xx

00
Example:
- On May 1, ABC Co. had $5,000 in raw materials on hand. During the
month, the company purchased $45,000 in raw materials on account.

- On May 4, ABC Co. had $42,000 in raw materials requisitioned from the
storeroom for use in production. These raw materials included $40,000
of direct and $2,000 of indirect materials.

Required:
Prepare journal entries and post to raw material inventory account.
Answer
Journal entries:
Purchasing material:
May 1 Raw Materials Inventory 45,000
Accounts payable 45,000

Sending material to the plant (Direct & indirect)

May 4 Work in Process Inventory(direct) 40,000
Manufacturing overhead (indirect) 2,000
Raw Materials Inventory 42,000

Post to raw material inventory account:

DR Raw material inventory CR

Beg. Bal. 5,000 May 4 42,000

000 000
May 1 45,000
000
End. Bal. 8,000
000

2-Labor cost
- Direct labor is debited to Work in Process and credited to salaries and
wages payable.

- Indirect labor is debited to Manufacturing Overhead and credited to

salaries and wages payable.

Journal entry to record direct and indirect labor:

Work in Process Inventory(direct) xx
Manufacturing overhead (indirect) xx
Salaries and wages payable xx

03
Example:
During the month the employee time tickets included $35,000 of direct labor
and $12,000 for indirect labor.

Required:
Prepare the journal entry to record direct and indirect labor

Answer
Work in Process Inventory(direct) 35,000
Manufacturing overhead (indirect) 12,000
Salaries and wages payable 47,000

3- Applied manufacturing overhead

Manufacturing overhead costs are applied to Work in Process by multiplying the
predetermined overhead rate by the actual quantity of the allocation base
consumed by each job.

Work in Process Inventory xx

Applied Manufacturing overhead Xx

Example:
ABC Co. uses a predetermined overhead rate of $2.50 per machine-hour. During
the month, 5,000 machine-hours were worked on jobs.

Required:
Prepare the journal entry to record applied MOH.
Answer
Applied MOH = $2.5 X 5,000 machine-hours =$12,500
Work in Process Inventory 12,500
Applied Manufacturing overhead 12,500

4- Cost of job completed

When goods are completed, their costs are transferred from Work in Process
to Finished Goods as follows:
Finished goods Inventory xx
Work in Process Inventory xx

Example:
During the period, ABC Co. completed jobs with a total cost of $27,000.
Required:
Prepare the journal entry to record Cost of job completed.

Answer
Finished goods Inventory 27,000
Work in Process Inventory 27,000

02
5- Cost of job sold
As goods are sold, their costs are transferred from Finished Goods to Cost of
Goods Sold as follows:

Cost of goods sold xx

Finished goods Inventory xx

6- Sale price of job

Cash or Accounts receivable xx
Sales revenue xx

Example:
ABC Co. sold the $27,000 in Finished Goods Inventory to customers for
$42,500 on account.
Required:
Prepare the journal entries.

Cost of job sold

Cost of goods sold 27,000
Finished goods Inventory 27,000

Sale price of job

Accounts receivable 42,500
Sales revenue 42,500
Note:
The difference between the selling price and cost is the company’s gross margin
on the job, $15,500.

7- Other manufacturing overhead incurred

Manufacturing overhead xx
Prepaid insurance xx
Accumulated dep. xx
------------------- xx

8-Closing applied MOH and actual MOH

 Applied manufacturing overhead (credit close debit)
 Actual manufacturing overhead (debit close credit)
 Over or under applied (The difference between applied overhead and
actual manufacturing overhead) should be recorded as COGS.

A-In the case of over applied MOH

Applied Manufacturing overhead xx
Manufacturing overhead xx
Cost of goods sold (over applied) xx

02
B-In the case of under allocated MOH
Applied Manufacturing overhead xx
Cost of goods sold (under applied) xx
Manufacturing overhead xx

9- Accounting for Nonmanufacturing Cost (selling and administrative cost)

Nonmanufacturing costs are not assigned to individual jobs, rather they are
expensed in the period incurred.
Examples:
- Salary expense of employees who work in a marketing, selling,
or administrative capacity.
- Advertising expenses.

The journal entry for nonmanufacturing costs:

Salaries expense xx
Advertising expense xx
Cash or Accounts payable xx

Exercise(1): Alex Company is a manufacturing firm that uses job-order costing.

At the beginning of the year 2020, the company's inventory balances were as
follows:

Raw materials .................... $10,000

Work in process ................ $81,000
Finished goods................... $20,000

The company applies overhead to jobs using a predetermined overhead rate

based on direct labor-hours. At the beginning of the year, the company
estimated that it would work 33,000 direct labor -hours and incur $231,000 in
manufacturing overhead cost. The following transactions were recorded for the
year:
a. Raw materials were purchased, $372,000 cash.
b. Raw materials were requisitioned for use in production, $347,000
($325,000 direct and $22,000 indirect).
c. The following employee costs were incurred: direct labor, $309,000
and indirect labor, $41,000.
d. Manufacturing overhead was applied to jobs. The actual level of
activity for the year was 30,000 direct labor -hours.
e. The cost of job completed for the year was $894,000.
f. Cash sales for the year totaled $1,233,000 and the costs on the job
cost sheets of the goods that were sold totaled $879,000.
g. Other manufacturing overhead $157,000 (Depreciation recorded for
the year relates to factory assets)

02
 h. Over or under applied was closed out to Cost of Goods Sold.
i. During the year, Alex Co. paid sales salaries of $3,000, and
advertising expense of $1,500.
Required:
1. Prepare journal entries to summarize 2020 transactions.
2. Show posted T-accounts for all inventories (raw material, Work in
process, finished goods), MOH and cost of goods sold.

Answer
1- Journal entries
Raw material
a- Purchasing material
Raw Materials Inventory 372,000
Cash 372,000
b- Sending material to the plant(Direct & indirect)
Work in Process Inventory(direct) 325,000
Manufacturing overhead (indirect) 22,000
Raw Materials Inventory 347,000
Labor cost
C- Direct and indirect labor
Work in Process Inventory(direct) 309,000
Manufacturing overhead (indirect) 41,000
Salaries and wages payable 350,000

D- Applied manufacturing overhead

- PDOH = Budget MOH ÷ Budget direct labor hours
= $231,000 ÷ 33,000 hours = $7 per hour

- Applied OH = budget rate X Actual base (DL hours)

= 7 X 30,000 hours = $210,000
Work in Process Inventory 210,000
Applied Manufacturing overhead 210,000

e- Cost of job completed

Finished goods Inventory 894,000
Work in Process Inventory 894,000

f- Cost of job sold

Cost of goods sold 897,000
Finished goods Inventory 897,000

f- Sale price of job

Cash 1,233,000
Sales revenue 1,233,000

02
g- Other manufacturing overhead incurred
Manufacturing overhead 157,000
Accumulated Dep. 157,000
h-Closing applied MOH and actual MOH

Over-under applied MOH

Actual MOH =
Indirect material $22,000
Indirect Labor $41,000
Other manufacturing overhead $157,000

$220,000
Over-under applied MOH = applied MOH – actual MOH
=$210,000 - $220,000 = - $10,000 under applied
Should be added to cost of goods sold (debit)

Applied manufacturing overhead 210,000

Cost of goods sold (under applied) 10,000
Manufacturing overhead 220,000

i- The journal entry for nonmanufacturing costs:

Salaries expense 3,000
Advertising expense 1,500
Cash 4,500

2- Posting:

DR Raw material inventory CR

Beg. Bal. 10,000 (b) 347,000

000
(a) 372,000
000
End. Bal. 35,000
000

DR Work in process inventory CR

Beg. Bal. 81,000

(e) 894,000
000
(b) 325,000
(c) 309,000
(d) 210,000

End. Bal. 31,000

000 02
 DR Finished goods inventory CR

Beg. Bal. 20,000

(f) 879,000
(e) 894,000

End. Bal. 35,000

DR MOH CR

(b) 22,000 (h) 220,000

(c) 41,000

(g) 157,000

End. Bal Zero

DR Cost of goods sold CR

(f) 897,000
000
(h) 10,000
000
End. Bal. 907,000
000

33
Exercise (2):
ABC Company is a manufacturing firm that uses job-order costing. The company
started operations at 1-1-2020. The following transactions were
recorded for the year:
a) Budget manufacturing overhead for the year $150,000.
b) Budget direct labor hours 50,000 hours.
c) Direct labor hours are used as the allocation base for manufacturing
overhead.
d) The material purchased $120,000.
e) Raw materials were requisitioned for use in production, $90,000
($80,000 direct and $10,000 indirect).
f) The following employee costs were incurred: direct labor,$135,000;
indirect labor, $15,000.
g) During 2020 the company worked on 3 jobs 100,101and 102.as follows:
Job 100 Job 101 Job 102
Direct material 30,000 30,000 20,000
Direct labor 40,000 60,000 35,000
Direct labor hours 10,000 20,000 15,000
h) By the end of 2020 job 100,101were completed while job 102 was still in
process.
i) Job 100 was sold for $150,000 cash.
j) Other manufacturing overhead $95,000(Depreciation recorded for the
year relates to factory assets).
k) During the year, ABC Co. paid sales salaries of $2,000, and advertising
expense of $750.

Required:
1- Prepare the job cost sheet.
2- What is the cost of completed jobs?
3- What is the cost of goods sold?
4- Compute over-under applied manufacturing overhead.
5- Prepare the appropriate journal entry for each of the items above.

Answer
1- The job cost sheet
- POHR = Budget MOH ÷ Budget direct labor hours
= $150,000 ÷ 50,000 hours = $3 per hour

- Applied MOH to job = POHR X Actual base (DL hours)

Job 100 = 3 X 10,000 hours = $30,000
Job 101 = 3 X 20,000 hours = $60,000
Job 102 = 3 X 15,000 hours = $45,000

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- Job cost sheet
Job 100 Job 101 Job 102 Total
Direct material 30,000 30,000 20,000 80,000
Direct labor 40,000 60,000 35,000 135,000
MOH allocated 30,000 60,000 45,000 135,000
Total cost 100,000 150,000 100,000 350,000

2- The cost of completed jobs = Cost of job 100 + 101

=100,000 + 150,000 =$250,000

3- The cost of goods sold = Cost of job 100 = $100,000

4-Over-under applied MOH

- Actual MOH =
Indirect material $10,000
Indirect Labor $15,000
Other manufacturing overhead $95,000

$120,000

Over-under applied MOH = Applied MOH – actual MOH

=$135 000 - $120 000 = + $15 000 over applied

5- Journal entries
1- Raw material
- Purchasing material
Raw Materials Inventory 120,000
Cash 120,000
- Sending material to the plant(Direct & indirect)
Work in Process Inventory(direct) 80,000
Manufacturing overhead (indirect) 10,000
Raw Materials Inventory 90,000

2-Labor cost
- Payment of Direct and indirect labor
Work in Process Inventory(direct) 135,000
Manufacturing overhead (indirect) 15,000
Salaries and wages payable 150,000

3- Applied manufacturing overhead

Work in Process Inventory 135,000
Applied Manufacturing overhead 135,000

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4- Cost of job completed
Finished goods Inventory 250,000
Work in Process Inventory 250,000

5- Cost of job sold

Cost of goods sold 100,000
Finished goods Inventory 100,000

6- Sale price of job

Cash 150,000
Sales 150,000

7- Other manufacturing overhead incurred

Manufacturing overhead 95,000
Accumulated Dep. 95,000

8-closing allocated MOH and actual MOH

Applied Manufacturing overhead 135,000
Manufacturing overhead 120,000
Cost of goods sold (over applied) 15,000
9- The journal entry for nonmanufacturing costs:
Salaries expense 2,000
Advertising expense 750
Cash 2,750

30