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Job Costing Process Costing

Types of goods heterogeneous goods/wide variety of distinct Homogeneous/similar/identical
products goods
Quantity Small Large
Nature of processing Specific processing Continuous processing
Cost object Individual job Department or process
Cost accumulation Costs accumulated by jobs Costs accumulated in departments

Unit cost Unit cost determined by dividing cost of job by # Unit cost determined by dividing
of units process costs of period by units
produced during period

Recording Job cost record Production worksheet

who uses job costing? Examples include home builders who design specific houses for each
customer and accumulate the costs separately for each job, and caterers who accumulate the costs
of each banquet separately. Consulting, law, and public accounting firms use job costing to measure
the costs of serving each client. Motion pictures, printing, and other industries where unique jobs are
produced use job costing. Hospitals also use job costing to determine the cost of each patient’s care.

Job order costing is a cost accounting system in which direct costs are traced and indirect costs are
allocated to unique and distinct jobs instead of departments. It is appropriate for businesses that
provide non-uniform customized products and services.
Job order costing is one of the two main cost accounting systems, the other being the process
costing in which costs are traced and allocated first to different processes carried out in different
departments and then to products and services. Many companies use costing systems that are a
blend of features of both job-order costing and process costing systems.

Companies that use job-order costing

Some of the companies that use job-order costing include
 accounting, consulting and legal firms
 Architects
 Manufacturers of ships and airplanes
 Book publishers
 Movie producers
The nature of their work is such that they are interested in finding profitability of different jobs and
hence they accumulate costs with reference to different jobs like audit engagement, consulting
projects, books, movies, etc.

Steps in job-order costing process

In a job-order costing system, jobs are accounted for using the job-order cost sheet. The process
involves the following steps:
1. Identification of the job
 2. Tracing direct costs to the job
3. Identifying the indirect costs i.e. manufacturing overheads and finding the cost allocation
base for each cost.
4. Applying the indirect costs to the job using the pre-determined allocation rate.
5. Finding total cost by summing up all the cost components.
6. Closing the under/over-applied manufacturing overheads to cost of goods sold/income
statement.
7. Calculating revenue and profit.

Journal entries: example

Dynamic Systems Inc. (DS) received an order to manufacture a customized airplane for the official
use of the president of Pakistan. DS will charge an amount equal to the cost of the airplane plus a
30% profit margin on cost to the government of Pakistan. The job code is PK03.
Since the manufacture of the airplane is a one-off project, job-order costing is the most appropriate
cost accumulation system. Let us post the required journal entries in the DS costing system.
1. DS purchased raw materials (such as aluminum, fiber, etc.) at a cost of $4 million.
Material inventory $4,000,000
Accounts payable $4,000,000
2. $2.8 million worth of raw materials were used in the project as direct materials.
work in process—PK03 $2,800,000
Inventories $2,800,000
3. $0.4 million worth of raw materials were used as indirect materials.
Manufacturing overheads $400,000
Inventories $400,000
4. Total direct labor hours consumed on the job cost $3 million. The amount is already paid.
Work in process—PK03 $3,000,000
Cash $3,000,000
5. Indirect labor hours relevant to the project cost $1 million.
Manufacturing overheads $1,000,000
Cash $1,000,000
6. Other indirect costs yet to be paid were $2.5 million.
Manufacturing overheads $2,500,000
Accounts payable $2,500,000
7. Manufacturing overheads are charged to jobs at 100% of direct labor cost i.e. $3,000,000.
Work in process—PK03 $3,000,000
Manufacturing overheads $3,000,000
8. The cost of PK03 is transferred from work in progress to finished goods on its completion at total
cost of $8,800,000 (=direct materials cost of $2,800,000 plus direct labor cost of $3,000,000 and
applied manufacturing overheads of $3,000,000).
Finished goods $8,800,000
Work in process—PK03 $8,800,000
9. Revenue is recorded at $11,440,000 [= $8,800,000 × 1.3].
 Accounts receivable $11,440,000
Revenue $11,440,000
10. Actual manufacturing overheads are $3,900,000 (=indirect materials of $400,000 plus indirect
labor of $1,000,000 and other overheads of $2,500,000). Applied manufacturing overheads are
$3,000,000. The $900,000 worth of manufacturing overheads under-applied is taken to the cost of
goods sold or income statement.
Cost of goods sold $900,000
Manufacturing overheads $900,000
Profit on PK03 is $1,700,000 (=revenue of $11,440,000 minus finished goods of $8,800,000 and
under-applied overheads adjustment of $900,000).

Job Cost Accounting Journal Entries

The job cost accounting journal entries below act as a quick reference, and set out the most
commonly encountered situations when dealing with the double entry posting of job costing.
The journal entries follow the job costing process from purchase of raw materials, allocation of direct
materials, direct labor, and manufacturing overhead to work in process, transfer of the goods through
to finished goods and finally to cost of goods sold and sales.
In each case the job cost accounting journal entries show the debit and credit account together with a
brief narrative. For a fuller explanation of journal entries, view our examples section.
Typical Job Cost Accounting Journal Entries

Account Debit Credit

Raw materials inventory XXX

Accounts payable XXX

To purchase raw materials

Account Debit Credit

Labor cost XXX

Wages payable XXX

To accrued labor cost

Account Debit Credit

Manufacturing overhead XXX

Raw materials (indirect) XXX

Labor cost (indirect) XXX

Depreciation XXX

Utilities XXX

Other costs XXX

To transfer indirect materials, indirect labor and other overhead

to manufacturing overhead account

Account Debit Credit

Work in process inventory XXX

Raw materials inventory XXX

Direct labor cost XXX

Manufacturing overhead XXX

To transfer direct materials, direct labor, and manufacturing

overhead (at the predetermined rate) to work in process

Account Debit Credit

Finished goods inventory XXX

Work in process inventory XXX

To transfer work in process to finished goods

Account Debit Credit

Cost of goods sold XXX

Finished goods XXX

To transfer finished goods to cost of goods sold

Account Debit Credit

Accounts receivable XXX

Sales XXX

To record the sale of the goods

Job cost sheet is a document used to record manufacturing costs and is prepared by companies that use
job-order costing system to compute and allocate costs to products and services. The accounting
department is responsible to record all manufacturing costs (direct materials, direct labor, and
manufacturing overhead) on the job cost sheet. A separate job cost sheet is prepared for each individual
job. All necessary details about the job and costs incurred to complete the job are written on the job cost
sheet. The information about a job or order that is shown on job cost sheet usually includes job number,
product name, starting date, completing date, number of units completed etc. The information about
manufacturing costs that is shown on job cost sheet usually includes materials requisition number, cost of
direct materials issued, time tickets, direct labor hours, direct labor rate per hour and total
cost, manufacturing overhead rate per direct labor or machine hour and total cost etc. Job cost sheet is not
only used to charge cost to jobs but is also a part of the company’s accounting record. It is used as a
subsidiary ledger to the work in process account because it contains all details about the job in process.
Example:
An example of a complete job cost sheet is given below:
After accepting a job or order, the first step in a job order costing system is to determine the direct
materials requirement to complete the job. The type and quantity of direct materials required to
manufacture a product can be determined either by using a bill of materials or by production staff.
Bill of materials is a document that lists the type and quantity of direct materials required to manufacture
a standard product. But companies using job order costing system frequently receive orders that require
customization in design, size and color etc.  In such circumstances, the bill of materials cannot be used to
determine the type and quantity of materials required to complete the job. Therefore the production
department determines materials requirement using the information provided by customers.
After direct materials requirement has been determined, the production process starts with issuance of
direct materials. For this purpose, production department prepares a document known as ‘materials
requisition form‘. An authorized person from production department writes the type, quantity, and job
number (to which the materials cost is to be charged) on materials requisition form. A signed copy of this
form is then sent to the storeroom clerk who completes the form by entering on it per unit and total cost of
materials to be issued. After necessary verification, storeroom clerk issues direct materials to production
department.
A complete materials requisition form is also used by accounting department to record direct materials
cost on the job cost sheet of the related job order.
An example/sample of materials requisition form is given below:
Use of computer technology for materials requisition:
The procedure described above is the manual procedure of issuing materials. In today’s business world,
many companies are replacing manual procedure with computer technology. In computer
technology, automated information processing systems are used to send the requisition information to
storeroom. The material is transferred from storeroom to the production department on the basis of this
information. An entry about each requisition is made in a computer that automatically updates the
subsidiary materials record.
Journal entries to record the flow of materials:
Normally two types of journal entries are made for direct materials cost. One at the time of purchase of
direct materials from suppliers and one at the time of issuance of direct materials from storeroom to
production department. These two entries are given below:
When materials are purchased:

When materials are issued:

In job order costing system, the method of measuring and recording direct labor cost is similar
to measuring and recording direct materials cost. Direct labor hours worked, direct labor rate per hour,
and total amount in dollars for each individual job or task is recorded on a document known as  time
ticket or employee time ticket. A separate time ticket is prepared by each worker for every working
day.Accounting department collects all time tickets at the end of the day. These time tickets are used to
enter direct labor cost on the job cost sheet of each individual job order. An example/sample of complete
time ticket is given below:
Employee Time Ticket

In job order costing system, any labor charges that are not directly traceable to a particular job are known
as indirect labor cost. In example of time ticket given above “maintenance” is indirect labor. Other
examples of indirect labor are cleanup costs and supervision etc. Indirect labor is not included in direct
labor cost and, therefore, becomes a part of the manufacturing overhead. These days, many companies
have replaced the manual process of recording direct materials cost with the computerized approaches.
They use a bar code technology to enter data into a computer. This technology increases the speed and
accuracy of the whole process.
Journal entry to record direct labor cost:
After collecting time tickets by accounting department, wages of workers are computed and labor costs
are classified as direct or indirect on the basis of information provided by time tickets. As discussed
earlier, indirect labor is a part of manufacturing overhead and its accounting treatment has been discussed
in “measuring and recording manufacturing overhead” article. The journal entry of direct labor cost is
made as follows:

MOH
Manufacturing costs other than direct materials and direct labor are known as manufacturing overhead
(also known as factory overhead). It usually consists of both variable and fixed components. Examples of
manufacturing overhead cost include indirect materials, indirect labor, depreciation, salary of production
manager, property taxes, fuel, electricity, grease used in machines, and insurance etc. Unlike direct
materials and direct labor, manufacturing overhead is an indirect cost that cannot be directly assigned to
each individual job. This problem is solved by using a rate that is computed at the beginning of each
period. This rate is known as predetermined overhead rate.
Application of manufacturing overhead:
As stated earlier, the predetermined overhead rate is computed at the beginning of the period and is used
to apply manufacturing overhead cost to jobs throughout the period. Manufacturing overhead cost is
applied to jobs as follows:
Overhead applied to a particular job = Predetermined overhead rate × Amount of the allocation base
incurred by the job

Example: Suppose the GX company has completed a job order. The time tickets show that the
workers have worked for 27 hours to complete the job. The predetermined overhead rate computed at the
beginning of the year is $8 per direct labor hour. The manufacturing overhead cost would be applied to
this job as follows:

Overhead applied to a particular job = Predetermined overhead rate × Amount of the allocation base
incurred by the job
= $8.00 × 27 DLH
= $216
The manufacturing overhead cost assigned to the job is recorded on the job cost sheet of that particular
job.
Journal entry to record manufacturing overhead cost:
The manufacturing overhead cost applied to the job is debited to work in process account. The journal
entry for the applied manufacturing overhead cost, computed in the above example, would be made as
follows:

The reason of using a predetermined overhead rate rather than actual overhead costs:
Notice that the procedure of manufacturing overhead application described above is based on an
estimated overhead rate (predetermined overhead rate). The manufacturing overhead cost applied to the
job is, therefore, not actual manufacturing overhead cost incurred by the job. The reason is that the total
actual manufacturing overhead costs are usually not known to managers before the end of the year.
The application of manufacturing overhead based on a predetermined overhead rate helps in computing
cost of goods sold of a particular job before it is shipped to the customer. The use of predetermined
overhead rate to apply manufacturing overhead cost to products or job orders is known as  normal cost
system.
Predetermined overhead rate is used to apply manufacturing overhead to products or job orders and is
usually computed at the beginning of each period by dividing the estimated manufacturing overhead
cost by an allocation base (also known as activity base or activity driver). Commonly used allocation
bases are direct labor hours, direct labor dollars, machine hours, and direct materials.
Formula:
The formula of predetermined overhead rate is written as follows:
Example:
Suppose GX company uses direct labor hours to assign manufacturing overhead cost to job orders. The
budget of the GX company shows an estimated manufacturing overhead cost of $8,000 for the
forthcoming year. The company estimates that 1,000 direct labors hours will be worked in the
forthcoming year. Using the above information, we can compute the predetermined overhead rate as
follows:
Predetermined overhead rate = Estimated manufacturing overhead cost/Estimated total units in the
allocation base
Predetermined overhead rate = $8,000 / 1,000 hours
= $8.00 per direct labor hour
Notice that the formula of predetermined overhead rate is entirely based on estimates. The overhead
applied to products or job orders would, therefore, be different from the actual overhead incurred by jobs
or products. This difference is eliminated at the end of the period. The elimination of difference between
applied overhead and actual overhead is known as disposition of over or under applied overhead.
Multiple Predetermined overhead rate:
The predetermined overhead rate computed above is known as single predetermined overhead rate or
plant-wide overhead rate. It is mostly used by small companies. In large companies, each production
department computes its own predetermined overhead rate. The use of multiple predetermined overhead
rates may be complex and time consuming but is considered more accurate than a single plant-wide
overhead rate. According to a survey 34% of the manufacturing businesses use a single plant wide
overhead rate, 44% use multiple predetermined overhead rates and rest of the companies use activity
based costing (ABC) system.
The over or under-applied manufacturing overhead is defined as the difference between
manufacturing overhead cost applied to work in process and manufacturing overhead cost actually
incurred during a period. If the manufacturing overhead cost applied to work in process is more than the
manufacturing overhead cost actually incurred during a period, the difference is known as over-applied
manufacturing overhead. On the other hand; if the manufacturing overhead cost applied to work in
process is less than the manufacturing overhead cost actually incurred during a period,  the difference is
known as under-applied manufacturing overhead.
The occurrence of over or under-applied overhead is normal in manufacturing businesses because
overhead is applied to work in process using a predetermined overhead rate. A predetermined overhead
rate is computed at the beginning of the period using estimated information and is used to apply
manufacturing overhead cost throughout the period. The procedure of computing predetermined overhead
rate and its use in applying manufacturing overhead has been described in “measuring and recording
manufacturing overhead cost” article.
Recording actual and applied overhead cost in manufacturing overhead account:
Over or under-applied manufacturing overhead is actually the debit or credit balance of manufacturing
overhead account (also known as factory overhead account). Actual manufacturing overhead costs are
debited and applied manufacturing overhead costs are credited to manufacturing overhead account.
Actual overhead costs are debited as they are incurred and applied overhead costs are credited as they are
applied to work in process. At the end of a period, if manufacturing overhead account shows a debit
balance, it means the overhead is under-applied.  On the other hand; if it shows a credit balance, it means
the overhead is over-applied. For further explanation of the concept, consider the following example:

The debit or credit balance in manufacturing overhead account at the end of a month is carried forward to

the next month until the end of a particular period – usually one year.
Disposition of over or under-applied manufacturing overhead:
At the end of the year, the balance in manufacturing overhead account (over or under-applied
manufacturing overhead) is disposed off by either allocating it among work in process, finished goods
and cost of goods sold accounts or transferring the entire amount to cost of goods sold account. These two
methods have been discussed below:

Allocation among work in process, finished goods and cost of goods sold account:
Under this method, the amount of over or under-applied overhead is disposed off by allocating it among
work in process, finished goods and cost of goods sold accounts on the basis of overhead applied in each
of the accounts during the period. The following journal entry is made to dispose off an over or under-
applied overhead:
When overhead is under-applied:
When overhead is over-applied:

This method is more accurate than second method. The only disadvantage of this method is that it is more
time consuming.

Transferring the entire amount of over or under-applied to cost of goods sold:

Under this method the entire amount of over or under applied overhead is transferred to cost of goods
sold. The following entry is made for this purpose:
When overhead is under-applied:

When overhead is over-applied:

This method is not as accurate as first method. Companies use this method because it is less time
consuming and easy to use.
Example:
During the year 2012, Beta company started two jobs – job A and job B . Job A consisted of 1,000 units
and job B consisted of 500 units. At the end of the year 2012, job A was completed but job B was in
process. The information about manufacturing overhead cost applied to job A and B was as follows:

The actual manufacturing overhead cost incurred by the company during 2012 was $108,000. Out of
1,000 units in job A, 750 units had been sold before the end of 2012.
Required: Calculate over or under applied manufacturing overhead and make journal entries required to
dispose off over or under applied manufacturing overhead assuming:
1. It is disposed off by allocating between inventory and cost of goods sold accounts.
2. It is disposed off by transferring to cost of goods sold.

Solution:
Calculation of over or under-applied manufacturing overhead:
In our example, manufacturing overhead is under-applied because actual overhead is more than applied
overhead. The under-applied overhead has been calculated below:
Under-applied manufacturing overhead =  Total manufacturing overhead cost actually incurred – Total
manufacturing overhead applied to work in process
= $108,000 – $100,000
= $8,000
Journal entries to dispose off under-applied overhead:
(i). Allocation of under-applied overhead among work in process, finished goods, and cost of goods sold
accounts:

(ii). Transfer of entire under-applied overhead to cost of goods sold account:

Non-manufacturing expenses have no effect on the production cost of the company because they are
treated as period costs.
Non-manufacturing costs are not included in manufacturing overhead account but are charged directly
to income statement. Examples of non-manufacturing expenses are sales commission, advertising
expenses, rent of office building, and depreciation on the equipment used in office etc.
Journal entries to record non-manufacturing costs:
To understand how entries for non-manufacturing costs are made, consider the following example:
GX company uses job order costing system and has incurred the following non-manufacturing expenses
for the most recent period:
1. Selling and administrative salary: $60,000
2. Depreciation on office expenses furniture: $14,000
3. Advertising expenses: $84,000
4. Other selling and administrative expenses: $16,000
Required: make journal entries from the information provided above.

 Journal entries:

Note: In entry 2, the depreciation on office furniture have been debited to depreciation expense because
depreciation on office furniture or equipment is treated as period cost. If it were a depreciation on factory
equipment, it would have been debited to manufacturing overhead because depreciation on factory
equipment is treated as manufacturing or product cost.
Recording finished goods and cost of goods manufactured:
In a job order costing system, all manufacturing costs (i.e., direct materials, direct labor, and applied
manufacturing overhead) of the job are debited to work in process account. When a job is completed, its
cost (as shown by job cost sheet) is transferred from the work in process account to the finished goods
account. After completion, the job becomes finished goods and is, therefore, transferred from the
production department to the finished goods storeroom (also called warehouse).
The following journal entry is made to transfer the cost of a completed job from work in process account
to finished goods account:
The total cost transferred from the work in process account to the finished goods account during a period
is equal to the cost of goods manufactured for that period. At the end of a period, the cost of incomplete
jobs remain in the work in process account and is shown as “work in process inventory” in assets section
of the balance sheet. Next period, this cost represents the opening balance of the work in process account.
Cost of goods sold:
When finished goods are shipped to customers, the cost of finished goods are transferred from finished
goods account to cost of goods sold account. If a job is completed according to specification of a
particular customer, the complete job is shipped to the customer immediately and the manufacturing cost
associated with the job (as shown by the job cost sheet) is charged to the cost of goods sold. But in some
cases, the complete job is not shipped but only a portion of the job is sold to customers. In such
circumstances, the manufacturing cost per unit is computed and the cost of the units that have been
shipped to customers is charged to cost of goods sold account. Sales and the transfer of cost from finished
goods to cost of goods sold account are recorded by making the following journal entries:

(1). When sales are made:

i. If sales are made on account:

ii. If sales are made on cash

(2). When cost is transferred to cost of goods sold account:

Comprehensive example of job order costing systemFacebookTwitterEmailPinterestMore283
The Fine manufacturing company uses job order costing system. The company uses machine hours to
apply overhead cost to jobs. At the beginning of 2012, the company estimated that 150,000 machine
hours would be worked and $900,000 overhead cost would be incurred during 2012.
The balances of raw materials, work in process (WIP), and finished goods at the beginning of 2012 were
as follows:
 Raw materials: $40,000
 Work in process: $30,000
 Finished goods: $60,000
The Fine manufacturing company recorded the following transactions during 2012:
 a. Raw materials purchased on account, $820,000.
 b. Raw materials were requisitioned for use in production, $760,000 ($720,000 direct materials
and $40,000 indirect materials).
 c. Direct labor labor, $150,000; indirect labor, $220,000; sales commission, $180,000; and
administrative salaries, $400,000.
 d. Sales travel costs were $34,000.
 e. Utility costs incurred in the factory, $86,000.
 f. Advertising expenses were $360,000.
 g. Depreciation for the year was $700,000 ($560,000 relates to factory and $140,000 relates to
selling and administrative activities).
 h. Insurance expired during the year, $20,000 ($14,000 relates to factory operations and $6,000
relates to selling and administrative activities).
 i. Fine manufacturing company worked 160,000 machine hours. Manufacturing overhead was
applied to production.
 j. Goods costing $1,800,000 were completed during the year.
 k. The goods costing $1,740,000 were sold to customers for $3,000,000.
Required:
1. Prepare journal entries, T-accounts and income statement from the above information.
2. Prepare a journal entry to close the balance in manufacturing overhead account (over or
under applied manufacturing overhead) to cost of goods sold.

Solution:
1  (a). Journal entries:
* Manufacturing overhead is applied to production by multiplying actual direct labor or machine hours
worked during the year and predetermined overhead rate computed at the beginning of the year. It is
shown as follows:

= $900,000 / 150,000 machine hours =$6 per machine-hour

Manufacturing overhead applied to production = Actual machine hours × Predetermined overhead rate =
160,000 hours × $6 $960,000
(c) Cost of goods sold statement:

*Over applied manufacturing overhead

2. Journal entry to close the balance in manufacturing overhead account (disposition of over or
under applied manufacturing overhead):
Notice that the balance in manufacturing overhead account is credit. It means overhead is over-applied.
The following journal entry would dispose it off to cost of goods sold:
Manufacturing overhead—Dr. 40,000  

      Cost of goods sold–Cr.   40,000