1.

Description of concept and technique

In the organizations where in a certain period many products are produced, job order costing
is used. This technique is process of assigning costs of manufacturing to many or a single
product. Usually, job ordering technique is used when the products are different from each other.
Keeping the records of expenses and assignments of costs in job ordering technique is more
complicated if company produces many different products or services than producing only one
product or service. Costs of manufacturing are classified into three categories which are: direct
materials, direct labor and manufacturing overhead. In job order costing job cost sheet is used. It
is the combined calculations of all categories involved in particular job. Each of the categories
have their own cost record keeping form. Direct materials cost sheet gathers all the cost details
about the consumed material all listed with the quantities and costs. Process of calculating the
cost of direct labor involves the workers starting and ending time and getting the total amount of
payment which the employee earned. Calculating the manufacturing overhead is the hardest of
all three. In order to get the cost of manufacturing head, first we need to know the predetermined
overhead rate (POHR). In order to assign manufacturing overhead to each and every job
allocation base is used. There are many reasons why it is applied. First of all it is very difficult to
trace overhead costs for certain jobs done. Besides, mostly manufacturing costs are fixed type,
despite the final output fluctuates at a particular period. Getting the predetermined rate for the
job makes the estimation total job costs quicker. Actual overhead will only be known at the end
of the job process. Estimated total cost of manufacturing overhead is divided by total estimation
amount of allocation bas for the particular period will give the result of production level
estimation.
In job order costing can occur underapplied or overapplied problems. Underapplied can
happen when the manufacturing overhead for the period with all the estimations has less rate
than the actual overhead incurred for that period. Overapplied is the vice versa of underapplied.
When this problems happen, the unbalanced amount can be allocated in a current amount or it
could be divided between the accounts equally, which will give more accurate result.
Nevertheless, the amount of efforts will be required more if the unbalances amount is distributed
among the accounts.

2. Its importance for the organization.

According to survey among the companies, 51.1 % of companies whose business is
manufacturing using the job order costing. Why is it so important for the organizations?
First of all we have to mention that using the job order costing enables companies to estimate
production cost before even the production of items started. By doing all the calculations,
companies can decide if the production should be proceed or not. Furthermore, job order costing
gives opportunity to assess the performance of employees. This technique provides sufficient
data to help company people to evaluate each individual performance data in regards of
productivity, efficiency and cost control. Cost calculated with this technique will be more easy
to update and modify. Some companies use job order costing because of its flexibility. Meaning,
if companies are getting customized orders accountants can trace all the calculations and get the
appropriate charge amount for the order. Plus, the accuracy of charge in job order costing will be
more precise, since it uses all the necessary information for each product or job individually.
Besides, if any inappropriate balance is discovered at the end of the production, it can easily be
traced where the balancing needs to be done.

3. Detail description of the technique.

Job order costing is used where many different products are produced at a certain period of
time. In this technique costs are traced to each job. Total cost of job is divided by the number of
units of production, for the purpose of getting the average unit cost. Job order costing is used
mainly in manufacturing and service companies. Because, in this organizations companies get
orders for various products, cost assignment for a product turns out to be harsh.
Materials used in job order costing are assigned in raw materials and manufacturing overhead
accounts relatively its environment. Special materials requisition sheet is used in this technique
to list down all the necessary materials. This method makes sure that costs allocated properly for
the particular job. Taken data from raw materials inventory is added to the work in process
account.
Labor can be allocated in time ticket form or in manufacturing overhead account.
Information about labor cost in time ticket is transferred to work in process inventory based on
the completeness of time tickets. Data helps to identify which job an employee has spent time on.
Indirect materials and indirect labor are allocated in manufacturing overhead. In order to
calculate manufacturing overhead first of all we will need to know predetermined overhead rate.
Predetermined overhead rate is calculated by estimating total overhead costs during the
specified period and dividing that by estimated allocation bas, which can be direct material or
direct labor. For example, if the companys estimated overhead cost is RM 300,000 and as an
allocation base direct labor is used. Direct labor for the period is supposed to be RM 250,000.
The companys predetermined overhead rate will be 1.2. Now lets assume that direct labor costs
for the month is RM 20,000. Overhead of the company for that labor would be RM 20,000. Then
this data is taken to work in process account.
Total manufacturing cost is determined using three inventories accounts data in work in
process account. On the income statement cost of goods manufacturing will be reported after
transferring data from work in process account to finished goods account.

In job order costing technique special form which is called job costing sheet is used. Total
amount for the job will be divided total number of units of production. It will give the average
unit product cost.
In companies which are using job order costing there always occurs the possibility of
underapplied or overapplied manufacturing costs. The reason is the actual cost of the production
is now known until the production is done. So, the solution for this kind of problems can either
be charging or adding of the cost of goods sold, or separating it among the amounts. By
separating the unbalanced amount between the accounts we can get more accurate result.
However, it will require more time and more labor to do. So, most of the companies choose to
balance only on goods of sold account.
With the growth of technology, work of job order costing is getting more and more accurate.
Bar code technology can increase the accuracy of recording the labor time, reducing the harsh
work. In a developed company, the process of production starts with getting the electronic order
from the customers. By the improvement of better technology, the orders are received through
electronic data interchange (EDI). Job order costing process could be shared among many
Internet connected computers and could be shared with each other not loosing or getting
inappropriate data. Recently, EDI has been replaced with XML, because of its better price for the
companies. Once an order is received, XML file will share the information to all the suppliers. A
unique bar code is produced for each job. The process of updating the order is easy and cost
effective. The unique bar code is scanned, and all the information is distributed to all computers
so that no kind of miscommunications will happen.
Nowadays most of the companies are job order costing because of its effectiveness. Time
spent and price of this method is getting better by the growth of technology. Advantages and
disadvantages of this technique will be discussed more deeply later on. Companies using this
technique will be mentioned as well.