Job Order

Costing
(Management Accounting)

SIA, RICHELLE & MEDRIANO,

MARVIN
 Learning objectives:
• Explain job order costing system. What are the
businesses for which job order costing system is
ideal?
• Explain a job cost sheet. How is it prepared?
• What is a predetermined overhead rate? How is it
calculated?
• How various manufacturing as well as non-
manufacturing expenses are accumulated
or recorded under a job order costing system.

SIA, RICHELLE & MEDRIANO,

MARVIN
What is Job order costing
system?
It is generally used by companies that
manufacture a number of different products. It is
a widely used costing system in manufacturing as
well as service industries.
Per unit cost = Total cost applicable to job /
Number of units in the job

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MARVIN
 Job-Order Costing – An Overview
Charge
Charge direct
direct
Direct
DirectMaterials
Materials material
material and
and
Job
JobNo.
No.11 direct
direct labor
labor
costs
costs to
to each
each
Direct
DirectLabor
Labor Job
JobNo.
No.22 job
job as
as work
work
is
is performed.
performed.
Manufacturing
Manufacturing Job
JobNo.
No.33
Overhead
Overhead
• In a job-order costing system, direct materials and direct labor are
traced directly to each job as the work is preformed.
Sia, Richelle & Medriano,
Marvin
 Direct Manufacturing
Costs
Manufacturing
Manufacturing
Overhead,
Overhead,
Direct
Direct Materials
Materials
including
including
Job
Job No.
No. 11
indirect
indirect
materials
materials and and
Direct
Direct Labor
Labor
indirect
indirect labor,
labor,
Job
Job No.
No. 22 are
are allocated
allocated
to
to all
all jobs
jobs
Manufacturing
Manufacturing Job
rather
rather than
than
Job No.
No. 33
Overhead
Overhead directly
directly traced
traced
to
to each
each job.
job.
What are the businesses for which job
order costing system is ideal?
• 51.1% of manufacturing companies in United
States use job order costing.

Manufacturing Business Service Business

Clothing factories Movie producers
Food companies Accounting firms
Air craft manufacturing Law firms
companies
Hospitals

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MARVIN
 What is Job Cost Sheet
• 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.
E.g. of Manufacturing cost:
direct materials, direct labor, and manufacturing overhead
• Job cost sheet usually includes job number, product
name, starting date, completing date, number of units
completed etc.
E.g. of Job cost sheet in Manufacturing
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.

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MARVIN
 Job Cost Sheet

SIA, RICHELLE & MEDRIANO, MARVIN

 Steps in Job Order Costing System
1. Determine the direct materials requirement
• Bill of materials - document that lists the type and
quantity of direct materials required to manufacture a
standard product

• Production Staff - production department determines

materials requirement using the information provided by
customers. (customization in design, size, and color)
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MARVIN
Steps in Job Order Costing System
2. Preparation of document known as ‘materials
requisition form.

3.  Issuance of direct materials to production

department.
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MARVIN
 Journal entries to record the flow
of materials:
- There are two (2) types of journal entries are made for direct materials cost:
(1) One at the time of purchase of direct materials from suppliers, and
(2) One at the time of issuance of direct materials from storeroom to production
department.
When materials are purchased:

When materials are issued:

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MARVIN
 Measuring and recording direct
labor cost
• 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.

• Any labor charges that are not directly traceable to a

particular job are known as indirect labor cost.

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MARVIN
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.

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MARVIN
 Measuring and recording
manufacturing overhead cost
• Manufacturing costs other than direct materials and
direct labor are known as manufacturing overhead
(also known as factory overhead).
• It consists of both variable and fixed components.
E.g. Cost include indirect materials, indirect labor,
depreciation, salary of production manager, property
taxes, fuel, electricity, grease used in machines, and
insurance etc.
• Since 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.
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 Predetermined overhead rate
• It 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.

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MARVIN
 Predetermined overhead rate
E.g.
Suppose ABC company uses direct labor hours to assign
manufacturing overhead cost to job orders. The budget
of the ABC company shows an estimated manufacturing
overhead cost of Php85,000 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 = Php85,000 / 1,000 hours

• = Php85.00 per direct labor hour

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MARVIN
 Multiple Predetermined
Overhead Rates
To this point, we have assumed that there is a single
predetermined overhead rate called a plantwide overhead
rate.

Large companies May be more complex

often use multiple but . . .
predetermined
overhead rates.

May be more accurate because

it reflects differences across
departments.
 Over or under-applied
manufacturing overhead
• 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.
• 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.

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MARVIN
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).
• 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.

SIA, RICHELLE & MEDRIANO,

MARVIN
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 Thank You!

SIA, RICHELLE & MEDRIANO,

MARVIN