Job Order and Process Costing

Chapter 6

Learning Objectives
Distinguish between job order costing
and
process costing
Record materials and labor in a job order
costing system
Record overhead in a job order costing
system

Learning Objectives

Record completion and sales of finished

goods and the adjustment for under- or
overallocated overhead
Calculate unit costs for a service company
Allocate costs using a process costing
systemweighted-average method (see
Appendix 17A)

1
Distinguish between job order costing and
process costing

Cost Accounting Systems

Gather information to determine the

production cost per unit

Help managers:
set selling prices that will lead to profits
compute cost of goods sold for the income

statement
compute the cost of inventory for the balance
sheet
Assign these costs to the companys product

or service using:
Job order costing
Process costing
5

Job Order

For manufactured
Costing

batches of unique
products or
specialized services
Accounting firms
Music studios
Building contractors
Health-care providers

Accumulates cost per

batch or job
More prevalent with
service-based
companies and with
ERP systems
6

Process Costing
For companies that produce

identical units through a

series of processes
Coca-Cola
Surfboards
Medical equipment

Used by large producers of

similar goods
Accumulates cost of each
process needed to
complete the product
Assigns costs to products

Job Order vs. Process Costing

Cost tracing is used to assign directly traceable

costs
Direct materials
Direct labor

Cost allocation
Assigns indirect costs to the product
Overhead costs
Less precise technique

S17-1: DISTINGUISHING BETWEEN JOB COSTING AND PROCESS COSTING

Job costing and process costing track costs differently.

Would the following companies use job order costing or
Process costing
process costing?
costing
a. A manufacturer of refrigerators Process
__________________
Job order__________________
costing
b. A manufacturer of specialty wakeboards
order costing
c. A manufacturer of luxury yachtsJob __________________
Job order costing
d. A professional services firm __________________
Job order costing
e. A landscape contractor __________________
Process costing
f. A custom home builder __________________
Process costing
g. A cell phone manufacturer
__________________
costing
h. A manufacturer of frozen pizzas Process
__________________
costing
i. A manufacturer of multivitaminsProcess
__________________
j. A manufacturer of tennis shoes __________________
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2
Record materials and labor in a job order
costing system

Flow of Costs
Job 293
Direct materials

Work in process
Direct labor

Cost of goods sold

Overhead
10

Finished goods

Purchasing Materials

Purchasing for cash or on account

Debit materials inventory
Asset account

Subsidiary ledger
Direct

materials
Indirect materials

Materials inventory
70,000

11

Using Materials
Direct materials debited

to Work in process
Indirect materials debited
to Manufacturing
overhead
Inventory is credited for
materials removed

Materials inventory

12

Manufacturing
overhead

Work in process

Materials Requisition

Used to request the transfer of materials to

Work in process
Assigns the cost of the direct material to a
job (Job 16)
Shows the company cost of the material
requested

13

Job Cost Record

14

Labor

Use electronic labor/time records to streamline

the labor tracking costs

Debit Work in process inventory (for direct labor)
Debit Manufacturing overhead (for indirect labor)
Credit Wages payable

Work in process

15

Wages payable

Manufacturing
overhead

Job Cost Record with Labor

Added

16

S17-3: ACCOUNTING FOR MATERIALS

Rite Packs manufactures backpacks. Its plant records

include the following materials-related transactions:
Purchases of canvas (on account) . . . . . . . . . . . . . . . . . . . . . .
$71,000
Purchases of sewing machine lubricating oil (on account) . . .
1,100
Materials requisitions:
Canvas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sewing machine lubricating oil . . . . . . . . . . . . . . . . . . . .

64,000
250

1. Journalize the entries to record these transactions.

2. Post these transactions to the Materials inventory

account.
3. If the company had $34,000 of Materials inventory at
the beginning of the period, what is the ending balance
of Materials inventory?
17

S17-3: ACCOUNTING FOR MATERIALS

1. Journalize the entries to record these

transactions.
Purchases

Requisitions

18

S17-3: ACCOUNTING FOR MATERIALS

2. Post these transactions to the Materials inventory

account.

3. If the company had $34,000 of Materials

inventory at the beginning of the period, what is
The ending balance of materials inventory account is $41,850.
the ending balance of Materials inventory?
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3
Record overhead in a job order costing
system

20

Accounting for Manufacturing

Overhead

21

Assigning Manufacturing
Overhead to Jobs
Actual overhead costs are accumulated in the

Manufacturing overhead account

Overhead costs are essential to production
Must be assigned to determine full cost
Two step process
Step 1 Calculate overhead allocation rate
Step 2 Rate is multiplied by the actual quantity of

allocation base used on the job

Formula:

22

Predetermined Manufacturing
Overhead Rate
Most accurate allocation when total overhead

cost is known
A predetermined rate is calculated before the
period begins using estimates
Use this rate to allocate estimated overhead
cost to jobs
Rate is based upon two factors:
Total estimated manufacturing overhead costs for

the period
Total estimated quantity of the manufacturing
overhead allocation base
23

Predetermined Manufacturing
Overhead Rate
Identify an allocation base
Direct labor hours (labor-intensive production)
Direct labor cost (labor-intensive production)
Machine hours (machine-intensive production)

24

Allocate Overhead Costs to Jobs

How to allocate overhead cost to jobs
Compute the predetermined manufacturing

overhead rate
The application rate is multiplied by the actual
quantity of allocation base used on the job
If the rate is based on direct labor hours
Rate is multiplied by the direct labor hours used on each

job

Predetermined manufacturing
rate (from Step 1)

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Actual quantity of the overhead

allocation base used by each job

Manufacturing Overhead on Job Cost Record

26

Assignment of Overhead to Jobs

Overhead is allocated to jobs in process
The journal entry includes:

At the end of the period, when a balance

exists
If allocated amount is less than actual overhead
27

underallocated

4
Record completion and sales of finished
goods and the adjustment for under- or
overallocated overhead

28

Completion and Sale of Finished

Goods
To complete the process, we must:
Account for the completion and sale of finished

goods
Adjust manufacturing overhead at the end of the
period

29

Accounting for the Completion and Sale of

Finished Goods
Remember the flow of costsa job goes

from:
work in process
to finished goods
to cost of goods sold

Journal entry:
Work in process to Finished goods
Finished goods to Cost of goods sold

30

Accounting for Finished Goods

Cost Flows
T-account example of cost flows

31

Adjusting Manufacturing Overhead

Overhead is allocated to jobs in process

At the end of the period, when a balance exists

If allocated amount is less than actual overhead

underallocated
If allocated amount is more than actual overhead

overallocated
An adjustment is made to close out the account
32 Adjustment should increase (decrease) Cost of

Adjusting Manufacturing Overhead

To close Manufacturing overhead
If underallocated:
Debit Cost of goods sold
Credit Manufacturing overhead
Increases Cost of goods sold for unallocated amount

33

If overallocated:
Debit Manufacturing overhead
Credit Cost of goods sold
Decreases Cost of goods sold for overallocated amount

5
Calculate unit costs for a service company

34

Service Companies
Have no inventory
Need to know the cost of jobs to set prices
Example:
Cost of Job 19......................................................... $ 6,000
Add standard markup of 50% ($6,000 0.50) .......
3,000
Sale price of Job 19 ................................................ $9,000

How do service firms trace direct labor to

individual jobs?
STEP 1: Compute the predetermined indirect cost

35

allocation rate
STEP 2: Allocate indirect costs to jobs by
multiplying the predetermined indirect cost
allocation rate (Step 1) by the actual quantity of
the allocation base used by each job

Assigning Labor Costs to Service Jobs

Often service companies largest cost is labor
Once costs are computed, prices can be set

Indirect cost of the firm is $30 per hour

Total costs assigned to a client are as follows:

Direct labor: 14 hours $50/hour ........... $ 700

Indirect costs: 14 hours $30/hour..........
420
Total costs...............................................$ 1,120
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6
Allocate costs using a process costing system
weighted-average method

37

Process Costing
Used where large quantities of similar products

are produced
Two methods:
Weighted-average
FIFO

Costs accumulated in each manufacturing

process
Company then assigns these costs to products
passing through that process
Sum of the costs applied to units produced to
determine costs per unit
38

Job Order Costing

39

Process Costing

40

Process Costing: Building Blocks

Two cost categories:
Direct materials
Conversion costs
Direct labor and manufacturing overhead combined
Costs incurred to convert materials into finished

products

Equivalent units
Allow measurement of partially finished goods
Express production in terms of fully completed
units
Materials may have different percentage
completed than conversion costs
41

Process Costing: Building

Blocks
Equivalent units
Direct materials often added at a specific point

or different points in the process

Compute separate equivalent units
Direct materials
Conversion cost

42

Steps of Process Costing

43

Chapter 17 Summary
A job order costing system accumulates costs

for each individual batch, or job. Process

costing accumulates costs for each individual
process needed to complete the product.
Direct materials and direct labor associated
with a specific job are tracked to a job costing
record based on a job number. When direct
materials costs are incurred for a job, Work in
process inventory is debited and Materials
inventory is credited.

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Chapter 6 Summary
When direct labor costs are incurred on a job,

Work in process inventory is debited and

Wages payable is credited. Indirect materials
and indirect labor utilized are debited to the
Manufacturing overhead account to be
allocated to jobs later.
Manufacturing overhead is allocated to jobs
based on a predetermined manufacturing
overhead rate. The rate should be based on
the main cost driverthat is, the item that
drives manufacturing overhead costs up or
down.
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Chapter 6 Summary
Once the predetermined manufacturing

overhead rate is determined, manufacturing

overhead is allocated (assigned) to jobs
based on this rate. At the end of the period,
the balance in manufacturing overhead will
be the difference between actual costs
(debits) and costs allocated to jobs (credits).
The total actual manufacturing overhead
costs (debits) rarely equal the total
manufacturing overhead costs allocated to
jobs (credits).
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Chapter 6 Summary
At the end of the period, we must adjust the

under-allocated or overallocated Manufacturing

overhead account balance. Closing the
Manufacturing overhead account means
zeroing it out. The balance is closed out to Cost
of goods sold.
Service firms must also allocate overhead to
jobs to determine each jobs real cost. Just like
with manufacturing firms, a predetermined
indirect cost allocation rate must be
determined. The rate is then used to allocate
overhead costs to service jobs.
47