Chapter 5:

Job Order Costing

Cost Accounting Principles, 8e

Raiborn and Kinney

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 Learning Objectives
 How do job order and process costing systems, as well as
their related valuation methods, differ?
 What are the fundamental characteristics of a job order
costing system?
 What are the primary documents supporting a job order
costing system and what purposes are served by each of
them?
 How are costs accumulated in a job order costing system?
 How are standard costs used in a job order costing
system?
 How does information from a job order costing support
management decision making?
 How are losses treated in a job order costing system?

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Job Order or Process Costing

Job Order Process

 Small quantities  Large quantities
 Batches of identifiable,  Homogeneous goods
tailor-made products
 Tracks costs by batch of
 User-specific services
goods by department
 Tracks costs by job

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Job Order Costing
 A job is a single unit or group of units
identifiable as being produced to distinct
customer specifications
 A job can be a
 Client
 Engagement
 Project
 Contract

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Methods of Product Costing

 Cost Accumulation System defines

 cost object
 method of assigning costs to production
 Valuation Method specifies
 how product costs will be measured

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Six Possibilities
V COST ACCUMULATION
A SYSTEM
L M
Job Order Process
U E
 Actual  Actual
A T
 Normal  Normal
T H
 Standard  Standard
I O
O D
N
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Job Order Costing System

 Each job is a cost object

 Costs are accumulated for each job
 A job can consist of one or more units of
output
 There is a subsidiary ledger for each job

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Job Order Costing System
WIP Subsidiary Ledger
Job 1 Job 2 Job 3 WIP Control
100 200 500 = Job 1 100
Job 2 200
Job 3 500
Total 800

Job 1 + Job 2 + Job 3 = WIP Control

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Tracking
 Material Requisition Form
 Tracks who is responsible for materials
 Verifies flow of materials from warehouse to department to job
 Employee Time Sheet
 Time worked on each job
 Job Order Cost Sheet
 All financial information about a job
 direct material (from material requisition)
 direct labor (from time sheets or labor tickets)
 applied overhead
 budgeted cost information
 When job is complete, use job order cost sheet to analyze actual
costs compared to budgeted costs

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Job Order Costing and Technology

 Automate data collection and data entry

 Accounting software includes job costing
modules
 Share information using intranet

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Intranet

Restricted network for sharing

information and delivering data from
corporate databases to local-area
network (LAN) desktops

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Standard Cost System

 Actual cost
 Normal cost
 Standard cost
 Predetermined norms (or standards) for
materials, labor, and overhead
 Compare actual costs to standard costs—

difference is a variance

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Management Use of
Job Order Costing Systems

 Estimate future job costs

 Establish realistic bids and selling prices
 Develop budgets and standards
 Compare actual costs to estimated costs
 Furnish performance evaluation
information based on profitability of jobs

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 Product and Material Losses
 Shrinkage
 Evaporation
 Leakage
 Oxidation
 Production errors
 Defects can be economically reworked
 Spoilage cannot be economically reworked
 Normal Loss—expected during production
 Abnormal Loss—exceeds what is expected during
production

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Product and Material Losses
Normal Abnormal
Loss Loss

Loss for
most jobs In overhead Period cost
rate

Loss identified Charge to Period cost

with a specific job
specific job

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Questions

 What is the difference between job

order and process costing systems?
 How do actual, normal, and standard
costing valuation methods differ?
 How is the job order cost sheet used?

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Potential Ethical Issues
 Inflating costs assigned to cost-plus contracts
 Assigning costs from a fixed-fee contract to a cost-
plus contract
 Substituting materials with inferior quality
 Overstating costs included in Work in Process
 Using methods or materials that violate intellectual
property rights of other firms
 Recording sales value of defective work as “Other
Revenue”

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.