UNIT 2 JOB ORDER COSTING SYSTEM

Content

2.0 Aims and Objective

2.1 Introduction
2.2 Workflow
2.3 Recording Costs as Incurred
2.4 Matching Cost Flow and Work Flow
2.5 Departmental Cost Centers
2.6 Recording Cost Flows: Raw Material, Labor, and Overheads
2.7 Summary
2.8 Answers to Check Your Progress Exercise
2.9 Glossary
2.10 Model Examination Questions

2.0 AIMS AND OBJECTIVE

After completing this unit you should be able to understand: -

 how to Match the workflow with cost flow in manufacturing enterprise.

 how a job order-manufacturing firms is organized.
 how the accounting system is organized.
 how accounting records and procedures are established to record, transfer and
summarize manufacturing costs.

2.1 INTRODUCTION

The job order cost system accumulate costs applicable to each specific job order or lost of
similar goods manufactured on a specific order for stock or for customer. When production
on a job begins, the job is assigned a number, and a form called a job cost sheet is set up. As
direct materials are used, their costs are entered on the job cost sheet. Similarly, direct labor
cost incurred on a job is recorded periodically. When the job is completed (or periodically as
the job is worked on), manufacturing overhead cost applicable to the job are estimated and

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entered on the job cost sheet. The job cost sheet, when complete, shows the total cost of the
completed job. Te cost per unit may then be obtained by dividing the total cost of the job by
the number of units completed.

Manufacturers, such as a furniture manufacturer, who produce a verity of products, often use
the job order cost system. Because such producers need to keep track of each specific order
to ensure correct allocation of costs. Also, the actual cost shown on the job cost sheet may be
compared with the estimated costs on which sales prices were based.

2.2 WORK FLOW

A firm’s cost accounting system should go along with its flow of operation. The sequence of
operation firms that makes and sells it own products are indicated below.

1. Procurement – Raw materials and supplies needed for manufacturing are

ordered, received and stored. Direct and indirect factory labor and services are
obtained.
2. Production - Raw materials are transferred from the storeroom to the factory.
Labor tools, machine, power, and other costs are applied to complete the product.
3. Warehousing – Finished goods are moved from the production floor to the
warehouse and remain there until they are sold.
4. Selling – Merchandise is shipped from the warehouse. Sales to customers are
recorded.

2.3 RECORDING COSTS AS INCURRED

As each cost is incurred, it must be recorded in an appropriate general ledger account. At

different point in the operating cycle different accounts are needed. For example;

1. Procurement – accounts must be provided to record the purchase of materials

cost labor cost, and overhead cost. These costs will later be charged to production.
Typical general ledger account titles used for this purpose are Raw material,
factory payroll clearing, and manufacturing overhead control.

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 2. Production – An account is required to gather procurement costs as they become
chargeable to manufacturing operation and this account is called work in process.
3. Warehousing – an account should be setup to record the cost of goods that have
been completely manufactured. This account is finished goods.
4. Selling – The cost of the completed goods that have been sold must be recorded,
and for this purpose a general ledger account called cost of good solids is
maintained.

The following illustration shows the relationship in the operating cycle of the above-
mentioned accounts.
Procurement Production Warehousing Selling
Cost of
Raw material Work in Process Finished Goods Goods Sold

Factory
Payroll Clearing

Manufacturing
overhead control

2.4 MATCHING COST FLOW AND WORKFLOW

The provision for special cost accounts sets the stage for the more intricate job of charging
costs in accordance with the flow of work. The process can best be under stood if it is
analyzed step by step.

1. Procurement: - Purchases of materials, labor, and overhead are recorded as

debits to raw material, factory payroll clearing, and manufacturing overhead
control. As these costs are used, or applied, in factory operation, they are credited
to these accounts and transferred to production.

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 2. Production: - costs of materials, labor, and overhead transferred into production
are debited to work in process account. As goods are finished and moved from the
factory floor, their total cost is removed from the work in process account by a
credit entry and charged (debited) to finished goods.
3. Warehousing: - The cost of finished goods transferred from work in process is
recorded as a debit to finished goods. The cost of merchandise shipped from
warehouse to customers is credited to finished goods and charged (debited) to cost
of goods sold.
4. Selling: - As finished goods are sold and shipped from the warehouse, this cost is
debited to cost of good sold. At the end of the accounting period, this account is
closed by crediting cost of good sold and debiting income summery account.

The illustration of matching of cost and workflow is below.

Procurement Production Warehousing Selling

Cost of
Raw material Work in Process Finished Goods Goods Sold
In Out In Out In Out
In Out

Factory
Payroll Clearing
Income Summery
In Out
In Out

Manufacturing
overhead control

In Out

2.5 DEPARTMENTAL COST CENTER

Of the four steps in the operating cycle, production is probably the most complicated to
account for and to control. Tons of materials and supplies of every description might be used
daily by hundreds of workers who complete a wide verity of processes on countless machine.
Total costs are not very useful as indicators of efficiency under such conditions. Therefore,

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when several operations are performed in the factory, it is customary to group similar
activities into departments or cost center. The cost accounting system is then devised to
accumulate and report costs separately by department or cost center. Such reporting matches
cost flow with workflow down to the smallest functional unit. The person in charge of the
department is then holding accountable for its efficient performance. Departmentalization
thus helps to provide operation Control over manufacturing activities and cost.

Factory operations normally include two types of department’s production and service.
Production department or producing department, engages in work directly related to the
product. A service department serves or assists production departments. For example,
maintenance department maintains a plant so that production can be carried on under the best
possible working condition.

2.6 RECORDING COST FLOWS, RAW MATERIAL, LABOR, OVERHEADS

Recording Cost Flows: -

You have seen how a cost accounting system is developed by matching the flow of costs with
the flow of factory activities. The next thing is for you to examine the cost system of a
typical manufacturing corporation in operation.

3F company produces different house hold product based on the customer specification, ever
the some standard furniture are also produced and held in inventory for future sales. The firm
is organized into three major divisions: Administration, Production, and sales. The
production division, which directs factory operation, consists of four departments three
producing department and one service department. The three producing department are dep.1
dep.2, dep.3. The service department is building service department.
The activities involved in each department are as follows: -

Dep. 1 – rough lumber is trimmed and shaped into finished form for use in manufacturing
Furniture.
Dep. 2 – here the individual pieces are put together with screws and glue, and various
Hardware is attached. When pre fabricated parts are purchased to be assembled,
work on an order begins in this department. The operation of this department is

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 Performed primarily by hand.
Dep. 3 – In this department, the varnish is applied to the product. Sanding, staining,
Rubbing operations are performed. The completed goods go from the finishing
Department to the finished goods warehouse for shipment.
Building service and Administration department – which include:
 Accounting section
 Procurement
 Personnel
 Janitors
 Maintenance
General lager accounts maintained by 3F with beginning balance are as follows
Raw material = begging balance = $55,450
Work in process = begging balance = 45,500
Finished goods = begging balance = 29,500
Factory payroll cleaning
Manufacturing overhead control.

During the period the company purchased additional raw materials at a cost of $ 75,000 on
account, and the company is using voucher system. The journal entry will be as follow:

Raw material ……………………. $ 75,000

Voucher payable ……….…………… $ 75,000
To recorded cost of raw materials purchased.

Raw material used

During the month, raw material costing $85, 750.00 were used
 Direct materials, chargeable to work in process $ 75,899.00
 Indirect materials, chargeable to manufacturing overhead control is l $ 9,851.00 the
entry will be as follow.
WIP…………….. $ 75,899.00
MOH. Control……….9,851.00
Raw material …………….. $ 85,750.00
To record the cost of material used

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Factory wage Earned
During the month, wage and salaries totaling $94,875.45 were earned by the factory
employees and charged from the factory payroll register to the factory payroll clearing
accounts. The entry is as follows.
Factory payroll clearing ……….. 94,875.45
Salaries and wage payable ……………. 94,875.45
To record factory payroll for the period

Labor charged to operation

An analysis of the records indicates that labor cost of $94,875.45 should be allocated.
 Direct labor, chargeable to work in process - $70,544.20
 Indirect labor, chargeable to manufacturing overhead control = 24,331.25
The entry will be
Wp ……… $70,544.20
MHO control ….24,331.25
Factory payroll clearing – 94,875.45
To recorded cost of labor used in operation during the period.

Manufacturing Overhead cost

In addition to the indirect material $9,851 and indirect labor $24,331.25, other over head cost
totaling $16,790.75 incurred during the period were charged from various journals.
MOH Control. 16,790.75
Voucher payable ………… 16,790.75
To record overhead applied to jobs during the month.

It should be remembered that, the credit to MOH control is an estimate. This will usually be a
small balance in the account. A debit balance means that less overhead was charged, or
applied, to production than the total cost incurred. This is called under applied overhead.

If the estimated overhead transferred is grater than the actual costs incurred, manufacturing
overhead control will have a credit balance. This is called over applied overhead.

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Manufacturing overhead applied to products

It is estimated that overhead cost totaling $48,223 are chargeable to jobs worked on during
the period. An estimate of overhead applicable to each job must be made because it is
impossible to determine the exact amount applicable. The entry is as follows.

Wip………….. $48,223.00
MOH Control ………………… $48,233.00
To recorded overhead applied to job during the period.

Transfer of finished goods

During the month, some jobs were completed and transferred to the finished goods
warehouse. The job costs $150,000. This flow of goods is shown by a debit to finished goods
and credit to work in process.
Finished goods. 150,000
W I P………………………….. 150,000
To recorded the transfer of finished goods.

Sales of Finished goods

During the month finished goods costing $160,000 were sold to various customer. The entry
to record the flow is as follow.
Cost of good sold …………..
Procurement Production $160,000 Warehousing Selling
Finished goods ………….. $160,000 Cost of
Raw material Work in Process Finished Goods Goods Sold
55,450 To recorded cost of45,500
85,750 good sold. 150,000 29,500 160,000
75,899 160,000
75,000 70,544.2 150,000
48,223

Factory
Payroll Clearing
94,875.45 94,875.45

Manufacturing
overhead control
9,851 48,223
24,331.25
16,790.75

Under 2750

Ending Balance
Raw material – 44,700.00
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WIP - 90,166.20
Finished goods 19,500.00
End of period statement
The cost accounts in the general ledger contain essential figures needed to complete the
statement of cost of goods manufactured and the income statement. The statement of cost of
goods manufactured is supported by a schedule of manufacturing overhead, which shows
details overhead items.

Schedule of manufacturing overhead

End of period

Actual overhead cost include

Indirect material…………………………9,851.00
Indirect labor……………………………24,331.25
Other overhead cost. 16,790.75
50,973.00
Deduct under applied overhead 2,750.00
Manufacturing overhead applied 48,223.00

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Statement of cost of goods manufactured end of the period

Direct material
Raw material Beginning …………… $ 55,450.00
Material purchased ………………… 75,000.00
Total material available for use……. 130,450.00
Raw material ending ………………. (44,700.00)
Total material used ………………… 85,750.00
Deduct indirect material used ……… (9,851.00)
Direct material used ………………………………. 75,899.00
Direct labor………………………………………… 70,544.20
Manufacturing overhead applied…………………… 48,223.00
Total manufacturing cost……………………………194,666.20
Add wip-beginning ………………………………… 45,500.00
Less wip ending ……………………………………. (90,166.20)
Cost of goods manufactured ……………………….. 150,000.00

Check your progress

1. How does an accountant match the workflow against the cost flow.
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2. What is the controlling account at different level of factory operation?
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2.7 SUMMARY

A cost accounting system parallels the flow of operations. The four steps in the typical
operating cycle of a manufacturer are procurement, production; warehousing and selling

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procurement is the purchase of materials, labor and over head items for use in the factory.
Production consists of the actual manufacturing of goods. Warehousing is the movement of
finished goods in to the warehouse to wait sale. Selling includes finding customer and
making shipment of merchandise.

2.8 ANSWERS TO CHECK YOUR PROGRESS EXERCISES

I. By categorizing activities in relation production and by establishing account at each levels

of activities

II. Procurement
a. Raw material account
b. Factory payroll checking account
c. Manufacturing overhead control

Production
Working process account
Warehousing
Finished good account
Selling
Cost of good sold account

2.9 GLOSSARY

Procurement – Raw material and supplies needed for manufacturing are ordered, received
And stored. Direct and indirect labor and services are obtained.
Production – Raw materials are transferred from storeroom to the factory. Labor tools,
Machines, power, and other costs are applied to complete the product.
Warehousing – Finished goods are moved form the factory to the warehouse to be held
Until they are sold
Selling – Customers are found. Merchandise is shipped from the warehouse. Sales to
Customers are recorded.

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2.10 MODEL EXAMINATION QUESTIONS

1. What are the four basic steps in a typical cycle of operations for
Manufacturing firm__________________________________________
2. Of the four steps in the production cycle, which step is usually the most
Complicated to account for and to control ___________________________
3. The total cost of finished goods is removed from work in process and transfer
To which account. ----------------------------------------------------------------------------
3. Recording and posting manufacturing costs.
A.B.C furniture Inc manufactures bookshelves. The total manufacturing cost for
September is as follows.
- Raw marital purchased $92,430.00
- Raw material used – direct materials $82,475.00 indirect materials,
$16,175.00
- Factory wage earned $106,620.00
- Factory wage allocated direct labor-$84,060, indirect labor $22,560
- Other overhead cost incurred $30,563 (credit the total to voucher
payable)
- Estimated manufacturing overhead cost applied to jobs worked on
$67,248
- Finished goods transferred to ware house $229,348
- Finished goods sold and shipped to customer $231,898
- Finished goods sold and billed to customer $336,252
- Instruction
- A. Prepare a journal entry
- B. Assuming beginning balance of
- Row material-----$64820 dr
- Work in process-----$48,370 dr
- Finished goods-------$32,090 dr
Calculate the cost of goods manufactured

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