ACCUMULATING COSTS IN A JOB -ORDER COSTING SYSTEM

Overview

In a job-order costing system, costs of a direct labor and manufacturing overhead are assigned to
each production job. These costs comprise the inputs of the product costing system. As costs are
incurred, they are added to the work -in-process inventory account in the ledger. To keep track of
the manufacturing costs assigned to each job, a subsidiary ledger is maintained. The subsidiary
ledger assigned to each job is a document called a job cost sheet.

Objectives

This section discusses the purpose of job-cost sheet and procedures used to accumulate the costs
of direct material, direct labor and manufacturing overhead for a job. A job constitutes the set of
activities performed by the job order costing system.

Job cost sheet

Job cost sheet is a document on which the costs of direct material, direct labor, and
manufacturing overhead are recorded for a particular production job or batch. It is a subsidiary
ledger account for the work-in-process inventory account in the general ledger. An example of a
job-cost sheet is displayed below:

Job-cost sheet

Job Number____________ Description ______________

Date Started _____________ Date completed ___________
Number of units completed __________
Direct material
Date Requisition number Quantity Unit price Cost

Direct labor
Date Time card number Hours Rate Cost
Manufacturing overhead
Date Activity base Quantity Application Cost
rate

Cost summery
Cost item Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping summary
Rate Number of units shipped Cost balance

Three sections on the job-cost sheet are used to accumulate the costs of direct material, direct
labor and manufacturing overhead assigned to the job. The other two sections are used to record
the total cost and average unit cost for the job, and to keep track of units shipped to customers. A
job cost sheet may be a paper document upon which the entries for direct material, direct labor
and manufacturing overhead are written.

The procedures used to accumulate the costs of direct material, direct labor and manufacturing
overhead for a job constitute the set of activities performed by the job-order costing system.
These procedures are discussed next.

6.3.3 Direct material costs

As raw materials are needed for the production process they are transferred from the warehouse
to the production department to authorize the release of materials. The production department
supervisor completes a material requisition form and presents it to the warehouse supervisor. A
copy of the material requisition form is given to the cost accounting department. There it is used
as the basis for transferring the cost of the requisitioned material from the raw-material inventory
account to the work-in-job cost sheet for the production job in process. A document such as the
material requisition form, which is used as the basis for an accounting entry, is called a source
document. An example of a material requisition form is shown below:

Material -Requisition Number 352 Date 1/12/1998

Job number to be charged J 621 department painting
Department supervisors Tamiru Desse
Item Quantity Unit cost Amount
White enamel paint 8 gallons Br .14. 00 Br .112
Clear Lacquer 2 gallons Br 11.00 22

In many factories material requisitions are entered directly into a computer terminal by the
production department supervisor. The requisition is automatically transmitted to terminals in the
warehouse and in the cost accounting department. Such automation reduces the flow of
paperwork, minimizes clerical errors, and speeds up the product costing process.

Material Requirements Planning

For producers and product components that are produced routinely, the required materials are
known is advance. For these products and components, material requisitions are based on a bill
of materials that lists all of the materials needed.

In complex manufacturing operations in which production takes place in several stages, materials
requirement planning (MRP) may be used. MRP is an operations management tools that assits
manger in scheduling production in each stage of the manufacturing process. Such careful
planning ensures that, at each stage in the production process, the required sub-assemblies,
components, of partially processed materials will be ready for the next stage. MRP system which
are generally computerized , include files that list all of the component parts and materials in
inventory and all of the parts and materials needed in each stage of the production process. The
MRP is diagrammed as follows:

Material 1
 Component A
Material 2

Final Product

Material 3

Material 4 Component B

Material 5
Production Production
Department I Department II
Material 6

As the diagram indicates, the bill of materials for component A includes materials 1, 2 and 3.
This bill of materials would be consulted by the supervisor of production department I when
requisitioning materials.
6.3.4 Direct labor costs

The assignment of direct labor costs to jobs is based on time tickets filed out by employees. A
time-ticket is a form that records the amount of time an employee spends on each production job.
The time ticket is the source document used in the cost accounting department as the bases for
adding direct labor costs to work -in-process inventory and to the job-cost sheets for the various
jobs in process.

An example of time ticket is shown below:

Employees name Dereje Tariku Date 1/22/1997
Employee number 47 Department Drilling

Time Started Time Stopped Job Number

8:00 11:30 A267
11:30 12:00 Ship clean up
1:00 5:00 J122
As the example shows, most of the employee’s time was spent working on two different
production jobs. In the accounting department the time spent on each job will be multiplied by
the employee’s wage rate, and the cost will be recorded in the work in process inventory and on
the appropriate job cost sheets. The employee also spent one half hour on ship clean -up duties.
This time will be classified by the accounting department as indirect labor, and its cost will be
included in manufacturing overhead.

6.3.5 Manufacturing overhead costs

It is relatively simple to trace direct material and direct labor costs to production jobs, but
manufacturing overhead is not easily traced to jobs. By definition, manufacturing overhead is a
heterogeneous pool of indirect production costs such as indirect material, indirect labor, utility
costs, and depreciation. These costs often bear no obvious relationship to individual jobs or units
of product, but they must be incurred for production to take place. Therefore, it is necessary to
assign manufacturing overhead costs to jobs in order to have a complete picture of product costs.
The process of assigning manufacturing overhead costs to production jobs is called overhead
application (or sometimes overhead absorption).

Overhead Application
For product costing information to be useful, it must be provided to managers on a timely basis.
Suppose the cost accounting department waited until the end of an accounting period so that the
actual costs of manufacturing overhead could be determined before applying overhead costs to
the firm's products. However, the information might be useless because it was not available to
managers for planning, control and decision making during the period.

Predetermined overhead rate

The solution to this problem is to apply overhead to products on the basis of estimates made at
the beginning of the accounting period. The accounting department chooses some measure of
productive activity to use as the basis for overhead application. In traditional product costly
systems, this measure usually is some volume based driver (or activity base) such as direct labor
hours, direct labor cost, or machine hours. An estimate is made of
i) The amount of manufacturing overhead that will be incurred during a specified period of time
and
ii) The amount of the cost driver (or activity base) that will be used or incurred during the same
time period.

Then a predetermined overhead rate is computed as follows:

Predetermined = budgeted manufacturing overhead cost

Overhead rate budgeted amount of cost driver (or activity base)
For example, suppose that Chairman Print has chosen machine hours as its cost driver (or
activity base). For the next year, the firm estimates that overhead cost will amount to Br 90,000
and that total machine hours used will be 10,000 hours. The predetermined overhead rate is
computed as follows:

Predetermined overhead rate = Br 90,000 =Br 9.00 per machine hour

10,000 hours
In our discussion of the predetermined overhead rate, we have emphasized the term cost driver;
because increasingly this term is replacing the more traditional term activity. Further more, we
have emphasized that traditional product costing systems tend to rely on a single, volume based
driver. We will discuss more elaborate product costing systems based on multiple cost drivers
later in this unit.

Applying Overhead Costs

The predetermined overhead rate is used to apply manufacturing overhead costs to production
jobs. The quantity of the cost driver required by a particular job multiplied by the predetermined
overhead rate to determine the amount of overhead cost applied to the job. For example, suppose
Chairman Print’s job number C22, consisting of 1000 brochures, requires three machine hours.
The overhead applied to the job is computed as follows:

Predetermined overhead rate............................................................ Br. 9

Machine hours required by job C22................................................X 3
Overhead applied to job C22.......................................................... Br 27

The Br. 27 of applied overhead will be added to work in process inventory and recorded on the
job cost sheet for job C22. The accounting entries made to add manufacturing overhead to work
in process inventory may be made daily, weekly or monthly depending on the time required to
process production jobs. Before the end of accounting period, entries should be made to record
all manufacturing costs incurred to date in work in process inventory. This is necessary to
properly value work in process on the balance sheet.

Overview
The preceding section examined the accumulation of costing in a job order costing system in a
manufacturing enterprise. This section illustrates the procedures used in job-order costing
system. It also discusses the application of job-order costing system for a service enterprise.

Objectives
This section exemplifies the application of job -order costing system in manufacturing
enterprises. It also describes the application of job-order costing system to a service enterprise.

To illustrate the procedures used in job-order costing, we will examine the accounting entries
made by Oxorm Company during November of 1996. The company worked on two production
jobs:
Job number C12, 80 deluxe wooden canoes
Job number F16, 80 deluxe aluminum fishing boats.

The job numbers designate these as the twelfth canoe production job and the sixteenth fishing
boat production job undertaken during the year. The events of November are described below
along with the associated accounting entries.

Purchase of materials

Four thousand square feet of rolled aluminum sheet were purchased on account for Br. 50,000.
The purchase is recorded with the following journal entry.

(1) Raw material Inventory --------------------------------------10,000

Accounts payable -----------------------------------------------------10,000
The posting of this and all subsequent journal entries to the ledger are shown is exhibit 6-1 later.

Use of Direct material and indirect material

Use of direct material

On November 1, the following material requisition was filed.

Requisition number 802: 8000 board feet of lumber; at Br 2 per board foot for a total of (for job
number C12) cost of Br 16000.
Requisition number 803: 7200 square feet of aluminum sheet metal, at Br 2.50 per (for job
number F16) square foot, for a total cost of Br 18,000.

The following journal entry records the release of these raw materials to production

(2) Work in process Inventory --------------------------------34,000

Raw materials Inventory---------------------------------------------34,000
The associated ledger posting is shown in exhibit 6-1. These direct material costs are also
recorded on the job cost sheet for each job. The job cost sheet for job number F16 is displayed
below. Since the job cost sheet for job number C12 similar, it is not shown.

Job cost Sheet

Job number F16 Description 80 deluxe aluminum fishing boats

Date started Nov 1, 1996 Date completed Nov. 22, 1996
Number of units completed 80
Direct material
Date Requisition number Quantity Unit price Cost
11/19 803 7200 sq Br 2.50 Br. 18,000
6
Direct labor
Date Time card number Hours Rate Cost
Variou Various time cards 600 Br. 20 Br, 12,000
s Date
Manufacturing overhead
Date Activity base Quantity Application rate Cost
11/30/96 Machine hours 2000 Br 9.00 Br 18,000
 Cost summary
Cost item Amount
Total direct material Br 18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost Br 48,000
Unit cost Br 6000
Shipping summary
Date Units shipped Units Remaining inventory Cost Balance
11/30/96 60 20 Br 12,000

Use of Indirect material

On November 15, the following material requisition was filed.

Requisition number 804: 5 gallons of bonding glue, at Br 10 per gallon, for a total cost of Br 50.

Small amounts bonding glue are used in the production of all classes of boats manufactured by
Oxorm Company. Since the cost incurred is small, no attempt is made to trace the cost of glue to
specific jobs. Instead, glue is considered an indirect material, and its cost is included in
manufacturing overhead. The company accumulates all manufacturing overhead costs in the
manufacturing overhead account. All actual overhead costs are recorded by debiting this account.
The account is debited when indirect materials are requested, when indirect labor costs are
incurred, when utility bills are paid, when depreciation is recorded on manufacturing equipment
and so forth. The journal entry made to record the usage of glue is as follow:

3) Manufacturing overhead -------------------------------------------50

Manufacturing supplies inventory --------------------------------------------50

The posting of this journal entry to the ledger is shown in exhibit 6-1. No entry is made on any
job cost sheet for the usage of glue, since its cost is not traced to individual production jobs:

Use of direct labor and indirect labor

Use of Direct labor

At the end of November, the cost accounting departments uses the labor time tickets filed during
the month to determine the following direct labor costs of each job.

Direct labor job number C12 ---------------------------------Br 9,000

Direct labor job number F16 -------------------------------------12,000
-------------------------------------12,000
Total direct labor Br 21,000

The journal entry made to record there costs is shown below:

(4) Work -in-process inventory ------------------------------ 21,000
Wages payable -----------------------------------------------------21,000

The associated posting is shown is exhibit 6-1. These direct labor costs are also recorded on the
job cost sheet for each job. The job cost sheet for job number F16 is shown above. Only one
direct labor entry is shown on the job cost sheet. In practice, there would be numerous entries
made on different date at a variety of wage rates for different employees.

Use of Indirect labor

The analysis of labor time cards undertaken on November 30 also revealed the following use of
indirect labor.

Indirect labor: not charged to any particular job, Br 14,000

This cost is comprised of the production supervisor’s salary and the wages of various employees
who spent some of their time on maintenance and general cleaning duties during November. The
following journals entry is made to add indirect labor costs to manufacturing overhead.

5) Manufacturing overhead -------------------------------14,000

Wages payable ------------------------------------------------------14,000

No entry is made on any job cost sheet, since indirect labor costs are not traceable to any
particular job. In practice, journal entries (4) and (5) are usually combined into one compound
entry as follows:

Work in process inventory ---------------------------------21,000

Manufacturing overhead ----------------------------------- 14,000
Wages payable -------------------------------------------------------35,000
Incurrence and Application of Manufacturing Overhead Costs

Incurrence of manufacturing overhead costs

The following manufacturing overhead costs were incurred during November

Manufacturing overhead:
Rent on factory building -----------------------------------Br 3000
Depreciation on equipment -------------------------------- 5000
Utilities (electricity natural gas -------------------------- 4000
Property taxes ------------------------------------------------- 2000
Insurance ------------------------------------------------------ 1000
Total --------------------------------------------------------- Br 15,000

The following compound journal entry is made on November 30 to record these costs.
6) Manufacturing overhead -----------------------------------15,000
Prepaid Rent -------------------------------------------------------------30,000
Accumulated depreciation ---------------------------------------------5000
Accounts payable (utilities and property taxes) -------------------- 6000
Prepaid Insurance -------------------------------------------------------- 1000

The entry is posted in exhibit 6-1. No entry is made on any job cost sheet, since manufacturing
overhead costs are not traceable to any particular job.

Application of manufacturing overhead

Various manufacturing overhead costs were incurred during November and these costs were
accumulated by debiting the manufacturing overhead account. However no manufacturing
overhead costs have yet been added to work in process inventory or recorded on the job cost
sheets. The application of overhead to the firm's products is based on predetermined overhead
rate. This rate was computed by the accounting department at the beginning of 1996 as follows:

Predetermined overhead rate = budgeted total manufacturing overhead for 1996

Budgeted total machine hours for 1996

= Br 360.00 = Br 9. 00 per machine hour

40,000
Factory machine usage records indicate the following usage of machine hours during November.

Machine hours used: job number C12-----------------------------------1,200 hours

Machine hours used: job number F16 --------------------------------- 2,000 hours
Total machine hours -----------------------------------------------------Br.
-----------------------------------------------------Br. 3200 hours

The total manufacturing overhead applied to work in process inventory during November is
calculated as follows:
Machine predetermined Manufacturing
Hours overhead rate overhead applied
Job number C12 1200 X Br 9.00 = Br 10,800
Job number F16 2000 X 9.00 = 18,000
Total manufacturing overhead applied ------------------------------ Br 28,800

The entry is posted in exhibit 6-1 and the manufacturing overhead applied to job number F16 is
entered on the job cost sheet above.

Summary of overhead Accounting

As the following time line shows, three concepts are used in accounting for overhead. Overhead
is budgeted at the beginning of the accounting period, it is applied during the period, and actual
overhead is measured at the end of the period.

Time
Beginning of _________________________________________ End of accounting
Accounting period Period

The following diagram summarizes the accounting procedures for manufacturing overhead.

Manufacturing overhead
Actual manufacturing overhead costs manufacturing overhead is applied
are accumulated as they are incurred to production jobs
Various Account work in process inventor
The associated credits are to various accounts Manufacturing overhead is added related to
manufacturing overhead costs to work in process inventory

The left side of the manufacturing overhead account is used to accumulate actual manufacturing
overhead costs as they are incurred throughout the accounting period. The actual costs incurred
for indirect material, indirect labor, factory rental, equipment depreciation, utilities property
taxes, and insurance are recorded as debits to the account.

The right side of the manufacturing overhead account is used to record overhead applied to work
in process inventory.

When the left side of the manufacturing overhead account accumulates actual overhead costs, the
right side applies overhead costs using the predetermined overhead rate, based on estimated
overhead costs. The estimates used to calculate the predetermined overhead rate will generally
prove to be incorrect to some degree. Consequently; there will usually be a non- zero balance left
in the manufacturing overhead account at the end of the year. This balance is usually relatively
small, and its disposition is covered later in this illustration.

Selling and Administration costs

During the month of November, Oxorm Company incurred selling and administrative costs as
follows:
Rental of sales and administrative offices -------------------------------Br 1500
Salaries of sales personnel -------------------------------------------------- 4000
Salaries of management --------------------------------------------------------8000
Advertising -----------------------------------------------------------------------1000
Offices supplies used ----------------------------------------------------------- 300
Total -------------------------------------------------------------------------------14,000
-------------------------------------------------------------------------------14,000

Since there are not manufacturing costs, they are not added to work in process inventory. Selling
and administration costs are period costs, not product costs; they are treated as expenses of the
accounting period. The following journal entry is made.

8) Selling and administrative expense -------------------------14,800

Wage payable ------------------------------------------------------------12,000
Accounts payable -------------------------------------------------------10,000
Prepaid rent ------------------------------------------------------------- 1500
Office supplies inventory --------------------------------------------- 300

Completion of a Production Job and Sales of Goods Completion of a Production

Job.

Job number F16 was completed during November whereas job number C12 remained in process.
As the job cost sheet above indicates, the total cost of job number F16 was Birr 48,000. The
following journal entry records the transfer of these jobs costs from work in process Inventory to
finished goods inventory.

10) Accounts Receivable ----------------------------54,000

Sales Revenue ------------------------------------------------54,000

11) Cost of goods sold ------------------------------36,000

Finished goods inventory ----------------------------------36,000

The remainder of the manufacturing costs for job number F16 remains in finished goods
inventory until some subsequent accounting period when the units are sold. Therefore, the cost
balance for job number F16 remaining in inventory is Br, 12,000 (20 units remaining times Br
600 per unit). The balance is shown on the job cost sheet above.
Under applied and over applied overhead

During November, Oxorm Company incurred total actual manufacturing overhead costs of Br.
29,050 but only Br. 28,800 of overhead was applied to work-in-process inventory. The amount
by which actual overhead exceeds applied overhead, called under applied overhead is calculated
below.

Actual manufacturing overhead (50 +14,000+15,000) Br 29,050

Applied manufacturing overhead (9X3200)
(9X3200) 28,800
Under applied overhead Br 250

If actual overhead had been less than applied overhead the difference would have been called
over applied overhead. Under applied or over applied overhead is caused by errors in the
estimates of overhead and activity used to compute the predetermined overhead rate. In this
illustration, Oxorm Company’s predetermined overhead rate was understated by a small amount.

Disposition of under applied or over applied overhead

At the end of an accounting period, the cost accountant has two alternatives for the disposition of
over applied overhead. Under, the most common alternative the under applied or over applied
overhead is closed to cost of goods sold. This is the method used by Oxrom Company, and the
required journal entry is shown below.

12) Cost of goods sold --------------------------------------------------250

Manufacturing overhead-----------------------------------------------------250

The entry which is posted in exhibit 6-1 brings the balance in the manufacturing account to zero.
This account is then clear to accumulate manufacturing overhead costs incurred in the next
accounting period. Journal entry (12) has the effect of increasing cost of goods sold expense.
This reflects the fact that the cost of the units sold had been understated due to the slightly
understated predetermined overhead rate. Most companies use this approach because of it is
simple and the amount of under applied or over applied overhead is usually small. Moreover,
most firms wait until the end of the year to close under applied or over applied overhead into cost
of goods sold rather than making the entry monthly as in this illustration.

Peroration of under applied or over applied overhead

Some companies use a more accurate procedure to dispose of under applied of over applied
overhead. . This approach recognizes that underestimation or overestimation of the
predetermined overhead rate affects not only the cost of goods sold, but also work -in-process
inventory and finished goods inventory. As shown below, applied overhead passes through all
three of these accounts. Therefore all three accounts are affected by any inaccuracy in the
predetermined overhead rate.
Work in process inventory Finished goods inventory Cost of goods sold
Applied overhead Applied overhead applied overhead is
Is added to work is included in cost included in cost of goods
in Process of goods completed sold.
When under applied or over applied overhead is allocated among the three accounts shown
above, the process is called proportion. The amount of the current periods applied overhead
remaining in each account is the basis for the proration procedure. In the Oxorm company
illustration the amounts of applied overhead remaining in the three accounts on November 30 are
determined as follows: Finished goods Inventory Cost of goods
sold
Overhead applied
To job C12 10,800 Applied overhead Applied overheadtransferred Over applied
to job transferred to finished goods to cost of goods sold when 60
F16 18,000 when job F16 was completed out of 80 units wide 13,500
Applied overhead remaining in each account in November 30 is
Account Explanation Amount Percentage Calculation of
percentage
Work in process Job C12 only Br 10,000 37.5% 10,800 /28,800
Finished good ¼ of units in job 16 4500 15.6% 4500/28,800
Cost of goods sold ¾ of units in job F16 13,500 46.9% 13500/28,800
Total overhead applied in November Br 28,800 100%

Using the percentages calculated above, the peroration of Oxurm Company under applied
overhead is determined as follows:
Account Under applied Percentage Amount added to
overhead account
Work in process Br 250 37.5% Br 93.75
Finished goods 250 15.6% 39.00
Cost of goods sold 250 46.9% 117.25
Total under applied
prorated Br 250

If Oxorm Company had chosen to prorate under applied overhead, the following journal entry
would have been made.
Work in process inventory-------------93.75
Finished goods inventory---------------39
Cost of goods sold------------------------117.25
Manufacturing overhead-----------------------------250

Since this is not the method used by Oxurm Company in our controlling illustration, this entry is
not posted to the ledger in exhibit 6-1.

JOBS -ORDER COST SYSTEMS FOR SERVICE ENTERPRISE

A job order cost accounting system may be useful to the management of a service enterprise in
planning and controlling operations. Since the “product" of such an enterprise is service,
management focus is on direct labor and overhead costs. The cost of any materials or supplies
used in rendering services for a client is usually small in amount and is normally included as part
of the overhead.

The direct labor and overhead costs of rendering services to clients are accumulated in a work in
process account, which is supported by a cost ledger. A job cost sheet is used to accumulate the
costs for each client’s job. When a job is completed and the client is billed, the costs are
transferred to a cost of services account. This account is similar to the cost of merchandise sold
account for a merchandising enterprise or the cost of goods sold account for a manufacturing
enterprise. A finished goods account is not necessary, since the revenues associated with the
service are recorded after the services have been rendered.
In practice, additional accounting consideration unique to service enterprise may need to be
considered. For example, a service enterprise may bill clients on a weekly or monthly basis
rather than waiting until a job is completed. In these situations, a portion of the costs related to
each billing should be transferred from the work in process account to the cost of service
account.

t of conversion costs of $40,950; during January 19,000 units were started; during January
materials costs of $282,000 and conversion costs of $378,000 were added to production;
during January 20,000 units were completed; on January 31, 2,000 units were in process--
60% complete in regards to materials and 50% complete in regards to conversion costs;
500 of the completed units were spoiled; company-wide standards state that a spoilage rate
of 2% of completed units is considered to be normal; spoilage is detected at the end of the
manufacturing process; it is assumed that the spoiled units came entirely from the units
started and completed during January
Beginning Inventory 3,000
Units Started 19,000