Costing Systems: Job Order Costing

Costing Systems: Job Order Costing20

Product Unit Cost Information and the Management Process

OBJECTIVE 1: Explain why unit cost is important in the management process.


• In the planning stage, managers use cost information to– Develop budgets.– Establish prices.– Set sales goals.


• In the planning stage, managers use cost information to (cont.)– Plan production volume.– Estimate product or service unit costs.– Determine human resource needs.


• During the year, managers use cost information to– Make decisions about controlling costs.– Manage the company’s volume of activity.– Ensure the quality of products or services.– Negotiate prices.


• When evaluating performance, managers use cost information to– Evaluate actual and planned performance.– Adjust planning and decision-making

strategies.


• When communicating in reports, managers use cost information to– Determine inventory balances and the cost of

goods or services sold for the financial statements.

– Prepare internal reports that compare actual unit costs and targeted costs.

©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Product Costing Systems

OBJECTIVE 2: Distinguish between the two basic types of product costing systems, and identify the information each provides.

Table 1: Characteristics of Job Order Costing and Process Costing Systems


• To track product costs throughout the management process, an organization may use a job order costing system, a process costing system, or a hybrid version of the two.


• The type of product costing system an organization uses depends on the nature of its production process.


• Organizations whose units of output are quite different—that is, they make custom, unique, or special-order products—typically use job order costing.– A job order costing system traces the costs of

direct materials, direct labor, and overhead to a specific batch of products or a specific job order.

• A job order is a customer order for a specific number of specially designed, made-to-order products.


• Organizations whose units of output are quite different—that is, they make custom, unique, or special-order products—typically use job order costing.– A job order costing system traces the costs of

direct materials, direct labor, and overhead to a specific batch of products or a specific job order. (cont.)

• A job order cost card is the document on which all costs incurred in the production of a particular job order are recorded.


• Organizations that produce large amounts of similar products or liquids or that have a continuous flow of identical products typically use process costing. – Examples of products whose production flow

makes them suitable for process costing include bricks, beverages, paint, and paper.


• Organizations that produce large amounts of similar products or liquids or that have a continuous flow of identical products typically use process costing. – A process costing system first traces the costs of

direct materials, direct labor, and overhead to processes, departments, or work cells and then assigns an average cost per unit to the products produced by those processes, departments, or work cells.


Job Order Costing in a Manufacturing Company

OBJECTIVE 3: Explain the cost flow in a manufacturer’s job order costing system.

Exhibit 1: The Job Order Costing System—Augusta, Inc.

Exhibit 1: The Job Order Costing System—Augusta, Inc.


• Cost flows in a manufacturer’s job order costing system are recorded as follows:– The costs of materials are first charged to the

Materials Inventory account and are recorded in the corresponding accounts in the Materials Inventory account’s subsidiary ledger.



– Labor costs are first accumulated in the Factory Payroll account.


– The various overhead costs (including indirect labor costs and indirect materials) are first charged to the Overhead account.

• As products are manufactured, the costs of direct materials and direct labor are transferred to the Work in Process Inventory account and are recorded in a subsidiary ledger of job order cost cards that supports the Work in Process Inventory account.


• Overhead costs applied at a predetermined overhead rate are charged to the Work in Process Inventory account and are recorded in that account’s subsidiary ledger. These charges are used to reduce the balance in the Overhead account.


– When products and jobs are completed, the costs assigned to them are transferred to the Finished Goods Inventory account and are recorded in that account’s subsidiary ledger.


– When the products are sold and shipped, their costs are transferred to the Cost of Goods Sold account.


– Any balance in the Overhead account at the end of the period is closed to Cost of Goods Sold.

• Underapplied overhead

• Overapplied overhead


A Job Order Cost Card and the Computation of Unit Cost

OBJECTIVE 4: Prepare a job order cost card, and compute a job order’s product or service unit cost.

Figure 1: Job Order Cost Card for a Manufacturing Company

Figure 2: Job Order Cost Card for a Service Organization


• In a job order costing system, all the costs of a particular job’s direct materials, direct labor, and overhead are accumulated on a job order cost card.– Because all manufacturing costs are

accumulated in one Work in Process Inventory account, a subsidiary ledger made up of job order cost cards is needed to trace the costs of specific jobs.


• Product unit cost in a job order costing system is calculated as follows:– Total all manufacturing costs recorded on a

particular job order cost card.– Divide total manufacturing costs by the

number of units produced for that job.


• Service organizations use job order cost cards to record the costs of labor, materials and supplies, and overhead incurred in performing a particular job and to determine selling prices in cost-plus contracts.


Costing Systems: Job Order Costing

Documents

job order costing system

job order cost card

specific job order

particular job order

estimate product

cost of goods

customer order

actual unit costs