JOB ORDER COST SYSTEMS
Dr. George A Gekas
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There are two distinct types of cost accounting systems:
1. Job order cost system
2. Process cost system
Both systems produce the same results: calculate manufacturing costs, unit cost, cost of inventories
on hand and cost of goods sold.
Job order cost systems are used by companies that manufacture “one of a kind” products or
products that tailor to the specifications of individual customers. In a job order cost system the cost
of direct costs and manufacturing costs are accumulated separately for each job. If each job
contains more than one unit of product the unit costs are determined by dividing the total
accumulated job cost by the number of units produced.
Job order cost systems are used by construction firms, ship builders, motion picture studios,
furniture makers, print shops, repair shops, hospitals (each patient represents a job), law firms,
accounting firms and others.
Under a job order cost system manufacturing costs are charged separately for each job to the
work in process inventory (WIP) account. This controlling account is supported by a subsidiary
ledger of job cost sheets for each job performed.
The job cost sheets are completed when the job is done. It shows the cost of direct materials (D/M)
the direct labour (D/L) (e.g. hours times the hourly rate), the manufacturing overhead (O/H) (e.g.
rate times hours) and the total of all three. The total of D/M, D/L and O/H divided by the number of
units produced shows the total cost per unit.
Accounting for D irect Material (D/M)
Accounting for D/M is simple. Purchases of raw material inventories are recorded to the purchases
journal then posted to the subsidiary ledger of materials.
To obtain material for the production process a materials requisition form is issued from the
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production to the warehouse. At the end of the month, a summary entry is made. A debit to WIP
inventory and a credit to material inventory, for all materials issued from the warehouse.
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Accounting for Direct Labour (D/L)
The direct labour costs applicable to each specific job are calculated from the time cards of each
employee. As employees do specific jobs we debit D/L and credit payroll payable.
As payments to direct factory workers are made we debit D/L and credit cash.
At the end of the month, a summary entry is made debiting WIP and crediting D/L.
Since the D/L account is debited when work is done and credited when workers are paid the cost
charged to jobs (credited) is most of the times greater to the payments (debit). The difference
represents wages payable. Payments to indirect factory workers (e.g., security guards) are debited
to manufacturing overhead.
Accounting for Overhead (O/H)
Manufacturing overhead is a controlling account that includes all manufacturing costs other than
D/M and D/L. In order to calculate the total manufacturing costs we need to apply (add)
manufacturing costs to Direct Material and Direct Labour costs. Since we do not know in advance
what the Overhead costs are going to be we need to estimate them. This is done by calculating the
predetermined O/H rate.
The predetermined O/H is calculated as: the total Budgeted O/H costs over the total Budgeted
units in the activity base.
The predetermined rate times the total number of units produced provides the total applied
Applied (Estimated manufacturing Overhead costs are credited.
Actual manufacturing costs, (when they are determined at the end of the accounting period) are
Total budgeted manufacturing costs$360,000
Total budgeted production hours 10,000
Total number of units produced 2,000
Predetermined O/H Rate: $360 000/ 10 000 hrs = $36
Applied O/H: $36 x 2,000 units = $72,000
To provide reliable results accurate applied O/H the activity bases must be a true d