JOB ORDER COSTING SYSTEM:Direct Materials, Direct Labor, Factory Overhead

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Cost & Management Accounting (MGT-402)

LESSON# 18

JOB ORDER COSTING SYSTEM

It has been explained that a cost accounting system is composed of two sub-systems:

(i)

A system of recording and summarizing costs and

(ii)

A costing system.

Costing system means "the ascertainment of costs ", It includes determination of total cost as well as

unit cost. A costing system determines and reports to management total and unit cost of product

or project of service with details of cost components

Costing is compulsory for satisfying at least three important needs of management.

I. Unit cost must be known to assist the management in making price decisions.

II. Ascertainment of cost at every stage of production is important for exercising control over

costs.

III. In order to operate a system of accounting for costs, management needs to know cost of

materials, labor and overhead to be charged to work in process, cost of work completed

and transferred to finished goods and the cost of goods sold so that necessary debit and

credit entries can be passed.

Choice of a Costing System

Job Order Costing or Process Costing?

What type of costing system an accounting entity should adopt? It depends upon:

(1)

Nature of operations and

(2)

Information needs of management.

Take the example of a construction company that produces houses in response to customers'

orders and according to their specifications. All the times, the company remains engaged in the

construction of many houses at different sites for different customers. Such a company definitely

wants to know the cost incurred on each house separately so that customers' can be billed properly

and profit (or loss) on each contract may be ascertained. Here the nature of operations is such that

each house is clearly distinguishable from the other and separate calculation of cost for each house

is desirable and practically possible. This company will employ job costing system.

On the other hand take the example of a company producing cement. All of the bags of cement

produced are quite similar. Here separate calculation of cost of cement supplied to each

customer is neither desirable nor feasible. The company can calculate cost per bag of cement

produced by dividing total cost incurred during the accounting period by total number of bags

produced during the period.

Accordingly, the company can fix the price per bag and bill each customer according to the

number of bags supplied to him. This company will use process costing system.

Job costing and process costing are two basic types of costing systems and can be viewed

as two ends of a spectrum or range. In practice we find companies employing either one of

these two or some combination of features of the two both of these at the same time. For

example, a ready made garments manufacturer employs process costing to accumulate and

determine the cost of free size shirts produced by him in large quantity. At the same time he

uses job costing to accumulate the cost of waiters' uniforms supplied to a hotel under a

contract.

Job costing may be defined:

The costing system that separately accumulates costs incurred to produce each job in a situation where each job is

distinguishable from the other throughout the production process.

The job may be a single unit or a multi unit batch, a contract or a project, program or a service. Job

costing is employed by organisations possessing following characteristics:

1. Production is generally in response of customers' orders.

2. Every order has its own manufacturing specifications. Therefore, every job is different from the

other and requires different amounts materials, labor and overhead.

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Cost & Management Accounting (MGT-402)

3. Each job is clearly distinguishable from the other at all stages production process which makes

job-wise accumulation of possible.

4. Job-wise accumulation of cost is desirable and/or necessary for and profit determination and

5. Each job is generally of high value.

Following are the examples of organisations employing job costing include:

a) Accounting firms

b) Civil engineering

c) Furniture manufacturing

d) Medical care

e) Printing press

f) Ship-building

g) Advertising agencies

h) Computer programming

i) Jewellery manufacturing

j) Movie studios

k) Repair shops

As the costs are accumulated separately for each job, therefore, job costing requires considerable

amount of clerical work. Where production is carried in different departments of a factory,

department wise cost accumulation is also necessary for performance evaluation of departmental

management. In this way clerical work is further increased. Consequently, job costing is more

expensive as compared with process costing. Job costing is also called specific order costing or

production order costing.

Job order costing procedures

Most of the times, organisations employing job order costing are required to submit quotation

before finalization of customer's order. Therefore, naturally, the first step in job order costing is to

prepare an estimate of cost likely to be incurred to produce the job. The estimation is done by

coordination of sales, designing and production departments. On the basis of estimated cost price

is quoted. When customer's order has been initialized production planning and control

department takes the first step towards execution of the order.

On receipt of production order, cost accounting department prepares a job cost sheet for each

job. Job cost sheet may be defined as a document used for accumulating costs incurred to produce a job.

Design and contents of job cost sheet vary widely depending on customs of manufacturing

operations and information needs of management.

However, generally, a job cost sheet is designed to show the following information:

1. Job number

2. Name of the customer

3. Description and specifications of the job

4. Date of commencement of production

5. Date of completion of job.

6. Direct materials cost incurred on the job

7. Direct labor cost incurred on the job

8. Factory overhead applied to the job

9. Total cost of the job

10. Selling and administration expenses chargeable to the job

11. Sales price of the job

12. Profit (or loss) on the job

13. Where the job consists of a batch, the quantity produced and unit cost

14. Where cost estimates are prepared before production, estimated cost should also be shown for

comparison and efficiency evaluation.

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Cost & Management Accounting (MGT-402)

Job cost sheet is one of the basic documents used in job order costing. Upto the time the job is

incomplete; job cost sheet serves as a subsidiary record .for work in process control account and is placed in

work in process subsidiary ledger. On completion of job, the relevant job cost sheet is removed

from work in process subsidiary ledger.

Now it reveals the cost of completed job and serves as source document for debiting finished goods

account (or completed jobs control account) and for crediting work in process account.

Then it is placed in finished goods subsidiary ledger and serves as subsidiary record .for finished goods

account. When completed job is shipped to the customer, relevant job cost sheet serves as source

document for debiting cost of goods sold account and for crediting finished goods account. Then it

is placed in cost of goods sold subsidiary ledger where the same job cost sheet serves as subsidiary

record for cost of goods sold account.

Manufacturing process is, most of the times, divided into departments. This departmentalization

is the logical result of different types of operations performed to produce a product. For example,

furniture manufacturing is divided into cutting, assembling and finishing and polishing

departments; readymade garments manufacturing is divided into cutting, stitching finishing and

packing departments.

These departments are regarded as cost centers. Cost Centre means a division or segment for which a

separate individual is made responsible .for incurrence of cost. Accumulation of cost for each department is

necessary to achieve better control over cost. In job order costing it is necessary to identify cost

not only with the department but also with the relevant job.

Direct materials, direct labor and factory overhead to be charged to each job and to each

department are recorded in the following manners:

Direct Materials: Every materials requisition issued to secure direct materials bears the name of

department and job number for which materials are required. Periodically (weekly or fortnightly

etc) a summary of materials requisitions is prepared. Materials requisition summary analyses cost

of materials issued and ascertains cost of materials chargeable to each department and to each job.

Indirect materials issued cannot be associated with particular jobs, therefore, these are summarised

only by department. Instead of posting each individual materials issue to job cost sheets, the

periodic totals are recorded on relevant job cost sheets.

The periodic grand total are debited to work in process and factory overhead -control accounts and

credited to materials control account.

Direct Labor: Primary labor cost data are accumulated on Job Time Tickets. Job time tickets

contain names of departments and job numbers for which labor time is used. A labor cost analysis

sheet is prepared periodically that analyses the direct labor cost by departments and by jobs. As

indirect labor cost cannot be identified with particular jobs, therefore, labor cost analysis sheet

analyses it only by departments. The periodic totals are posted to job cost sheets and debited to

work in process and factory overhead control accounts.

Factory Overhead: Factory overhead is applied to jobs on the basis of predetermined

departmental factory overhead applied rates. Factory overhead is also periodically applied to the

jobs and entered in job cost sheets. Total applied factory overhead is debited to work in process

control account and credited to factory overhead applied account.

Practice Question

Job Order Costing. Shah Taj Engineering Works on April 5, 2006 started production of 100 lawn

mower of model EG- 72 ordered by Capital Development Authority. Islamabad, vide Order No.

2119-M dated April 1, 2006 at a price of Rs. 3,600 per lawn mower.

Production Planning Department allotted Job No. J-832-LM and instructed the factory to

complete production by April 20, 2006. However, the factory completed production on April 18,

2006.

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Cost & Management Accounting (MGT-402)

On April 11, weekly Materials Requisitions Summary. No. MRS-16 and weekly Labor Cost

Analysis Sheet No.LAS-16 showed following charges to Job No. J-832-LM.

Department 101

Department 102

Direct materials

Rs. 58,500

11,700

Direct labor

Rs. 13,500

15,750

(900 hours)

Materials Requisitions Summary No. MRS-17 and Labor Cost Analysis Sheet No. LAS-17

prepared on April 18 revealed following direct costs for the job.

Department 101

Department 102

Direct materials

Rs.71,500

Rs. 14,300

Direct labor

Rs. 16,500

Rs. 19,250

(1100 hours)

In department 101 factory overhead is applied @ 50% of direct labor cost and in department 102

@ Rs. 12 per direct labor hour. Marketing and administration expenses chargeable to the job were

respectively 7.5 % and 5% of the sale price. The lawn mowers were delivered to customer on April

22, 2006

Required:

(i) Prepare a Job Cost Sheet for Job No. J-832-LM.

(ii) Assuming that J-832-LM was the only job worked on during the two weeks period, pass

account entries in General Journal form to record:

(a) Cost incurred on the job:

(b) Completion of the job; and

Solution

SHAH TAJ ENGINEERING WORKS LIMITED

JOB COST SHEET FOR JOB NO. J-832-LM

Customer's Name:

Capital Development Authority. Islamabad.

Order No. 2119-M Dated 02-04-2006 Description Lawn Mowers Model EG- 72

Total Cost Rs. 260.000 No. of units. 100Date Started 05-04-2006

Date wanted 20-04-2006 Date Completed 18-04-2006 Unit Sales Price Rs. 3,600 Unit Cost Rs.

2,600

DIRECT MATERIALS

Date

Mat. Req. Sum. Department 101

Department 102

Total

11-04-2006

MRS-16

Rs. 58,500

11,700

70,200

18-04-2006

MRS-17

71,500

14,300

85,800

Total

130,000

26,000

156,000

DIRECT LABOR

Date

Lab

Analysis Department 101

Department 102

Total

Sheet No.

11-04-2006

LAS-16

Rs. 13,500

15,750

29,250

18-04-2006

LAS-17

16,500

19,250

35,750

Total

30,000

35,000

65,000

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Cost & Management Accounting (MGT-402)

FACTORY OVERHEAD APPLIED

Date

Department 101

Department 102

Total

D.L

Rate

Amount

D.L

Rate

Amount

Cost

Hours

11-04-2006

13,500

50%

6,750

900

10,800

17,750

18-04-2006

16,500

50%

8,250

1,100

13,200

21,450

Total

15,000

24,000

39,000

Total Production Cost

Direct material cost

156,000

Direct labor cost

65,000

Factory overhead cost

39,000

260,000

Income Statement

Sales price 100 units @ Rs. 3,600

360,000

Cost of production

260,000

Gross profit

100,000

Operating expenses

Marketing Expenses (Rs. 360,000 x 7.5%)

27,000

Administration Expenses (Rs. 360,000 x 5%) 18,000

45,000

Net Income/profit

55,000

Problem Questions

Q. 1

Arman Advertisers on November 15, 2006 received an order from Pheasent Cosmetics Limited for

manufacturing and installation of a huge neon sign for a contract price of Rs. 180,000. Job No.

676-PN was allotted and manufacturing was begun on November 21, 2006 .The costs are charged

to the jobs periodically by means of weekly summaries.

Following costs were related to Job No. 676-PN

WEEK ENDED

Nov. 23

Nov. 30

Dec.7

Dec. 14

Rs.

Direct materials

13,300

24,800

16,400

12,600

Direct labor

1,800

12,400

20,100

14,200

Factory overhead is applied @ 25% of prime cost. The Job was completed on December 14, 2006

Selling expenses are applied to the job @ 3 % of contract price and administration expenses @ 2%

of contract price.

Required: Prepare a job cost sheet containing above information

Q. 2

In order to submit quotation for air conditioning of Hina Shopping Centre, management of Indus

Electrical Industries made following estimates:

Direct materials Rs. 280,000;

Direct labor Rs. 120,000;

Predetermined overhead applied rate is 50% of direct labor cost;

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Cost & Management Accounting (MGT-402)

Predetermined rates for charging marketing and administration expenses are respectively 3% and

2% of the contract price.

On the basis of above estimates contract price was quoted as Rs. 575,000

The quotation was accepted by the owners of Hina Shopping Centre and the order was finalized

on October 6, 2006.

Job No. 1617 was assigned to the order and the work was started on October 12, 2006. Weekly

materials requisition summaries and labor cost analysis sheets showed following charges to Job

No. 1617.

Date

Direct Material

Direct labor

October 17

Rs. 120,000

Rs. 46,000

October 24

Rs. 96,000

Rs. 44,000

October 31

Rs. 60,000

Rs. 48,000

The job was completed on October 31. However, the time allowed for completion of job was upto

November 4.

Required

(i)

Prepare job cost sheet for Job No. 1617.

(ii)

Assuming that Job No. 1617 was the only job worked on during the above period, pass

entries in general journal form to record production and sale of the job. Job was accepted by the

customer on November 4 and cash received for the contract price.

Q. 3

Hussain Engineering Co. Ltd. produces machines as per customer's specifications. The following

data pertains to Job Order No. K 101:

Customer: Azam Banking Co.

Date Started: 06-08-2006.

Customer Order No. C 467.

Date Finished: 20-08-2006.

Dated: 31-07-2006. Total Cost of manufacture?

Sales Price?

Description: 6 Banking Machines.

Week End 13/08

Week End 20/08

Materials used. Dept. A.

Rs. 4,800

Rs. 2,600

Direct labor rate. Dept. A.

Rs 40 per hour

Rs. 40 per hour

Labor hours used, Dept. A.

1,200

800

Direct labor rate, Dept. B.

Rs 42 per hour

Rs. 42 per hour

Labor hour uses, Dept. B.

600

280

Machine hours. Dept. B.

400

240

Applied factory overhead Dept. A. Rs. 20/labor hr.

Rs. 20/labor hr.

Applied factory overhead Dept. B Rs. 18/machine hr

Rs.18/machine hr

Marketing and administrative costs are charged to each order @ 20% of the cost to manufacture

Required:

Prepare a job order cost sheet

Calculate sales price of the job, assuming that it has been contracted with a

markup of 40%

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