Job-order Costing

A. Job-order costing requires the collection of costs by physically identifiable jobs using job-order cost sheets. The jobs become the basis for calculating unit costs.

The basic elements for a job-order cost system are:

1. Job-order cost sheet.
2. Materials requisition form.
3. Employee time ticket.
4. Overhead rate.
5. Completed job sheet.


B. Accounting for cost elements:

1.Direct material and direct labor. These costs can be traced directly to a job (job-order costing) or to a producing department (process costing) and subsequently to the product.


2.Manufacturing overhead. These costs are not readily traceable to the product, but they can be:

a.traced directly to producing departments and indirectly to the product.


b.traced directly to service departments and indirectly to producing departments and indirectly to the product.


c.In making the allocation of manufacturing overhead to products, the calculation of a manufacturing overhead rate is required. The overhead rate can be used with one of several costing systems that are available:

1)actual costing under which all manufacturing costs are charged to the product at actual cost. This would occur at the end of the accounting period once all the actual costs and activity (DLH, MH, DL$, etc,) are known.

OH rate = actual OH / actual activity

The amount of manufacturing overhead charged to production is equal to the actual overhead rate multiplied by the actual activity (inputs).

2)normal costing under which actual material and labor costs are assigned directly to the product but manufacturing overhead costs are assigned the product using a predetermined overhead rate.

This requires an estimate of overhead expenses and related activity before the period begins.

OH rate = estimated OH / estimated activity

The amount of manufacturing overhead Charged to production is equal to the predetermined OH rate multiplied by the actual inputs (DLH, MH, DL$, etc.).

The predetermined overhead charged to production will equal actual manufacturing overhead only if the estimated activity and expenses are predicted with absolute accuracy.

The difference between the overhead charged to production and the overhead actually incurred is considered to be:

*underapplied if actual manufacturing OH expenses exceed the applied manufacturing OH expenses.

*overapplied if applied manufacturing OH expenses exceed the actual manufacturing overhead.

At the end of the accounting period, the under or overapplied overhead is closed to:

*cost of goods sold or

*cost of goods sold, work in process and finished goods in proportion to the ending balances in these accounts.

As jobs are completed, the cost of the completed job is transferred from work in process to finished goods. The value of the work in process inventory is equal to the total costs accumulated for each job still in process.