💸Cost Accounting Unit 4 – Job Order Costing

What's Job Order Costing?

• Job order costing tracks the costs of producing individual, unique products or batches
• Used when each job has different specifications, materials, and labor requirements
• Assigns direct materials, direct labor, and manufacturing overhead costs to specific jobs
• Helps determine the cost and profitability of each job
• Provides accurate pricing information for custom orders or bids
• Allows for better control over costs by identifying areas of inefficiency or overruns
• Useful in industries such as construction, printing, and custom manufacturing (furniture, jewelry)

Why Use Job Order Costing?

• Enables accurate tracking of costs for unique products or services
• Helps determine the profitability of individual jobs or orders
• Provides a basis for pricing custom orders or bids
• Allows for better cost control by identifying areas of inefficiency or cost overruns
• Facilitates decision-making regarding job acceptance, resource allocation, and process improvements
• Useful when there is a high degree of product customization or variability
• Helps in generating detailed cost reports for management analysis and planning

Key Components of Job Order Costing

• Direct materials are raw materials directly traceable to a specific job
  • Examples include wood for a custom furniture piece or fabric for a tailored garment
• Direct labor is the cost of labor directly involved in producing a specific job
  • Includes wages of workers who directly contribute to the production of the job
• Manufacturing overhead includes indirect costs allocated to jobs based on a predetermined rate
  • Examples include rent, utilities, and supervisor salaries
• Job cost sheet is a document that tracks all costs associated with a specific job
  • Used to accumulate and summarize costs for each job

Setting Up a Job Cost Sheet

• Create a unique job number for each job or batch
• Record customer information, job specifications, and estimated costs
• Set up columns for direct materials, direct labor, and manufacturing overhead
• Include a section for actual costs incurred and a comparison to estimated costs
• Provide space for notes and comments related to the job
• Ensure the job cost sheet is easily accessible and updated regularly
• Use the job cost sheet as a central document for tracking all job-related costs

Tracking Direct Costs

• Record the cost of direct materials used for each job
  • Track materials issued from inventory or purchased specifically for the job
• Document the direct labor hours worked on each job
  • Use timesheets or labor tracking systems to capture hours worked by employees
• Calculate the cost of direct labor by multiplying hours worked by the hourly rate
• Assign direct material and labor costs to the corresponding job cost sheet
• Monitor direct costs throughout the production process to identify any variances or issues

Allocating Overhead Costs

• Determine an allocation base for manufacturing overhead (direct labor hours, machine hours)
• Calculate the predetermined overhead rate by dividing estimated overhead costs by the allocation base
  • Predetermined overhead rate = $\frac{Estimated\ overhead\ costs}{Estimated\ allocation\ base}$
• Apply manufacturing overhead to each job using the predetermined rate
  • Overhead applied = Actual quantity of allocation base × Predetermined overhead rate
• Record the applied overhead costs on the job cost sheet
• Monitor actual overhead costs and compare them to the applied overhead to identify any variances

Calculating the Total Job Cost

• Sum up the direct material costs for the job
• Add the total direct labor costs incurred for the job
• Include the applied manufacturing overhead costs
• Calculate the total job cost by adding direct materials, direct labor, and applied overhead
  • Total job cost = Direct materials + Direct labor + Applied overhead
• Compare the total job cost to the estimated cost to determine any variances
• Use the total job cost to assess profitability and make pricing decisions

Job Order Costing vs. Other Methods

• Job order costing is suitable for unique, custom products or batches
• Process costing is used for mass production of homogeneous products (beverages, chemicals)
  • Costs are tracked by department or process rather than by individual jobs
• Activity-based costing (ABC) assigns costs to activities and then to products based on their consumption of those activities
  • Useful when there is a diverse product mix and varying levels of complexity
• Standard costing compares actual costs to predetermined standard costs
  • Helps identify variances and areas for improvement
• Job order costing provides the most accurate cost information for unique, custom products