4.5 Compute the Cost of a Job Using Job Order Costing

Job order costing tracks costs for unique products or services. It's crucial for businesses that make custom items or handle specific projects. This method helps managers understand the true cost of each job and set appropriate prices.

The process involves calculating direct materials, direct labor, and manufacturing overhead for each job. Costs are tracked through work-in-process, finished goods, and cost of goods sold stages. Job cost sheets are used to record and summarize all costs associated with a specific job.

Job Order Costing

Calculation of total job cost

Top images from around the web for Calculation of total job cost

• 

  Flow of Costs (Job Order Costing) | Accounting for Managers View original

  Is this image relevant?

• 

  2.3 Job Costing Process with Journal Entries | Principles of Accounting II View original

  Is this image relevant?

• 

  2.1 Characteristics of Job Order Costing | Managerial Accounting View original

  Is this image relevant?

• 

  Flow of Costs (Job Order Costing) | Accounting for Managers View original

  Is this image relevant?

• 

  2.3 Job Costing Process with Journal Entries | Principles of Accounting II View original

  Is this image relevant?

1 of 3

Top images from around the web for Calculation of total job cost

• 

  Flow of Costs (Job Order Costing) | Accounting for Managers View original

  Is this image relevant?

• 

  2.3 Job Costing Process with Journal Entries | Principles of Accounting II View original

  Is this image relevant?

• 

  2.1 Characteristics of Job Order Costing | Managerial Accounting View original

  Is this image relevant?

• 

  Flow of Costs (Job Order Costing) | Accounting for Managers View original

  Is this image relevant?

• 

  2.3 Job Costing Process with Journal Entries | Principles of Accounting II View original

  Is this image relevant?

1 of 3

• Direct materials
  • Raw materials directly traceable to a specific job (wood, steel, fabric)
  • Cost of direct materials added to the job cost sheet
• Direct labor
  • Labor costs directly traceable to a specific job (wages of assembly line workers, machine operators)
  • Cost of direct labor added to the job cost sheet
• Manufacturing overhead
  • Indirect costs that cannot be directly traced to a specific job (factory rent, utilities, depreciation, indirect labor)
  • Overhead allocated to jobs using a predetermined overhead rate
    • Predetermined overhead rate calculated as $\frac{Estimated\ total\ overhead\ costs}{Estimated\ total\ allocation\ base}$
    • Common allocation bases include direct labor hours, machine hours, direct labor costs
  • Allocated overhead calculated by multiplying predetermined overhead rate by actual quantity of allocation base
• Total job cost calculated by summing direct materials, direct labor, and allocated overhead

Job cost tracking stages

• Work-in-process inventory
  • Costs of incomplete jobs at the end of an accounting period
  • Includes direct materials, direct labor, and allocated overhead incurred for unfinished jobs
• Finished goods inventory
  • Costs of completed jobs that have not yet been sold
  • When a job is completed, its costs transferred from work-in-process to finished goods inventory
• Cost of goods sold
  • Costs of completed jobs that have been sold to customers
  • When a finished good is sold, its cost transferred from finished goods inventory to cost of goods sold

Job cost sheet preparation

• Job cost sheet (also known as job cost cards)
  • Document used to track the costs associated with a specific job
  • Includes sections for direct materials, direct labor, and overhead
• Direct materials section
  • Records the cost of direct materials used for the job
  • Information obtained from materials requisition forms
• Direct labor section
  • Records the cost of direct labor used for the job
  • Information obtained from employee time tickets or time sheets
• Overhead section
  • Records the allocated overhead for the job
  • Calculated using the predetermined overhead rate and the actual quantity of the allocation base used for the job
• Summary section
  • Totals the direct materials, direct labor, and allocated overhead to determine the total cost of the job

Cost Accumulation and Job Costing Systems

• Cost accumulation: The process of collecting and organizing cost data for cost objects (such as jobs or products)
• Job costing systems: Used to track costs for individual jobs or batches of unique products
• Cost drivers: Factors that cause changes in costs, used to allocate overhead to jobs
• Overhead application: The process of assigning manufacturing overhead costs to individual jobs
• Cost flows: The movement of costs through the manufacturing process, from raw materials to work-in-process to finished goods