Lecture Notes: Job Order Costing

Introduction

Job Order Costing: System used in management accounting to track and assign costs to specific jobs or orders.
- Used in industries with unique or customized products/services.
- Costs are accumulated for each job separately to determine the cost of individual products/services.
- Key complexities: Overhead cost allocation, handling over/under applied overhead.

Distinguish between process costing and job order costing.
Recognize the flow of costs through the job order costing system.
Compute and apply a predetermined overhead rate.
Record journal entries and look at T accounts as costs flow through the system.
Prepare schedules of cost of goods manufactured (related to Chapter 2).
Compute over and under applied overhead cost and prepare journal entries to close that balance out.
Note: Appendix 5A not covered this week.

Application: Used for unique or customized orders.
- Example industries: Aircraft manufacturers, construction companies, custom auto mechanics.
Direct Costs:
- Direct Materials: Raw materials directly traceable to specific jobs.
- Direct Labor: Wages paid to workers directly involved in production/service.
Manufacturing Overhead:
- Indirect materials/labor, factory utilities, rent, equipment depreciation.
- Allocated using a predetermined overhead rate.

Process Costing: Used when producing many units of a single product (e.g., cement, oil refining, bottling facilities).
- Identical products allow for average cost per unit.
Job Order Costing: Used for customized jobs (e.g., architects, caterers, builders of commercial vessels).

Order Received: Unique job number assigned to track costs.
Direct Costs Charged: Direct materials and labor charged to job number.
Overhead Allocated: Predetermined overhead rate applied using an activity base (e.g., labor hours).
Total Costs Accumulated: Direct materials, labor, and overhead totaled for job cost.
Pricing: Job priced with company markup.

Calculation: Estimated total manufacturing overhead cost / total estimated units in the allocation base.
Applied throughout the accounting period to estimate job costs.

Direct Materials: Traced through materials requisition forms.
Direct Labor: Traced through time tickets.
Manufacturing Overhead: Allocated using predetermined overhead rate.
Non-manufacturing Costs: Expensed in the period incurred (e.g., marketing, admin).

Overapplied: Applied amount > actual amount.
Underapplied: Applied amount < actual amount.
Disposition: Adjust cost of goods sold directly or allocate among work in process, finished goods, and cost of goods sold.