Job Order Costing System:
After studying this
chapter you should be able to:
job order costing system is used in situations where many different products
are produced each period. For example clothing factory would typically made many
different types of jeans for both men and women during a month. In a job order
costing system, costs are traced to the jobs and then the costs of the job are
divided by the number of units in the job to arrive at an average cost per unit.
Job order costing system is also extensively used in service industries.
Hospitals, law firms, movie studios, accounting firms, advertising agencies and
repair shops all use a variety of job order costing system to accumulate costs
for accounting and billing purposes. The details here deal
with a manufacturing firm, the same concept and procedures are used by many
service organizations.
The record keeping and cost assignment problems are more complex in a job order
costing system when a company sells many different products and services than
when it has only a single product or service. Since the products are different,
the costs are typically different. Consequently, cost records must be maintained
for each distinct product or job. For example an attorney in a large criminal
law practice would ordinarily keep separate records of the costs of advising and
defending each of her clients. And a clothing factory would keep separate track
of the costs of filling orders for particular styles, sizes, and colors of
jeans. A job order costing system requires more effort than a process costing
system. Companies classify manufacturing costs
into three broad categories:(1)
direct materials, (2)
direct labor, (3)
manufacturing overhead.
(See
manufacturing and non-manufacturing costs page) As we study the operation of a job costing system, we
will see how each of these three types of costs is recorded and accumulated.
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Measuring Direct Materials Cost in Job Order Costing System:
At the beginning of production
process a document known as
bill of materials is used for
standard products. "A
bill of materials
is a document that lists the type and quantity of each item of materials
needed to complete a unit of standard product".
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Measuring Direct Labor Cost in Job Order Costing System:
Direct labor cost is handled in much
the same way as
direct materials cost.
Direct labor consists of labor charges that are easily traced to a
particular job. Labor charges that cannot be easily traced directly to
any job are treated as part of manufacturing overhead.
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Application of Manufacturing Overhead:
Manufacturing overhead must be included with
direct labor on
the job cost sheet since manufacturing overhead is also a product cost.
However, assigning manufacturing overhead to units of product can be a
difficult task. Click here to
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Job Order Costing System - The Flow of Costs:
To understand the flow of costs in job
order costing system, we shall consider a single month's activity for a
company, a producer of product A and product B.
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article.
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Multiple Predetermined Overhead Rates:
When a single
predetermined overhead rate is used for entire factory it is called
plant wide overhead rate. This is fairly common practice - particularly
in smaller companies.
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Under-applied overhead and over-applied overhead calculation:
Since the
predetermined overhead rate is established before a period
begins and is based entirely on estimated data, the overhead cost applied to
work in process (WIP) will generally differ from the amount of overhead cost
actually incurred during a period.
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Disposition
of any balance remaining in the manufacturing overhead account at the end
of a period:
What disposition should be
made of an under-applied overhead or over-applied overhead balance remaining
in the manufacturing overhead account at the end of a period?
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Predetermined Overhead Rate and Capacity:
Companies typically base their
predetermined overhead rates on the estimated, or budgeted, amount of
allocation base for the upcoming period. This is the method that is used in
this chapter, but it is practice that is recently come under severe
criticism. An example will be very helpful why.
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Recording Non - manufacturing Costs:
In addition to manufacturing costs, companies also incur
marketing and selling costs. These costs should be treated as period
expenses and charged directly to the
income statement
and therefore should not go into the the manufacturing overhead account.
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Recording Cost of Goods Manufactured and Sold:
When a job has been completed, the
finished out put is transferred from the production department to the
finished goods warehouse. By this time, the accounting department
will have charged the job with
direct materials and
direct labor cost and
manufacturing overhead will have been applied using the predetermined
overhead rate.
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Job Order Costing in Services Companies:
Job order costing is also used in service
organizations such as law firms, movie studios, hospitals, and repair
shops, as well as manufacturing companies.
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full article.
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Use of Information Technology in Job Order Costing:
Bar code technology can
be used to record labor time--reducing the drudgery in that task and
increasing accuracy. Bar codes also have many other uses. In a company
with a well-developed bar code system, the manufacturing cycle begins
with the receipt of a customer's order in electronic form.
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Advantages and Disadvantages of Job Order Costing System:
One of the primary advantages of
job order
costing system is that the management team has ready access to all the
costs incurred for each job being completed. This allows the team to
examine each cost incurred, finding out why it happened, and determine
how it can be controlled better in the future, thereby contributing to
better ongoing levels of profitability.
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Job Order Costing Discussion Questions and Answers:
Find answers of various questions about job order costing system.
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Job
Order Costing Exercises:
Five exercises (solved)
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Case Studies
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