Chapter 34

Tracking Product Costs With Job Costing


 

Types of Costing Systems

There are two major types of product costing systems. They are sometimes called cost accounting systems. Management chooses a method to match the flow of production work in their business operations. The goal is to use a method in which costs are matched with the revenues generated.

 

    1.  Job-order costing systems (job costing systems)

    2.   Process costing systems

We will spend time in this course on job order costing. Process costing is covered in depth in Cost Accounting for accounting majors.
 

Job Order Costing

A company breaks its work into jobs or batches and tracks the costs of each job separately using a subsidiary ledger. You learned that companies use accounts receivable subsidiary ledgers to accumulate customer charges and customer payments to track the balances of individual customers. A subsidiary for job order costing works in much the same manner in that it accumulates costs incurred for the particular job.

 

Source Documents

Each job has a separate job cost sheet used to track all product costs on each job. At any point in time, the total of the costs on all job cost sheets should equal the total of the WIP account in the general ledger. The group of job cost sheets serves as the subsidiary ledger for job costing. Source documents used are similar to those introduced in product costing.

Materials requisition form

Used to request that materials, direct and indirect, be transferred from RM inventory

 Time tickets

 Prepared by all production workers to track direct and indirect labor

 

 

Assigning Costs to Job Order Cost Sheets

Most companies assign a job number to each job. A job order cost sheet may look like the one below with sections for material, labor, and overhead.

 

 

 

Costs are traced or applied to the three sections as follows:

Direct Materials section

 

Direct Labor section

 

Manufacturing Overhead section

Service Companies

Job order costing is used by many service companies such as attorneys, consulting companies, IT services, and CPA firms.  The biggest difference from product manufacturers is that service companies have either minimal or no direct materials.

 

 

Example #1

Clinton Ties began jobs 46, 47, 48, and 49 during June. Jobs 41, 45, 46, 48, and 49 were completed during June. At the beginning of June, jobs 41, 44, and 45 were in production, while jobs 40 and 42 were completed and waiting to be shipped to customers. Jobs 40, 41, 42, 46, and 48 were shipped to customers during June. List the jobs in work in process and in finished goods at June 30.

Solution

Because we have no costs to work with, we will show the jobs moving through the t-accounts by job numbers. Begin by setting up a t-account for WIP and post the beginning jobs. Since jobs 41, 44, and 45 were in production at the beginning of June, these jobs comprise the beginning WIP inventory:

 WIP

Beginning balance:    41, 44, 45

 

 

 

 

 

 

A job order cost sheet would also exist for each  of these three jobs which listed the costs incurred through the end of May. Add the jobs that were started during June. When jobs are started, they begin to incur costs so they will appear on the increase side of the WIP account.

 WIP

Beginning balance:   41, 44, 45

 

 

Started: 46, 47, 48, 49

 

 

 

Now post the jobs that were completed during June on the credit side of the WIP t-account. Only completed jobs are transferred out. Only incomplete job will remain the WIP account. For each account that appears on the left that is complete, (i.e,. listed on the right side as complete), you can assume the job is no longer in the WIP account. The only job numbers that remain in the WIP account are those not yet complete at the end of June: Jobs 44 and 47.

 WIP

Beginning balance:   41, 44, 45

 

Started: 46, 47, 48, 49

 

 

41, 45, 46, 48, 49  Completed

 Ending Balance  44, 47

 

Now we can set up the Finished Goods t-account and post the jobs that were there at the beginning of June. The problems describes these jobs as being 'completed and waiting to be shipped to customers.'

 FG

Beginning balance:  40, 42  

 

 

 

 

 

The jobs that appear on the right side of the WIP account were transferred out of WIP, and into FG inventory, so we need to add these jobs on the left side of the FG account:

 FG

Beginning balance:  40, 42     

 

From WIP: 41, 45, 46, 48, 49

 

 

 

 

Jobs shipped to customers have been sold, so they must be removed from FG inventory:

 FG

Beginning balance:  40, 42     

 

From WIP: 41, 45, 46, 48, 49

40, 41, 42, 46, 48  Sold

 Ending Balance  45, 49

 

Only completed jobs that are not yet sold will remain the FG account. For each account that appears on the left that is complete, (i.e,. listed on the right side as complete), you can assume the job is no longer in the FG account. The only job numbers that remain in the FG account are those that have not yet been sold to customers at the end of June: Jobs 45 and 49.

 

Example #2

Harvey Company applies overhead based on direct labor hours at a rate of  $1.20. Job 63 used $1,200 of direct materials, 40 machine hours, and 300 hours of direct labor at a cost of $16 per hour. How much is the cost of job 63?

Solution

Job costs include direct materials, direct labor, and applied overhead. From a practical perspective, job costs are posted on job cost sheets. Because you probably do not want to create a job cost sheet format, you can take a shortcut and list the costs that would be posted in each of the three sections. The amount of direct materials is given. Direct labor must be calculated by multiplying the number of hours on job 63 times the cost per hour: 300 hours x $16 = $4,800. Harvey Company applies overhead based on direct labor hours, so the amount applied will be the actual hours incurred on job 63 times the POHR: 300 hrs.*$1.20, for a total applied overhead cost of $360.

 

Direct materials

$1,200

Direct labor cost

4,800

Manufacturing overhead cost applied

     360

   Total manufacturing costs

$6,360

 

 

Example #3

Homely Tubs designs custom hot tubs. The company applies overhead at a rate of $12.00 per direct labor hour. Employees are paid $15 per hour. At the start of 2014, Job 27 and 28 were in process at accumulated costs of $800 and 560, respectively. Job 29 that had been completed on December 27, 2013 at a cost of $1,400 was scheduled to be shipped on January 4, 2014. During the month of January, the following direct costs were added to production:

  Job Numbers
  27 28 30 31
Direct materials 570 440 780 320
Direct labor 450 840 600 375

 

At January 31, job 30 is still in process. All completed jobs were shipped except for job 28. Draw t-accounts for the Work in Process control and subsidiary ledger, finished goods, and cost of goods sold, and post all respective amounts to the accounts. 

1. Ending work in process

2. Ending finished goods

3. Cost of goods sold

Solution

Five t-accounts must be set up--one subsidiary t-account for each of the 4 jobs that are in process during January, and one control account.

 

Step 1: The first posting is for jobs 27 and 28 that were in process at the beginning of the period, January 1, 2014. These jobs had been started but were not finished by the end of the previous year. The cost of these two jobs are added together and posted as the beginning balance of the control account. Each individual balance is posted to the respective subsidiary job account.

 

WIP (Control Account)   WIP - Job 27   WIP - Job 28   WIP - Job 30   WIP - Job 31
1,360     800     560              
                           

 

Step 2: The direct material costs incurred during January are posted to the t-accounts. Total direct materials is $2,110 which is posted as a debit to the control WIP account. The individual amounts for direct materials are posted to each of the respective jobs in the subsidiary ledger.

 

WIP (Control Account)   WIP - Job 27   WIP - Job 28   WIP - Job 30   WIP - Job 31
1,360     800     560              
2,110     570     440     780     320  
                           

 

Step 3: The direct labor costs incurred during January are posted to the t-accounts. Total direct labor is $2,265 which is posted as a debit to the control WIP account. The individual amounts for direct labor are posted to each of the respective jobs in the subsidiary ledger.

 

WIP (Control Account)   WIP - Job 27   WIP - Job 28   WIP - Job 30   WIP - Job 31
1,360     800     560              
2,110     570     440     780     320  
2,265     450     840     600     375  
                           

 

Step 4: The amount of manufactured overhead costs must be calculated prior to posting. This company applies MOH at the rate of $12.00 per direct labor hour. We know that total labor costs are determined by:

            [Labor rate per hour] x [Number of hours] = Total labor costs

 

Given that total direct labor is $2,265 and the labor rate per hour is $15.00, we divide to determine total labor hours:

                $2,265 / $15.00 = 151 labor hours

 

Total manufacturing overhead applied is:

                151 hours x $12.00 =  $1,812

 

Note that overhead in applied based on the actual activity. Total overhead applied is posted as a debit to the control WIP account. The individual amounts for overhead applied are calculated below, and are then posted to each of the respective jobs in the subsidiary ledger.

 

                Job 27: ($450/$15) x $12.00 = $360

                Job 28: ($840/$15) x $12.00 = $672

                Job 30: ($600/$15) x $12.00 = $480

                Job 31: ($375/$15) x $12.00 = $300

 

WIP (Control Account)   WIP - Job 27   WIP - Job 28   WIP - Job 30   WIP - Job 31
1,360     800     560              
2,110     570     440     780     320  
2,265     450     840     600     375  
1,812     360     672     480     300  
                           
                           

 

Step 5: At the end of January, only job 30 is still in process. This tells us that all the other jobs worked on in January have been completed. This includes jobs 27, 28 and 31. Add the total costs in the subsidiary ledger for each of these three jobs and post a credit in each respective account for the total costs of each respective job. This will transfer the costs out of the completed jobs to finished goods inventory. These three subsidiary ledger accounts now have a zero balance. The total of these three amounts is credited to the WIP control account to keep the control account in balance with the subsidiary ledger. The account balances for the WIP control account and the one remaining job--Job 30--are calculated as well.

 

WIP (Control Account)   WIP - Job 27   WIP - Job 28   WIP - Job 30   WIP - Job 31
1,360     800     560              
2,110     570     440     780     320  
2,265     450     840     600     375  
1,812     360     672     480     300  
   5,687    

 2,180

   

 2,512

         

 995

 1,860

     0      0     1,860      0  

 

Note that the total of all jobs remaining in the subsidiary ledger, job 30, equals the total in the WIP control account.

 

Step 6: The credit to the WIP control account of $5,687 represents the cost of all completed jobs transferred out of WIP. This amount is transferred into the Finished Goods account as a debit. Note that finished goods began the period with only job 29, which had a cost of $1,400.

 

Finished Goods
1,400  
5,687  
   
   

 

Step 7: We know that all completed jobs except job 28 were shipped during January. The debit amounts in the finished goods account represent the costs of jobs 29 (beginning inventory) and those jobs completed during the period--jobs 27, 28, and 31. The costs of jobs 27, 29, and 31 must be transferred out of finished goods as we can assume they were shipped and sold. The costs of these jobs can be found in the subsidiary ledger except for job 29 which comprises the beginning balance of finished goods. The balance of finished goods is calculated as $2,512, which matches the total of job 28 in the subsidiary ledger. The cost of the jobs transferred out are posted as debits to the cost of goods sold account.

 

Finished Goods   Cost of Goods Sold
1,400        
5,687        
  1,400   1,400  
  2,180   2,180  
  995   995  
2,512     4,575