The distinguishing characteristic of job order costing is that manufacturing costs are accumulated separately for each job. As explained in, all manufacturing costs are charged (debited) to the Work in Process Inventory account as incurred. In job costing, Work in Process Inventory is a controlling (or summary) account. supported by job cost sheets for each job. Collectively, the job cost sheets serve as a subsidiary ledger showing the manufacturing costs charged to each job. If a company is using an accounting software package, job cost information is recorded in computer-based files. However, the form and content of most job cost records are basically the same, regardless of whether they are maintained manually or by computer.
The Job Cosl Sheet Job cost sheets are the-heart of job order costing. A separate job cost sheet is prepared for each job and is used to accumulate a record of all manufacturing costs charged to
the job. Once the job is finished, the job cost sheet indicates the cost of the finished goods manufactured and provides the information necessary to compute the unit costs of production. Direct manufacturing costs (direct materials used and direct labor) are recorded on job cost sheet as quickly as these costs can be traced to the job. Once the job, is complete, overhead costs are applied using an overhead application rate. Shown below is a completed Job cost sheet of the Oak & Glass Furniture Co. This job involved the manufacture of 100 dining tables of a particular style.Throughout the production process, manufacturing costs traceable to the job are accumulated in the “Costs charged to this job” section of the job cost sheet The “Cost summary” section is filled in when the job is completed.
The total cost of completing job DO. 83 I is $75,000. Upon completion of the job, this amount should be transferred from the Work in Process Inventory account to the Finished Goods Inventory account. The “unitcost figures shown”in the job cost sheet are determined by dividing the total manufacmrlng costs by the 100 units manufactured. ]
Flow of Costs in Job Costing: An Illustration Pages 754 and 755 illustrate the flow of costs for Oak & Glass Furniture Co. This flowchart summarizes the company’s manufacturing operations during the month of.January. Notice that each of the inventory controlling accounts (Materials, Work in Process, and Finished Goods) is supported by a subsidiary ledger. In our flowchart. all subsidiary ledger accounts are shown in T account fonn to conserve
space. In practice. the individual job cost sheets serve as the subsidiary ledger for the Work in Process Inventory controlling account. Also, the subsidiary ledger accounts “for direct materials and finished “goodswould have additional columns providing detailed information as to quantities on hand and unit costs.
We will now use Oak & Glass Furniture Co. to explain the flow of manufacturing costs whenusing job order costing. Accounting for Direct Materials In a perpetual inventory system, purchases of direct materials are posted from the purchases journal to the accounts In the materials subsidiary ledger. The entries in the subsidiary ledger indicate the type, quantity, and cost of the material purchased. At the end of each month, a summary entry is made debiting the Materials Inventory controlling account for the total cost of direct materials purchased during the period. (The offsetting credi~ally is to Accounts Payable.) .
To obtain materials for use in the production process, the production department must issue a materials requisition form to the materials warehouse. This requisition shows the quantity of materials needed and thejob on which these materials will be used.
of these requisitions are sent to”the accounting department, where the cost of the materials placed into production is determined from the materials subsidiary ledger. The cost of the requisitioned materials is entered~ the requisition form and in the subsidiary ledger accounts. In subsidiary ledgers, usage of direct materials is recorded by (I) entering the cost of the materials used on the appropriate”job cost sheet and (2) crediting the materials subsidiary ledger.
Accounti’ng for Direct Labor Costs Debits to the Direct Labor account arise from making payments to direct factory workers; the offsetting credit is to the Cash account/ Payments to indirect factory workers (such as supervisors and security guards are debited to Manufacturing Overhead, not to the Direct Labor account.
The Direct Labor account is’ credited as direct labor is used-that is, as employees work oh specific jobs. A number of mechanical and computerized means have been developed for determining the direct labor cost applicable to each job.
One common method is to prepare time cards for each employee, showing the number of hours worked on .each job, the employee’s rate of pay, and the direct labor cost chargeable to each job. These time cards become the basis for preparing factory payrolls and for posting direct labor costs to the work in process subsidiary ledger accounts Gob cost sheets).
At the end of each month, a summary entry is made debiting Work in Process Inventory and crediting the Direct Labor account for all direct labor costs assigned to jobs during the month. For Oak & Glass, this entry is as follows:Notice that the Direct Labor account is debited when employees are paid, but it is credited for the cost of work performed on jobs. Work is performed on a daily basis, but employees are paid only at periodic intervals, such as every two weeks. Thus the direct labor cost charged to jobs does not necessarily equal the amount paid to employees during the month. In our example, $60,000 of direct labor was assigned to the three jobs in process, but payments to employees totaled only $52,000. Thus the $8,000 credit balance of the Direct Labor account at month-end represents a liability for accrued wage. payable,
Accounting for Overhead Costs Manufacturing overhead includes all manufacturing costs other than the costs of direct materials and direct labor. Manufacturing Overhead is a controlling account; the details of the many different types of overhead costs are kept in a subsidiary ledger.
The Manufacturing Overhead account is debited for the actual amount of overhead costs incurred during the period. In our illustration, actual overhead costs in January total $93,000. These.costs are posted to the overhead account from several sources. Indirect labor costs, for example, come from payroll records purchases of indirect materials and payments of utility bills are posted from the voucher register or from special journals; and depreciation of plant assets comes from end-of-period adjusting entries in the general journal Application of head Costs”to ‘Jobs’ As explained in overhead is an indirect cost and cannot be traced conveniently to specific jobs or units.
Therefore, a Pro the extent that Miscounts are withheld from employees’ pay for such purposes as income taxes and social security taxes, the offsetting credits are to various current liability accounts. AccOunting for payrolls was discussed in