Job Order Costing System Definition, Explanation ,Example and Problem

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Job Order Costing System:

After studying job order costing system chapter you should be able to:

  • Distinguish between process costing and job order costing and identify companies that would use each costing method.
  • Identify the documents used in job order costing system.
  • Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
  • Understand the flow of costs in a job order costing system and prepare appropriate journal entries to record costs.
  • Apply overhead cost to work in process (WIP) using a predetermined overhead rate.
  • Prepare a schedule of cost of goods manufactured and cost of goods sold.
  • Prepare T-accounts to show the flow of costs in a job order costing system.
  • Explain the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.

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.

  1. 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". Click here to read full article.

  2. 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. Click here to read full article.

  3. 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 read full article.

  4. 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. Click here to read full article.

  5. 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. Click here to read full article.

  6. 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. Click here to read full article.

  7. 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? Click here to read full article.

  8. 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. Click here to read full article.

  9. 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. Click here to read full article.

  10. 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. Click here to read full article.

  11. 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. Click here to read full article.

  12. 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. Click here to read full article.

  13. 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. Click here to read full article.

  14. Job Order Costing Discussion Questions and Answers:
    Find answers of various questions about job order costing system. Click here

  15. Job Order Costing Exercises:
    Five exercises (solved)

  16. Case Studies


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Introduction to Managerial Accounting
Business and Quality Improvement Programs
Cost Terms, Concepts and Classification
Job Order Costing system
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Process Costing System - Addition of Materials & Beginning Inventory
Controlling and Costing Materials
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