Job Order Costing: Cost Accounting Principles, 8e

Chapter 5: Job Order Costing Cost Accounting Principles, 8e Raiborn and Kinney

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Learning Objectives 

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How do job order and process costing systems, as well as their related valuation methods, differ? What are the fundamental characteristics of a job order costing system? What are the primary documents supporting a job order costing system and what purposes are served by each of them? How are costs accumulated in a job order costing system? How are standard costs used in a job order costing system? How does information from a job order costing support management decision making? How are losses treated in a job order costing system?

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Job Order or Process Costing Job Order  

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Small quantities Batches of identifiable, tailor-made products User-specific services Tracks costs by job

Process   

Large quantities Homogeneous goods Tracks costs by batch of goods by department

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Job Order Costing 

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A job is a single unit or group of units identifiable as being produced to distinct customer specifications A job can be a   

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Client Engagement Project Contract

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Methods of Product Costing 

Cost Accumulation System defines  

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cost object method of assigning costs to production

Valuation Method specifies 

how product costs will be measured

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Six Possibilities V A L U A T I O N

COST ACCUMULATION SYSTEM M E T H O D

Job Order   

Actual Normal Standard

Process   

Actual Normal Standard

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Job Order Costing System   

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Each job is a cost object Costs are accumulated for each job A job can consist of one or more units of output There is a subsidiary ledger for each job

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Job Order Costing System WIP Subsidiary Ledger Job 1

Job 2

Job 3

100

200

500

Job 1 + Job 2 + Job 3

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WIP Control Job 1 Job 2 Job 3 Total

100 200 500 800

WIP Control

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Tracking 

Material Requisition Form  

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Employee Time Sheet 

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Tracks who is responsible for materials Verifies flow of materials from warehouse to department to job Time worked on each job

Job Order Cost Sheet 

All financial information about a job    

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direct material (from material requisition) direct labor (from time sheets or labor tickets) applied overhead budgeted cost information

When job is complete, use job order cost sheet to analyze actual costs compared to budgeted costs

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Job Order Costing and Technology  

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Automate data collection and data entry Accounting software includes job costing modules Share information using intranet

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Intranet Restricted network for sharing information and delivering data from corporate databases to local-area network (LAN) desktops

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Standard Cost System   

Actual cost Normal cost Standard cost  Predetermined norms (or standards) for materials, labor, and overhead  Compare actual costs to standard costs— difference is a variance

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Management Use of Job Order Costing Systems     

Estimate future job costs Establish realistic bids and selling prices Develop budgets and standards Compare actual costs to estimated costs Furnish performance evaluation information based on profitability of jobs

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Product and Material Losses 

Shrinkage 

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Production errors 

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Evaporation Leakage Oxidation

Defects can be economically reworked Spoilage cannot be economically reworked

Normal Loss—expected during production Abnormal Loss—exceeds what is expected during production

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Product and Material Losses Normal Loss

Abnormal Loss

Loss for most jobs

In overhead rate

Period cost

Loss identified with a specific job

Charge to specific job

Period cost

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Questions 

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What is the difference between job order and process costing systems? How do actual, normal, and standard costing valuation methods differ? How is the job order cost sheet used?

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Potential Ethical Issues 

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Inflating costs assigned to cost-plus contracts Assigning costs from a fixed-fee contract to a costplus contract Substituting materials with inferior quality Overstating costs included in Work in Process Using methods or materials that violate intellectual property rights of other firms Recording sales value of defective work as “Other Revenue”

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.