CH 15 Job Order Costing and Analysis

Each customized product is manufactured separately and its production is called job order production, or job order manufacturing. Examples of job order production include such products as custom built homes, and invitations - such as for weddings, parties, or conventions. Production activities for a customized product represent a job. Many companies produce products individually designed to meet the needs of a specific customer. Boeing's aerospace division is one example of a job order production system. Its primary business is twofold: One is to design, develop, and integrate space carriers, and two is to provide systems engineering and integration of Department of Defense systems. Many of its orders are customized and produced through job order operations. When a job involves producing more than one unit of a custom product, it is often called a job lot. Products produced as job lots include imprinted T-shirts and baseball caps for a company picnic, or advertising signs for a chain of stores. Although these orders involve more than one unit, the volume of production is typically low, such as 200 T-shirts, 50 caps, or 100 signs. Process operations, also called process manufacturing or process production, is the mass production of products in a continuous flow of steps. Unlike job order production, where every product differs depending on customer needs, process operations are designed to mass-produce large quantities of identical products.

Job lot

Job order production

Job

Let's now look at an overview of production activities in a job order setting. Job order production in a manufacturing setting requires materials along with labor and overhead costs. Recall that direct materials are goods used in manufacturing that are clearly identified with a particular job. Similarly, direct labor is effort devoted to a particular job. Indirect materials and indirect labor are added to the overhead costs. Other overhead costs support production of more than one job. Common overhead items are depreciation on factory buildings and equipment, factory supplies, indirect materials, supervision and maintenance (indirect labor), cleaning, and utilities. During the course of a period, production is undertaken, which is known as work in process. We see that materials and labor are added to different jobs, which have all begun production. Total overhead cost is also added to the various jobs. At period's end, some work remains unfinished, whereas other jobs have been completed and are transferred to finished goods. Finally, some or all of the finished jobs are transferred to cost of goods sold as they are delivered to customers per their agreements with the producer.

Because they are product costs, manufacturing costs flow through inventory accounts (Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory) until the related goods are sold. While a job is being produced, its accumulated costs are kept in Work in Process Inventory. When a job is finished, its accumulated costs are transferred from Work in Process Inventory to Finished Goods Inventory. When a finished job is delivered to a customer, its accumulated costs are transferred from Finished Goods Inventory to Cost of Goods Sold. Typical general ledger accounts usually do not provide the accounting information that managers of job order cost operations need to plan and control production activities. This is so because the information required by managers is more detailed in nature. The necessary detailed data are usually stored in subsidiary records that are controlled by general ledger accounts. Subsidiary records store information about raw materials, overhead costs, jobs in process, finished goods, and other items.

Indirect Labor

Finished Goods Inventory

Direct Labor

Indirect Materials

Cost of Goods Sold

A major aim of a job order costing system is to determine the cost of producing each job or job lot. In the case of a job lot, the system also aims to compute the cost per unit. The accounting system must include separate records for each job or job lot to accomplish this, and it must capture information about costs incurred and charge these costs to each job. A job cost sheet is a cost record maintained for each job. This is a job cost sheet for Road Warriors. This job cost sheet identifies the customer, the job number costs, the product, and key dates. Only product costs are recorded on job cost sheets. Direct materials and direct labor costs incurred on the job are recorded on this sheet. Estimated overhead costs are included on job cost sheets (through a process that is covered in a different learning objective). When each job is complete, the supervisor enters the date of completion, records any remarks, and signs the sheet.

The typical general ledger accounts usually do not provide the accounting information that managers of job order cost operations need to plan and control production activities.

Another example of a job cost sheet is shown here, taken from a manufacturer of customized dollhouses. This job cost sheet identifies the customer, the job number assigned, the product, and key dates. Costs incurred on the job are immediately recorded on this sheet. This job cost sheet classifies costs as direct materials, direct labor, or overhead. It shows that a total of $6,000 in direct materials is added to Job J150 on two different dates. It also shows four entries for direct labor costs that total $2,700. This custom doll house builder allocates factory overhead costs of $540 to this job based on how much direct labor cost is added (at an allocation rate of 20% direct labor cost). Each time direct labor is added to the job cost sheet, overhead is also added; in practice, many producers make this an adjusting entry at the end of each period. A job cost sheet can be used to calculate the per unit cost for the customized product. In this summary area, all costs are summarized from the above information. Total costs of $9,240 are divided by the number of units, 15, produced. This results in a per unit cost of $616. As a job is being produced, its accumulated costs are kept in Work in Process Inventory. The collection of job cost sheets for all jobs in process makes up a subsidiary ledger controlled by the Work in Process Inventory account in the general ledger. Managers use job cost sheets to monitor costs incurred to date and to predict and control costs for each job. When a job is finished, its job cost sheet is completed and moved from the jobs in process file to the finished jobs file. This finished jobs file is a subsidiary ledger for Finished Goods Inventory account. When a finished job is delivered to a customer, the job cost sheet is moved to a permanent file supporting the total cost of goods sold. The balance in Cost of Goods Sold is the sum of all job sheets for jobs that have been sold and delivered to customers.

Work in Process Inventory, Finished Goods Inventory, Cost of Goods Sold

Indirect Labor

Job Cost Sheet Other Items Other items Job Cost Sheet Other items

Job Cost Sheet Other Items Other Items Job Cost Sheet Other Items

Job Cost Sheet Other items Job Cost Sheet Other items