JOB ORDER COSTING-Notes and Illustration

JOB ORDER

COSTING NOTES and ILLUSTRATIVE

PROBLEMS

System of Cost Accumulation

Actual (Historical) Cost System. Under this system, direct materials, direct

labor, and factory overhead costs are determined as they occur

simultaneously with the manufacturing operation but the total of these costs

is known only as the operation has been completed. An actual cost system

collects the actual amounts of direct materials, direct labor, and factory

overhead that are incurred for each product.

Standard (Predetermined) Cost System. Under this system, costs are

determined in advance from analysis and forecasts made before the actual

production begins. In a standard cost system, standard unit costs are

computed for the direct materials, direct labor, and factory overhead;

these amounts rather than the actual costs are carried to Finished Goods.

Normal Cost System. This system is a combination of the actual cost

system and the standard cost system. It accumulates only the actual

amounts of direct materials and direct labor costs. Factory overhead

costs are accumulated on the basis of predetermined overhead rate.

Cost Accumulation Procedures (Methods)

1. Job Order Costing

2. Process Costing

3. Blended Method/Hybrid Method

4. Backflush Costing

Job Order Costing.

A. products are manufactured within a department or cost

center are heterogeneous or dissimilar products.

B. they are manufactured individually or in distinct lots or

batches.

C. Each job requiring different amounts of materials, labor and overhead.

Job cost is determined in six steps:

1. Select an allocation base for computing the predetermined overhead

rate(s).

2. Estimate overhead for each overhead cost pool.

3. Calculate the predetermined overhead rate(s) by dividing the

estimated overhead by the estimated allocation base.

4. Record direct costs for each job as they are incurred.

5. Apply overhead using the predetermined rates as jobs are completed

or when the financial statements are prepared.

6. If there is over- or under-applied overhead, either write it off directly

to Cost of goods sold or allocate it.

A job is a cost object that can be distinguished easily because:

(1) they are unique in some way

(2) separate documents are kept that record the costs of the jobs.

Job#

Direct materials

Direct labor

Manufacturing overhead

Total costs

304 P3,000 P1,800 P2,520 P7,320

306 4,000 2,100 2,940 9,040

Total costs P7,000 P3,900 P5,460 P16,360

Job#

Material requisition summary

Time card summary (Hours)

304 P1,100 40

306 900 30

307 2,800 110

308 750 25

Total P5,550 205

Black Polo, Inc. specializes in custom steel frames and uses job costing to account

for its operations. The following information is available as of May 1 for the work-

in-process inventory account.

Black Polo pays an hourly rate of P15 for direct labor. The manufacturing overhead

costs are applied to jobs based on the direct labor hours. During the month of May,

Black Polo spends P5,800 for materials and P4,650 for manufacturing overhead.

The operations in May are summarized below.

Jobs 304, 306, and 307 are completed in May but only Jobs 304 and 307 are

delivered to customers.

ILLUSTRATION:

Requirements:

1. Calculate the predetermined overhead rate used.

2. Calculate the Over / (under) applied overhead.

3. Calculate the ending balance of Work In process (assuming

that over / under applied overhead is insignificant or

immaterial.)

4. Calculate the Ending Balance of Finished Goods Inventory

Account. (assuming that over / under applied overhead is

insignificant or immaterial.)

5. Calculate the Cost of Goods Sold if over/ under applied

overhead is immaterial.

6. Prepare the necessary journal entries for May (assuming any

over- or under-applied manufacturing overhead is written off to

Cost of goods sold account monthly)

Materials inventory 5,800

Accounts payable 5,800

(Materials purchased)

Work-in-process inventory 5,550

Materials inventory 5,550

(Materials put into production)


Wages payable 3,075

(Direct labor incurred)

Manufacturing overhead control 4,650

Accounts payable, etc. 4,650

(Manufacturing overhead incurred)


Applied manufacturing overhead 4,305

(Manufacturing overhead applied)

Finished goods inventory 27,640


(Jobs 304, 306, and 307 completed)

Cost of goods sold 16,620

Finished goods inventory 16,620

(Jobs 304 and 307 delivered to customers)

Applied manufacturing overhead 4,305

Cost of goods sold 345

Manufacturing overhead control 4,650

(Under-applied manufacturing overhead written off to Cost of

goods sold)

Costs added during May

Job#

BB

Direct

materials

Direct

labor

Manufacturing

overhead

EB

304 P7,320 P1,100 P600 P840 P9,860

306 9,040 900 450 630 11,020

307 - 2,800 1,650 2,310 6,760

308 - 750 375 525 1,650

Total P16,360 P5,550 P3,075 P4,305 P29,290

FINISHED GOODS: Jobs 304, 306, and 307 completed

WORK IN PROCESS: Job 308 remaining

COST OF GOODS SOLD: Jobs 304 and 307 delivered to customers

YELLOW-KITTY CORPORATION manufactures one product and accounts

for costs using a job-order cost system. You have obtained the following

information for the year ended December 31, 2011 from the Corporation’s

books and records:

Total manufacturing cost added during 2011 was P1,000,000 based on

actual direct material, actual direct labor, and factory overhead applied

based on actual direct labor pesos.

Costs of goods manufactured was P970,000 also based on actual direct

material, actual direct labor, and applied factory overhead.

Factory overhead was applied to work-in-process at 75% of direct labor

pesos. Applied factory overhead for the year was 27% of the total

manufacturing cost.

Beginning work-in-process inventory, January 1, was 80% of ending

work in process inventory,

December 31.

EXERCISE PROBLEM

Requirements:

1. Calculate the amount of Factory overhead applied.

1. Calculate the amount of Direct Labor Costs.

2. Calculate the ending balance of the work in process.

3. Calculate the beginning balance of the work in process.

4. Calculate the amount of total manufacturing costs to

account for.

Prepare the necessary journal entries from the following

information for Carmella Company, which uses a perpetual

inventory system.

a. Purchased raw material on account, 56,700.

b. Requisitioned raw material for production as follows: direct material-80

percent of purchases; indirect material-15 percent of purchases.

c. Direct labor wages of 33,100 are accrued as are indirect labor wages of

12,500.

d. Overhead incurred and paid for is 66,900.

e. Overhead is applied to production based on 110 percent of direct labor cost.

f. Goods costing 97,600 were completed during the period.

g. Goods costing 51,320 were sold on account for 77,600.

a. Raw Material Inventory 56,700

A/P 56,700

b. WIP Inventory 45,360

MOH 8,505

Raw Material Inventory 53,865

c. WIP Inventory 33,100

MOH 12,500

Wages Payable 45,600

d. MOH 66,900

Cash 66,900

e. WIP Inventory 36,410

MOH 36,410

f. FG Inventory 97,600

WIP Inventory 97,600

g. CGS 51,320

FG Inventory 51,320

A/R 77,600

Sales 77,600

Wages are payments made an hourly, daily, or piecework basis, whereas

salaries are fixed payments for managerial services. Other terms

necessary for any discussion of labor costs are best defined by

equations, as follows:

Gross Earnings = Regular wage + Overtime Premium

Regular Wage = Total hours worked (including overtime) x Regular hourly

rate

Overtime Premium = Overtime hours worked x Extra hourly compensation

for overtime

Other Additional Compensation chargeable to Factory Overhead

Control:

• Overtime premium and Shift premium or differential

• Bonus, Vacation and Holiday Pay, Pensions and Incentive Plans

• Fringe costs. Vacation and pension plans are only two of the most

common employee benefits. Other fringe costs are listed below:

Employer’s share in (not employees’ share):

Social Security System

PhilHealth Contribution

Scrap includes:

the filings or excessive trimmings of materials after the manufacturing

operations

defective materials that cannot be returned to vendor or not suitable

for manufacturing operations, and

broken parts as a result of an employee error or machine breakdowns

that causes the product in a poor quality condition

Scrap Sales are accounted for as:

A. Additional Revenue

B. Reduction to Cost of Goods Sold

C. Reduction to Factory Overhead Control

D. Reduction in Cost of Materials traceable to a job

Spoiled goods or spoilage differ from scrap, in the

manner that they are either partially or fully completed unit. For reason

of being spoilage, they cannot be corrected either because it is not

technically possible to correct them or it is not economical to correct

them.

Waste as distinguish to scrap materials refers to any amount

of raw materials left-over from a production process or production cycle

for which there is no further use. Waste is not usually saleable at any price

and must be discarded.

Rework is the process of correcting defective goods in order to bring

them into a saleable condition.

Spoilage loss

Charged to a particular job attributable to the exacting

specifications imposed by customers

Charged to all production or Factory Overhead due to internal

failure brought by worn out machinery or employee error.

Charged to all production or Factory Overhead due to internal

failure brought by worn out machinery or employee error.

Charged to a particular job attributable to the exacting

specifications imposed by customers

Yellow-Arrow company manufactures picture frames and uses job order

costing system. The following cost relate to the current run:

Estimated Overhead(exclusive of spoilage) ------ P80,000

Spoilage (Estimated)------------------------------------ 12,500

Sales Value of the Spoiled frames-------------------- 5,750

Labor hours--------------------------------------------------- 50,000

The actual cost of a spoiled frame is P 7. During the production,

150 frames are considered spoiled. Each spoiled frames can be

sold for P 4.

EXERCISE PROBLEM

1. Assume that spoilage is part of all jobs, What is the predetermined

overhead rate using labor hours as the activity base?

2. Prepare the Journal Entry for the spoilage.

3. Assume that the spoilage relate to a specific job # 143, What is the

predetermined overhead rate using labor hours as activity base?

4. prepare the Journal Entry for the spoilage.

Burblurry Co’s Job 168 for the manufacture of 4,400 coats, which was

completed in September at unit costs presented below. Final Inspection of

Job 168 disclosed 400 spoiled coats which were sold to a jobber for

P12,000

Direct Materials-------------------------------- P40

Direct Labor ------------------------------------ 36

Factory Overhead (includes an allowance

for P 2 overhead) -------------------- 36

P112

EXERCISE PROBLEM

1. If the spoilage loss is charged to all production , what would be the

unit cost of good coats produced on Job 168?

2. If the spoilage loss is attributable to exacting specifications, what

would be the unit cost of good coats produced on Job 168?

EXERCISE PROBLEM

Blackbike Co’s incurred the following costs on Job 999 for the manufacture

of 400 motors during April:

Direct Materials-------------------------------- P1,320

Direct Labor ------------------------------------ 1,600

Factory Overhead (150% of DL) ----------- 2,400

P 5,320

Direct Costs of reworking 10 units:

Direct Materials--------------------- P 200

Direct Labor ------------------------- 320

P 520

1. If the rework costs were attributable to internal failure or charged to

Factory overhead , what would be the unit cost of Job 999?

2. If the rework costs were attributable to exacting specifications of Job

999, what would be the unit cost of Job 999?

EXERCISE PROBLEM

Camille Co. manufactures electric drills to the exacting specifications of

various customers. During May 2012, Job 143 for the production of 2,200

drills was completed at the following costs per unit:

Direct Materials-------------------------------- P20

Direct Labor ------------------------------------ 16

Applied Factory Overhead (P 3 allowance)--- 24

P 60

Final inspection of Job 143 disclosed 100 defective units and 200 spoiled

units. The defective drills were reworked at total cost of P1,000, and the

spoiled drills were sold to a jobber for P 3,000.

What would be the unit cost of goods produced?

Carmella Mfg. Co. started 150 units in process on job order # 5. The prime

costs placed in process consisted of P30,000 for direct material in which

this amount is 62.5 percent of the said prime costs. The predetermined

overhead rate was used to charged factory overhead to production at

133.33 % of the direct labor cost. Upon completion of the job order, units

equal to 20 percent of good output were rejected for failing to meet the

strict quality control requirements.

The company sells rejected units as scrap at only 1/3 of its production

cost, and bills the customers at 150% of the production cost.

1. If the rejected units were due to machine breakdown, the billing price

of job order # 5 would be?

2. If the rejected units were due to customer specification, the billing

price of job order # 5 would be?

Silver Metal Products accumulates metal shavings from the shop floor and

sells them periodically to a nearby scrap dealer. Scrap sales, on account,

for the period just ended total P2,300.

Required: Indicate the journal entries when:

(1)The scrap sales are viewed as additional revenue.

(2)The scrap sales are viewed as a reduction of the cost of goods sold

during the period.

(3)The scrap sales are viewed as a reduction of factory overhead.

(4)The scrap sales are traceable to individual jobs and are viewed as a

reduction in the cost of materials used on the jobs.

(1) Accounts Receivable 2,300

Scrap Sales (or Other Income) 2,300

(2)Accounts Receivable 2,300

Cost of Goods Sold 2,300

(3)Accounts Receivable 2,300

Factory Overhead Control 2,300

(4) Accounts Receivable 2,300

Work in Process 2,300

A current job consisted of 31,000 total units, of which 28,500

good units were produced and 2,500 units were defective.

1. What is the amount of abnormal spoilage on this job if the

normal spoilage rate is 5% of the total units produced?


normal spoilage rate is 5% of the good units produced?


normal spoilage rate is 5% of the normal input?

Direct materials P20

Direct labor 18

Factory overhead (includes an allowance of P1 for spoiled work)

18

P56

Harper Co.’s Job 501 for the manufacture of 2,200 coats was completed during August at

the unit costs presented as follows.

Final inspection of Job 501 disclosed 200 spoiled coats, which were sold to a jobber for

P6,000.

1. Assume that spoilage loss is charge to all production during

August. What would be the unit cost of the good coats

produced on Job 501?

2. Assume instead that the spoilage loss is attributable to the

exacting specifications of Job 501 and is charged to this

specific job. What would be the unit cost of the good coats

produced on Job 501?

Saleable 5,000

Unsaleable (normal spoilage) 200

Unsaleable (abnormal

spoilage)

300

Hoyt Co. manufactured the following units:

Manufacturing costs totaled P99,000. What amount should Hoyt debit to finished

goods?

JOB ORDER COSTING-Notes and Illustration

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