62. Job order costing system & cost flow

Aproduct costing systemis a set of procedures used to account for an organization’s productcosts & to provide timely & accurate unit cost infofor pricing, cost planning &control, Inv valuation, & financial statement preparation. Job order costing & processcosting are the two basic types of product costing systems.30.Companies that make one-of-a-kind, special-order products or that provide custom services, suchas shipyards, makers of custom cabinets, or wedding planners, use a job order costing system.

Such a system traces the costs of direct materials, direct labor, & overhead to a specific batch of  products or job order. A job order is a customer order for a specific № of specially designed,custom-made products or services. A job order costing system measures the cost of each completeunit & summarizes the costs of all jobs in a single Work in Process Inv account that is supported by job order cost cards. A job order cost card is a record of all costs incurred in the production of a particular job order.

A job order costing system traces the costs of a specific order or batch of products to provide timely, accurate cost info& to facilitate the smooth & continuous flow of thatinformation..Because a job order costing system emphasizes cost flow, it is important to understand how costs are incurred, recorded, & transferred within the system.

1. In a manufacturer’s job order costing system, the purchase of materials is recorded by increasing Materials Inv & decreasing Cash or increasing Accounts Payable. When materials are issued into production, Work in Process Inv is increased for the direct materials portion, Overhead is increased for the indirect materials portion, & Materials Inv is reduced. 

2. The total cost of wages earned during the period is debited to the Factory Payroll account. The factory payroll is distributed to the production accounts by increasing the Work in Process Inv for direct labor, increasing Overhead for indirect labor, & decreasing Factory Payroll for the amount of direct labor.

3. Overhead costs, other than indirect materials & indirect labor costs, increase the Overhead account, & an appropriate account, such as Cash or Accounts Payable, is also recognized.Overhead is applied to specific jobs by recording it in the Work in Process Inv account& the Overhead account.

4. Upon completion of a specific job, Finished Goods Inv is increased, & Work in Process Inv is decreased.e0.When the finished goods are sold, two accounting entries are made. First, the sale isrecorded by increasing Cash or Accounts Receivable & increasing Sales for the total sales price. Second, Cost of Goods Sold is recognized, & Finished Goods Inv is reduced for the cost attached to the goods sold.f0.At the end of the period, an adjustment must be made for under- or overapplied overhead.Because all manufacturing cots are accumulated in one Work in Process Inv account,a separate accounting procedure is needed to trace those costs to specific jobs. The solution is the subsidiary ledger made up of job order cost cards. Each job being worked on has a job order cost card, which records the costs of direct materials used, direct labor, & overhead assigned to the job. When the job is completed, the product unit cost is computed by dividing the total costs for the job by the total № of units produced.

Prepare a job order cost card, & compute a job order’s product unit cost. In a job order costing system, all manufacturing costs are accumulated in one Work in ProcessInv account. Job order cost cards are used to connect these costs to specific jobs. Each jobhas its own job order cost card, which becomes part of the subsidiary ledger for the Work in Process Inv account. The job order cost card includes the cost of direct materials used,direct labor, & overhead assigned to the job. When the job is completed, the product unit cost is computed by dividing the total cost for the job by the № of units produced.

Apply job order costing to a service organization..Many service organizations use job order costing to compute the cost of rendering services.Because service organizations do not manufacture products, their materials costs are usuallynegligible. Their most important cost is labor. Job order cost cards are used to track the costs of labor for a job, as well as the costs of materials, supplies, & service overhead. Service jobs are often based on cost-plus contracts,which require the customer to pay all costs incurred in performing a job plus a predetermined amount of profit. b0.When a job is finished, the costs on the completed job order cost card become the cost of services. The cost of services is adjusted at the end of the accounting period for thedifference between the applied service overhead costs & the actual service overhead costs.