COST ACCOUNTING AND CONTROL
CHAPTER 4
JOB ORDER COSTING
● The job order cost procedure keeps the cost of various jobs or contracts separate during their manufacture or construction.
● The method is applicable to job order work in factories, workshops, and repair shops as well as to work by builders, construction
engineers, ship builders, and printers.
● In job order costing, each job is an accounting unit to which materials, labor, and factory overhead cost are assigned by means of job
order numbers.
MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING
1. JOB ORDER COST SHEET
a. Records accumulate product cost of a specific unit or small branches of units for both product costing and control purposes.
b. File of job order sheets for uncompleted jobs serves as a perpetual book inventory and the subsidiary ledger for work in
process control.
c. Separate cost sheet is prepared for each job.
2. MATERIALS STOCKCARD
a. Records are the perpetual book inventory of cost and quantities or materials on hand.
b. File of materials stock cards for unused materials is the subsidiary ledger for materials control.
c. Separate stock card is prepared for each type of materials on hand.
3. FINISHED GOODS STOCKCARD
a. Records are the perpetual book inventory of cost and quantities of completed goods held for sale.
b. File of finished goods stock cards for unsold goods is the subsidiary ledger of finished goods control.
4. FACTORY OVERHEAD CONTROL COST RECORD
a. Records accumulate detailed manufacturing overhead costs by department.
b. File of these records for the accounting period is the subsidiary ledger of factory overhead control.
5. MATERIALS REQUISITION, TIME TICKET AND CLOCK CARD
a. As the source documents for charging costs to jobs and departments.
b. To aid in fixing responsibility for control and usage for materials and labor.
ACCOUNTING PROCEDURES FOR MATERIALS ACCOUNTING PROCEDURES FOR LABOR
1
ACCOUNTING FOR FACTORY OVERHEAD
For factory overhead applied to production, a predetermined rate is used and this is computed using any of the following as a base:
1. Units of production 3. Direct Labor Hours 5. Machine Hours
2. Direct Material Cost 4. Direct Labor Cost
ACCOUNT FOR WORK IN PROCESS, FINISHED GOODS, & COST OF GOODS SOLD
2
TREATMENTS FOR DEFECTS AND SPOILAGES IN JOB ORDER COSTING
● DEFECTIVE UNITS
- can be corrected by reprocessing
- deemed to be reworked — would entail additional reprocessing costs
● SPOILED GOODS
- partially or fully completed units that are not correctable either because it is not possible to correct them or because it is not
economical to correct them
- simply disposed; or inventories at nominal value; sold immediately as seconds
HOW TO CHARGE (1) ADDITIONAL COSTS INCURRED IN DEFECTIVE UNITS AND (2) THE UNCOVERED COSTS
RESULTING FROM SPOILAGES.
● If the imperfection occurs because of actions taken by the customer or because of the order's exacting specifications, the losses are
charged to the specific job (debited to Work in Process) and shared by all manufactured units under the job order.
● If defects and spoilages occur from internal failure, such as an error by a worker or defective materials or equipment, the losses are
charged as actual overhead. They are debited to Factory Overhead Control, and shared by all manufactured units during the period.
SCRAPS AND WASTES MATERIALS
● SCRAPS are left over from the production process that cannot be put back to production for the same purpose, but may be usable
for a different purpose or which may be sold to outsiders for a nominal amount.
Scrap materials are commonly accounted for in either of the following ways:
SCRAP is traceable to a specific job. SCRAP is not traceable to a specific job.
Scrap materials xxxx Scrap materials xxxx
Work in Process xxxx Miscellaneous Income xxxx
● WASTES are left over from the production that has no further use or resale value and may require cost for their disposal.
Disposal Cost Allocated to All Jobs Disposal Cost Allocated to Specific Jobs
Factory Overhead Control xxxx Work in Process – Job xxxx
Accounts Payable xxxx Accounts Payable xxx
CHAPTER 5
JUST-IN-TIME (JIT)
● It means that raw materials are received just in time to go into production, manufactured parts are completed just in time
to be assembled into products, and products are completed just in time to be shipped to customers.
● The JIT manufacturing philosophy originated in Japan (primarily by Toyota and Kawasaki) and is being increasingly
utilized by American manufacturing companies.
● Requires raw materials to be delivered at exactly the points they are needed, and just when they are needed to initiate
production.
● Such arrangement completely eliminates the need for the warehouse space that has been considered an expensive part of
any manufacturing operation.
● It also reduces the cost of handling, from the point of delivery of raw materials to the point where the finished products is
shipped to the customer.
● JIT Manufacturing is characterized by decisions made by companies to intentionally maintain relatively small inventory
levels.
● Companies manufacturing inventory under JIT philosophy attempt to minimize the time which elapses beyween the
beginning of production to the completion of production and ultimate sale of inventory to the organization's customers.
Thus, inventory production is normally “on demand”.
● This type of production is consistent with the production process that is used by companies which wait for the receipt of
customer orders before beginning production such as: customer furniture manufacturers, customer shipbuilders, and
custom homebuilders.
● Continuous work. ; Their inventory end is small.
● JIT assumes that small (if any) quantities of direct materials, work-in-process, and finished goods inventories will be
maintained.
FIVE KEY ELEMENTS INVOLVED IN THE OPERATION OF A JIT SYSTEM:
1. A company must learn to rely on a few suppliers who are willing to make frequent (even daily) deliveries in small lots.
2. A company must improve its product flow lines by creating an individual flow line for each separate product.
3. A company must reduce the setup time between production runs. One way to do this is through employee training. Another way
is through automation by creating a flexible manufacturing system (FMS). An FMS is just one part of the overall concept of
computer-integrated manufacturing, in which a company's business functions are integrated with its manufacturing functions. (The
machinery is ready to run.)
4. A company must develop a system of total quality control (TQC) over its parts and materials. In the absence of TQC, it would be
impossible to successfully implement a JIT system. (Materials and machinery should have good quality, if not — it would be
difficult to apply the JIT system.)
5. A company must develop a flexible work force. (Limited employee = qualified to do many things.)
An individual firm in the present environment can, by careful scheduling of production based on market projections (or even better, based on
actual orders), reduce the level of finished goods inventory. (Minimize inventory.)
Just-in-time (JIT) costing differs from traditional costing with regards to the accounts used and the time of cost recording. There are basically
three major differences:
Just-in-Time (JIT) Costing
● combines (Materials and WIP) into a Raw and in Process account
● direct labor is usually considered a minor cost, so no separate account for direct labor is created
● overhead is not applied to production until they are completed, when products are completed — labor and overhead is added
to Cost of Goods Sold, since the goods are sold soon after production is completed
3
Traditional Costing
● uses separate accounts for Materials and Work in Process
● uses separate account for Direct Labor
● overhead is applied to products as they are being produced and is recorded into the Work in Process account
BACKFLUSHING
● also known as backflush costing or backflush accounting.
● it is a shortened version of the traditional method of accounting for cost
● the purpose of backflush costing is to simply and to reduce the number of events that are measured and recorded in the accounting
system
● compared to job order costing and process costing, it will be noted that there is no detailed tracking of the cost of work in process.
● under backflush costing the inventories are not adjusted during the accounting period to reflect the different production costs,
instead adjustments are made at the end of the period
CHAPTER 6
SYSTEMS OF ACCOUNTING FOR MATERIALS ISSUED TO PRODUCTION AND ENDING MATERIALS INVENTORY
(Either the periodic inventory system or the perpetual inventory system may be used to account for materials issued to production and
ending materials inventory.)
Accounting by the Periodic Inventory System
● Under a periodic system, the purchase of direct and indirect materials is recorded in an account entitled
“Purchases”.
Accounting by the Perpetual Inventory System
● Under a perpetual system, the purchase of direct and indirect materials is recorded in an account entitled “Materials
Inventory” rather than Purchase account.
CONTROL PROCEDURES
1. Inventory is the result of purchasing raw materials and parts. It is also the result of applying labor and factory overhead to the
raw materials to produce finished goods.
2. Reduction of inventory is the result of normal use and also finding alternatives uses for scrapping unneeded items.
3. Optimum inventory investment is based on quantitative techniques, which are designed to minimize the cost of carrying
inventory and the cost of ordering inventory.
4. Efficient purchasing, management, and investment in materials depend on an accurate forecast of sales and resulting
production schedules.
5. Forecast help determine when to order materials. Controlling inventory can be accomplished by scheduling production.
6. Inventory control is more than maintaining inventory records. Control is exercised by people who are making personal
judgements partially on the basis of past experiences but within the genereal framework of organizational objectives and
policies to achieve them.
7. Methods of inventory will vary depending on the cost of the materials and their importance to the manufacturing procedure.
Expensive materials and materials essential to production will tend to have their program for control reviewed more frequently
despite the cost and effort of doing so by experienced personnel.
An effective system of cost control is designed to control the people responsible for the expenditure because people control costs, costs do not
control themselves.
COMMONLY USED CONTROL PROCEDURES
1. ORDER CYCLING
● method where materials on hand are reviewed on a regular or periodic cycle, like 30 days
● A technique often used for small items is the 90-60-30 day method — when inventory level drops to a 60-day supply, an
order will be placed for a 30-day supply.
● You can't depend on one supplier. ; They give a number of days.
2. MIN-MAX METHOD
● this method is based on the assumption that materials inventory have minimum and maximum levels
3. TWO-BIN METHOD
● used for materials that are considered inexpensive and/or nonessential
● The quantity of materials that will be used between the time an order is received and the next order placed will be on
the first bin.
● The second bin will contain the quantity of materials that will be used between the ordering and delivery, plus
additional units of safety stock. The content of the second bin will be used until the receipt of the shipment.
4. AUTOMATIC ORDER SYSTEM
● used by most companies that are computerized — an order is automatically placed when the level of inventory reaches a
predetermined order point quantity.
● Perpetual inventory record cards are maintained which record purchases and issuance of the specific materials.
5. ABC PLAN
● used by companies with a large number of materials, each one having a different value
● The materials control for a high-value item will naturally be different from the material control for a low-value
item.
● The ABC plan is a systematic way of grouping materials into separate classification and determining the degree of
control that each group requires.
4
MATERIAL CONTROL
TWO BASIC ASPECTS OF MATERIAL CONTROL:
1) PHYSICAL CONTROL OR SAFEGUARDING MATERIALS - Every business requires a system of internal control that includes
procedures for the safeguarding of assets.
a) Limited Access - Only authorized personnel should have access to the materials storage area.
b) Segregation of duties - The following functions should be segregated to minimize opportunities for misappropriation
of inventories – purchasing, receiving, storage, use, and recording.
c) Accuracy in recording - Inventory records should permit the determination of inventory quantities on hand upon
request and cost records should provide the data for the valuation of inventories for the preparation of financial
statements.
2) CONTROL OF THE INVESTMENT IN MATERIALS - maintains the proper balance of materials on hand
These factors should be considered in determining:
(1) when orders should be placed
(2) how many units should be ordered
ORDER POINT - A subsidiary ledger must be kept for each individual item of raw material used in the manufacturing process.
Calculations of the record point is based on the following data:
1. Usage - anticipated rate at which the materials will be used
2. Lead time - estimated time interval between the placement of an order and receipt of the material
3. Safety Stock - estimated minimum level of inventory needed to protect against running out of stock
ECONOMIC ORDER QUANTITY - The purchase order which results in the minimum total inventory cost. In determining the quantity to be
ordered, the cost of placing an order and the cost of carrying inventory must be considered.
Factors to be considered in determining ordering costs:
1. Salaries and wages of employees
2. Communication costs
3. Materials accounting and record keeping
Factors to be considered in determining carrying costs:
1. Materials storage and handling costs
2. Interest, insurance, and property taxes.
3. Loss due to theft, deterioration, or obsolescence.
4. Records and supplies associated with the carrying of inventories.
METHODS OF COMPUTING ECONOMIC ORDER QUANTITY
1) TABULAR METHOD - under this method, several purchase order quantity alternatives are listed in separate columns
2) FORMULA METHOD - the formula method is easy to use and it produces exact figures. (PAGE 167)
BUSINESS PAPERS USED TO SUPPORT MATERIAL TRANSACTIONS
1. PURCHASE REQUISITION - is a written request, usually sent to inform the purchasing department of a need for materials
or suppliers
2. PURCHASE ORDER - is a written request to a supplier for specified goods at an agreed upon price
3. RECEIVING REPORT - when the goods that were ordered are delivered, the receiving department will unpack and count them
4. MATERIALS REQUISITION SLIP - a written order to the storekeeper to deliver materials or supplies to the place designated
or to issue the materials to the person presenting a properly executed requisition
METHODS OF COSTING MATERIALS
1. FIRST-IN-FIRST-OUT (FIFO) - this method is based on the assumption that cost should be charged to manufacturing cost or cost of
goods sold in the order in which incurred
2. AVERAGE METHOD/COST
A. Weighted average method - used for periodic inventory system — based on the assumption that units issued should be
charged at an average cost, such average being influenced or weighted by the number of units acquired at each price
B. Moving average method - when a perpetual inventory system is used, a new weighted average unit cost is calculated after
each new purchase, and this amount is used to cost each subsequent issuance until another purchase is made
SPECIAL PROBLEMS IN MATERIAL ACCOUNTING
1. DISCOUNTS - constitute a reduction in the list price
1) Trade Discounts - generally given in terms of percentage (15% 10%, 5%) and are used to convert single price list into a
series of price lists for different types of middleman
2) Quantity Discounts - represent cost savings for volume purchases
3) Cash Discounts - granted to customers to motivate them to pay promptly
a) When taken method - purchases and liabilities are recorded at gross amounts at the time of purchase – the
discount is only recognized when the account is paid within the discount period
b) When not taken method - purchases and liabilities are recorded at net at the time of purchase – when payment
is made after the lapse of discount period, the discount is not availed of is charged to a “Purchase Discount
Lost” account.
c) When offered method - purchases are recorded at net and the liability is recorded at gross, the difference is
charged to an “Allowance for Purchase Discount” account.
2. FREIGHT-IN
1) Direct charging - the freight incurred on the purchase of raw materials is added to the invoice price
a) Relative peso value method - freight is allocated on the basis of the peso value of the items purchased
b) Relative weight method - freight is allocated on the basis of the weight of the items purchased
2) Indirect charging - the freight incurred on the purchase of raw materials is charged to Factory Overhead Control account