2.
Chapter 2: Job Order Costing
Lecture Notes
● Definition: A costing system used when a company produces a small
number of custom or unique products. Costs are accumulated by job, or
customer order. Examples include construction, shipbuilding, or custom
furniture manufacturing.
● Key Source Documents:
○ Job Cost Sheet: The primary document used in job order costing. It
is a subsidiary ledger that tracks all costs (DM, DL, and MOH)
assigned to a specific job.
○ Materials Requisition Form: Used by the production department to
request raw materials for a job.
○ Labor Time Ticket: Used to track the time an employee spends on
each specific job.
● Recording Direct Costs:
○ Direct Materials: Costs are traced directly to the job using the
Materials Requisition Form.
1. Journal Entry: DR Work-in-Process Inventory & CR Raw
Materials Inventory.
○ Direct Labor: Costs are traced directly to the job using Labor Time
Tickets.
1. Journal Entry: DR Work-in-Process Inventory & CR Wages
Payable.
● Recording Manufacturing Overhead (MOH):
○ Since MOH costs are indirect, they cannot be traced directly to a
job. Instead, they must be allocated or applied to jobs using a
predetermined overhead rate (POHR).
○ Steps to Apply MOH:
1. Estimate Total MOH: At the beginning of the period,
management estimates the total manufacturing overhead
for the year.
2. Estimate the Allocation Base: Choose a cost driver that best
explains or causes the incurrence of overhead. Common
bases include direct labor hours, machine hours, or direct
labor cost.
3. Calculate the POHR:
■
4. Apply MOH to Jobs: Throughout the period, as jobs are
worked on, MOH is applied using the POHR.
■ Applied MOH = POHR Actual amount of the
allocation base incurred by the job.
■ Journal Entry: DR Work-in-Process Inventory & CR
Manufacturing Overhead Applied.
● Underapplied or Overapplied Overhead:
○ At the end of the period, the balance in the MOH Applied account is
compared to the actual overhead incurred (the MOH Control
account).
○ Underapplied Overhead: When the MOH Applied is less than the
Actual MOH. This means jobs were undercosted. The balance is a
debit.
○ Overapplied Overhead: When the MOH Applied is greater than the
Actual MOH. This means jobs were overcosted. The balance is a
credit.
○ Disposition of Under/Overapplied Overhead: The balance is
usually closed out to Cost of Goods Sold (for immaterial amounts)
or prorated among WIP Inventory, Finished Goods Inventory, and
Cost of Goods Sold (for material amounts).
● Cost of Goods Manufactured (COGM): The total cost of jobs completed
during the period.
○ COGM = Beginning WIP Inventory + Total Manufacturing Costs (DM
+ DL + Applied MOH) - Ending WIP Inventory.
● Cost of Goods Sold (COGS): The total cost of jobs sold during the period.
○ COGS = Beginning Finished Goods Inventory + COGM - Ending
Finished Goods Inventory.
Summary (Chapter 2)
Job Order Costing is a system for accumulating costs for unique products. Its
core document is the Job Cost Sheet, which tracks the Direct Materials and
Direct Labor costs that are directly traced to a job. Manufacturing Overhead
(MOH), an indirect cost, is allocated to jobs using a predetermined overhead
rate (POHR). This rate is calculated at the beginning of the period using
estimates of total overhead and an allocation base. At the end of the period,
the difference between the Applied MOH and the Actual MOH results in
underapplied or overapplied overhead, which is then disposed of, typically to
Cost of Goods Sold. The flow of costs ultimately leads to the calculation of Cost
of Goods Manufactured and Cost of Goods Sold.