Accounting Discussion #2 (part A)

Chapter 4: Job-Order Costing

Managers need to assign costs to products to facilitate external financial reporting and internal decision making. This chapter illustrates an absorption costing approach to calculating product costs known as job-order costing.

Job-order costing systems are used when:

 

• Many different products are produced each period.
• Products are manufactured to order.
• The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Companies that may benefit from using job order costing systems include Boeing, Bechtel International, and Walt Disney Studios.

Boeing is an aircraft manufacturer. Bechtel is perhaps the largest international construction company. The company works on huge projects that are unique to customer needs. Walt Disney Studios produces movies and entertainment parks.

Types of manufacturing costs that are assigned to products using a job-order costing system:

 

Direct costs

1. Direct materials  Traced directly to each job as the work is performed.

2. Direct labor  Traced directly to each job as the work is performed.

Indirect manufacturing costs are referred to as manufacturing overhead. Manufacturing overhead includes both indirect materials and indirect labor. These costs are allocated to jobs rather than directly traced to each job.

The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a given job. A job number uniquely identifies each job. Direct material, direct labor, and manufacturing overhead costs are accumulated for each job. The job cost sheet is a subsidiary ledger to the Work in Process account.

We will look at a job cost sheet used by a hypothetical company called PearCo. The company has a job that calls for the construction of wooden cargo crates. You can see the separate sections for direct materials, direct labor, and manufacturing overhead. In addition, we have a section to summarize total costs of the job.

Once a sales order has been received and a production order issued, the Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials (e.g., $116) to be drawn from the storeroom, and the job number (e.g., A-143) to which the cost of the materials is to be charged.

Here is the materials requisition form completed for job A - 143. The requisition is number X7 - 6890. The worker has requested twelve 2 by 4s, 12 feet long, and twenty 1 by 6s, 12 feet long. The unit cost of the lumber is shown in the unit cost column. The quantity requested is multiplied by the unit cost to arrive at the total cost for materials. The person in charge of the storeroom will issue the lumber once the materials requisition form has been properly authorized.

For an existing product, the production department can refer to a bill of materials to determine the type and quantity of each item of materials needed to complete a unit of product.

The Accounting Department records the total direct material cost (e.g., $116) on the appropriate job cost sheet. Notice, the material requisition number (e.g., X7-6890) is included on the job cost sheet to provide easy access to the source document.

))Sheet1

		PearCo Job Cost Sheet
		Job Number A - 143				Date Initiated 3-4-11
						Date Completed
		Department B3				Units Completed
		Item Wooden cargo crate
		Direct Materials			Direct Labor		Manufacturing Overhead
		Req. No.	Amount	Ticket	Hours	Amount	Hours	Rate	Amount
		X7-6890	$ 116
		Cost Summary					Units Shipped
		Direct Materials				$ 116	Date	Number	Balance
		Direct Labor
		Manufacturing Overhead
		Total Cost
		Unit Product Cost

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4-*

Measuring Direct Labor Costs

PearCo Materials Requisition Form

Requisition No. X7 - 6890Date 3-4-11

Job No. A - 143

Department B3

DescriptionQuantityUnit CostTotal Cost

2 x 4, 12 feet123.00$ 36.00$

1 x 6, 12 feet204.00 80.00

116.00$

Authorized

Signature

PearCo Job Cost Sheet

Job Number A - 143Date Initiated 3-4-11

Date Completed

Department B3Units Completed

Item Wooden cargo crate

Direct MaterialsDirect LaborManufacturing Overhead

Req. No.AmountTicketHoursAmountHoursRateAmount

X7-6890116$

Cost SummaryUnits Shipped

Direct Materials116$ DateNumberBalance

Direct Labor

Manufacturing Overhead

Total Cost

Unit Product Cost

PearCo Employee Time Ticket

Time Ticket No. 36 Date3-5-11

EmployeeI. M. Skilled Station42

StartingEndingHoursHourly

TimeTimeCompletedRateAmountJob No.

080016008.0011.00$ 88.00$ A-143

Totals8.0011.00$ 88.00$ A-143

Supervisor

C. M. Workman

PearCo Job Cost Sheet

Job Number A - 143Date Initiated 3-4-11

Date Completed

Department B3Units Completed

Item Wooden cargo crate

Direct MaterialsDirect LaborManufacturing Overhead

Req. No.AmountTicketHoursAmountHoursRateAmount

X7-6890116$ 36888$

Cost SummaryUnits Shipped

Direct Materials116$ DateNumberBalance

Direct Labor88$

Manufacturing Overhead

Total Cost

Unit Product Cost