Chapter 15: Job Order Costing

Job Order Costing Job order costing is a method used in cost accounting to assign costs to specific, customized products or batches (called job lots) that are produced separately for individual customers. Unlike mass production, job order costing is applied when each product is unique and customized, such as: • • • Custom homes, factory buildings Custom jewelry, wedding invitations Specialized services like audits by an accounting firm The key feature of job order production is the uniqueness and variability of products, where each job or customer order is distinct. When a single job includes multiple units (e.g., T-shirts for an event), it’s called a job lot. Job Order Costing vs. Process Costing Job order costing differs from process costing, which is used in continuous, mass production of homogeneous items, such as Hershey’s chocolate or Penn’s tennis balls. In job order costing, costs are tracked individually for each job, whereas in process costing, costs are averaged across many units. Production Activities and Cost Flows in Job Order Costing The primary cost components tracked in job order costing are: 1. Direct Materials: Raw materials directly linked to a specific job. 2. Direct Labor: Employee labor that directly converts materials into finished products. 3. Overhead: Indirect manufacturing costs that benefit multiple jobs, such as factory maintenance, depreciation, and utilities. The flow of costs in job order costing moves through several inventory accounts: • • • • Raw Materials Inventory (initial stage for materials) Work in Process (WIP) Inventory (in-progress jobs) Finished Goods Inventory (completed jobs) Finally, costs are transferred to Cost of Goods Sold when a product is delivered. These general accounts do not provide job-specific cost details; this is where job cost sheets come into play. Job Cost Sheet A job cost sheet is a document that tracks all costs related to a specific job and serves as a record for each customized order. It typically includes: • • • Customer and Job Information: Identifies the job number and customer. Direct Materials and Direct Labor Costs: Costs directly associated with the job are recorded. Overhead Costs: Estimated overhead costs are applied to each job, often using a predetermined rate. Example of Job Cost Sheet: • For Road Warriors, a custom car modification shop, a job cost sheet might track the direct materials (e.g., audio systems, paint), labor, and overhead allocated to a job such as Job B15. Total costs for a job are summarized on the sheet, and when complete, the job cost sheet is signed off by a supervisor. Linking Job Cost Sheets to Accounts Each job cost sheet is linked to the company’s Work in Process (WIP) account. For accurate tracking, the sum of all job cost sheets should match the total in the WIP account. This allows managers to monitor job progress and control costs. Target Costing In addition to tracking costs, companies often set a target cost using the formula: • Expected selling price - Desired profit = Target cost This helps ensure that production costs stay within budget, enabling profitable pricing. Example Problem For a job lot producing 200 custom T-shirts: 1. Complete Job Cost Sheet: Record all direct material, direct labor, and overhead costs. 2. Compute Cost per Unit: Total job cost divided by 200 (units) gives the cost per T-shirt. In sum, job order costing is a detailed approach to managing costs in custom production environments, while job cost sheets serve as the foundational record for capturing costs specific to each job or order.