Chapter: 5

Job Order Costing

Product Costing:
Product costing is the process of assigning manufacturing costs (i.e. direct material, direct labor and Factory
overhead to the products produced by the company. Product costing system is necessary for fixation of their
products prices.
Two types of systems may be used in manufacturing and service industries for determining the products
costs, but which system to be used, it depends on the types of products/ Industries.
These two systems are as under:
1. Job order Costing system
2. Process Costing system
1. Job order costing system
A Job orders costing system is used in such situations where heterogeneous or much different type of
products are produced simultaneously in each period. Each one must have a separate identification in terms
of units type or Job in each period. Moreover costs are accumulated for each job/product as the work
performs.
In a job order costing system, costs are traced to the each job by allotting an order number to each job as
soon as its production starts and then the costs are accumulated against this order number till the end. Total
accumulated costs of the job are divided by the number of units in the job to arrive at an average cost per
unit.
The manufacturing industries that commonly use Job order costing systems are, Air craft, automobile,
furniture, textile, shipbuilders, Construction Company, etc.
The service sectors may also use Job order costing system. Such as, hospitals, law firms, movie studios,
accounting firms, advertising agencies and repair shops, etc.

2. Process Costing system

A process costing system is used in situations where the company produces homogeneous products or
identical products in bulk quantities on continuous basis for a long period of time. Process costing is
basically used in companies that convert basic raw materials into homogenous products (Liquid or Powder)
or identical products.
In process costing system the costs are accumulated departmental/ process wise for the period rather Job
order wise. Job order wise cost accumulation is not possible in process costing system, as products are
produced homogeneous or identical in nature.
The industries that commonly use process costing systems are as under:
Oils, Chemicals, cement, petroleum, beverage, paper etc industries.

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Differentiation between job order costing and process costing

Job order costing
1.Production is started against specific order
2.Costs are collected and accumulated for each job
separately
3. Job Cost are calculated only when job is completed
4.Example are repair shop, printing press, Air craft,
law
firms, advertising agencies, etc.

Process Costing
1.Continues or mass production of homogeneous
products
2. Costs are collected and accumulated process - wise
or department - wise.
3. Process costs are calculated at the end of each
month.
4.Examples are Sugar, cement, chemicals, oil,
beverage, etc.

In this chapter we will discuss only job order costing system in detail

1. Job order costing system

Documents used in Job order costing system:
Following documents are used in job order costing system:
i). Material Requisition Form
ii). Time Ticket
iii). Job order Cost sheet

i). Material Requisition Form

A material requisition form is a document that specifies the type and quantity of material to be drawn from
the store. It also indicates the job number that will be charged with the cost of material.

ii). Time Ticket

The time ticket is a document that specifies hour by hour summary of the direct workers activities through
out the day.

iii). Job order Cost sheet

A job order cost sheet is a form prepared for each job. We record in job order cost sheet date wise direct
material consumption, direct labor and factory overhead applied through material requisition form and time
ticket. This control document serves two purposes:
a). Job order wise cost sheet.
b). It is subsidiary ledger for control account (Departmental total expenses) -- > See format on page: 94 of
prescribed book.

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Entries in job order costing system:

The following accounting entries are necessarily required to run successfully job order costing system. These
are as under:
1. Journal entries for materials (direct and indirect materials).
2. Journal entries for labor (direct and indirect labor).
3. Journal entries for factory overhead [Other than indirect material and indirect labor (Actual and
applied).
4. Journal entries for finished goods inventory
5. Closing entries to close factory overhead control account at month end.

1. Journal entries for materials (direct and indirect materials).

When direct or indirect material is purchased

Materials inventory
xx
Accounts payable ..
[To record purchase of raw materials on account]

xx

When direct and as well as indirect material is issued to production

Work in process inventory .
xx
Factory overhead control ..
xx
Materials Inventory ..
xx

[To record issuance of direct and indirect material issued to production)

2. Journal entries for labor cost for both direct and indirect labor

When payroll is recorded:

Payroll
Accrued payroll
Income tax payable (if any) .
[To record payroll for the month]

xx
xx
xx

When direct and as well as indirect labor is used/charged to production:

Work in process Inventory ..
Factory overhead control
Payroll .

xx
xx
xx

[To charge direct and indirect labor cost to production]

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3. Journal entries for factory overhead

Entries for factory overhead are made in two phases:

When actual factory over head is recorded (Other than indirect material and indirect labor)
Factory overhead control
A/C payable or Cash
Accumulated depreciation

xx
xx
xx

(To record actual factory over head incurred)

When factory overhead is applied to production

Work in process inventory .

Factory overhead control .
(To record applied Factory overhead)

xx
xx

Or, above (b) entry may be made alternatively, in case factory overhead applied account is
also maintained along with the factory overhead control account
Work in process Inventory .
Factory overhead applied
(To record applied Factory overhead)

xx
xx

Factory overhead applied .

xx
Factory overhead control
xx
(To record transfer of Factory overhead Applied to Factory overhead control)

4. Journal entries for finished goods inventory

General entries for finished goods completed:

Finished goods Inventory .

xx
Work in process Inventory .
(To record finished goods inventory completed)

Journal entries for finished goods inventory sold:

Cost of goods sold .
Finished goods Inventory .
[To record cost of goods sold]

xx

xx
xx

Journal entries when sale of above is recorded, if detail ( mark up) is given
Accounts Receivable or Cash
Sale
[To record sales]

xx
xx

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5. Closing entries to close factory overhead control account at month end

Case #1: If factory overhead is under applied
Cost of goods sold
Factory overhead head control

xx
xx

Case 2: If factory overhead is over applied

Factory overhead head control
Cost of goods sold ..

xx
xx

-----The end -----

Prepared by: S.Zulfiqar Jafar ACMA, ACIS, APFA, and M.Com.

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