Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo
Principles of Accounting, Volume 2: Managerial Accounting

4.5 Compute the Cost of a Job Using Job Order Costing

Principles of Accounting, Volume 2: Managerial Accounting4.5 Compute the Cost of a Job Using Job Order Costing

Menu
Table of contents
  1. Preface
  2. 1 Accounting as a Tool for Managers
    1. Why It Matters
    2. 1.1 Define Managerial Accounting and Identify the Three Primary Responsibilities of Management
    3. 1.2 Distinguish between Financial and Managerial Accounting
    4. 1.3 Explain the Primary Roles and Skills Required of Managerial Accountants
    5. 1.4 Describe the Role of the Institute of Management Accountants and the Use of Ethical Standards
    6. 1.5 Describe Trends in Today’s Business Environment and Analyze Their Impact on Accounting
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Thought Provokers
  3. 2 Building Blocks of Managerial Accounting
    1. Why It Matters
    2. 2.1 Distinguish between Merchandising, Manufacturing, and Service Organizations
    3. 2.2 Identify and Apply Basic Cost Behavior Patterns
    4. 2.3 Estimate a Variable and Fixed Cost Equation and Predict Future Costs
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Cost-Volume-Profit Analysis
    1. Why It Matters
    2. 3.1 Explain Contribution Margin and Calculate Contribution Margin per Unit, Contribution Margin Ratio, and Total Contribution Margin
    3. 3.2 Calculate a Break-Even Point in Units and Dollars
    4. 3.3 Perform Break-Even Sensitivity Analysis for a Single Product Under Changing Business Situations
    5. 3.4 Perform Break-Even Sensitivity Analysis for a Multi-Product Environment Under Changing Business Situations
    6. 3.5 Calculate and Interpret a Company’s Margin of Safety and Operating Leverage
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  5. 4 Job Order Costing
    1. Why It Matters
    2. 4.1 Distinguish between Job Order Costing and Process Costing
    3. 4.2 Describe and Identify the Three Major Components of Product Costs under Job Order Costing
    4. 4.3 Use the Job Order Costing Method to Trace the Flow of Product Costs through the Inventory Accounts
    5. 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production
    6. 4.5 Compute the Cost of a Job Using Job Order Costing
    7. 4.6 Determine and Dispose of Underapplied or Overapplied Overhead
    8. 4.7 Prepare Journal Entries for a Job Order Cost System
    9. 4.8 Explain How a Job Order Cost System Applies to a Nonmanufacturing Environment
    10. Key Terms
    11. Summary
    12. Multiple Choice
    13. Questions
    14. Exercise Set A
    15. Exercise Set B
    16. Problem Set A
    17. Problem Set B
    18. Thought Provokers
  6. 5 Process Costing
    1. Why It Matters
    2. 5.1 Compare and Contrast Job Order Costing and Process Costing
    3. 5.2 Explain and Identify Conversion Costs
    4. 5.3 Explain and Compute Equivalent Units and Total Cost of Production in an Initial Processing Stage
    5. 5.4 Explain and Compute Equivalent Units and Total Cost of Production in a Subsequent Processing Stage
    6. 5.5 Prepare Journal Entries for a Process Costing System
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  7. 6 Activity-Based, Variable, and Absorption Costing
    1. Why It Matters
    2. 6.1 Calculate Predetermined Overhead and Total Cost under the Traditional Allocation Method
    3. 6.2 Describe and Identify Cost Drivers
    4. 6.3 Calculate Activity-Based Product Costs
    5. 6.4 Compare and Contrast Traditional and Activity-Based Costing Systems
    6. 6.5 Compare and Contrast Variable and Absorption Costing
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  8. 7 Budgeting
    1. Why It Matters
    2. 7.1 Describe How and Why Managers Use Budgets
    3. 7.2 Prepare Operating Budgets
    4. 7.3 Prepare Financial Budgets
    5. 7.4 Prepare Flexible Budgets
    6. 7.5 Explain How Budgets Are Used to Evaluate Goals
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Standard Costs and Variances
    1. Why It Matters
    2. 8.1 Explain How and Why a Standard Cost Is Developed
    3. 8.2 Compute and Evaluate Materials Variances
    4. 8.3 Compute and Evaluate Labor Variances
    5. 8.4 Compute and Evaluate Overhead Variances
    6. 8.5 Describe How Companies Use Variance Analysis
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  10. 9 Responsibility Accounting and Decentralization
    1. Why It Matters
    2. 9.1 Differentiate between Centralized and Decentralized Management
    3. 9.2 Describe How Decision-Making Differs between Centralized and Decentralized Environments
    4. 9.3 Describe the Types of Responsibility Centers
    5. 9.4 Describe the Effects of Various Decisions on Performance Evaluation of Responsibility Centers
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  11. 10 Short-Term Decision Making
    1. Why It Matters
    2. 10.1 Identify Relevant Information for Decision-Making
    3. 10.2 Evaluate and Determine Whether to Accept or Reject a Special Order
    4. 10.3 Evaluate and Determine Whether to Make or Buy a Component
    5. 10.4 Evaluate and Determine Whether to Keep or Discontinue a Segment or Product
    6. 10.5 Evaluate and Determine Whether to Sell or Process Further
    7. 10.6 Evaluate and Determine How to Make Decisions When Resources Are Constrained
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  12. 11 Capital Budgeting Decisions
    1. Why It Matters
    2. 11.1 Describe Capital Investment Decisions and How They Are Applied
    3. 11.2 Evaluate the Payback and Accounting Rate of Return in Capital Investment Decisions
    4. 11.3 Explain the Time Value of Money and Calculate Present and Future Values of Lump Sums and Annuities
    5. 11.4 Use Discounted Cash Flow Models to Make Capital Investment Decisions
    6. 11.5 Compare and Contrast Non-Time Value-Based Methods and Time Value-Based Methods in Capital Investment Decisions
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Balanced Scorecard and Other Performance Measures
    1. Why It Matters
    2. 12.1 Explain the Importance of Performance Measurement
    3. 12.2 Identify the Characteristics of an Effective Performance Measure
    4. 12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added
    5. 12.4 Describe the Balanced Scorecard and Explain How It Is Used
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  14. 13 Sustainability Reporting
    1. Why It Matters
    2. 13.1 Describe Sustainability and the Way It Creates Business Value
    3. 13.2 Identify User Needs for Information
    4. 13.3 Discuss Examples of Major Sustainability Initiatives
    5. 13.4 Future Issues in Sustainability
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Thought Provokers
  15. A | Financial Statement Analysis
  16. B | Time Value of Money
  17. C | Suggested Resources
  18. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
  19. Index

To summarize the job order cost system, the cost of each job includes direct materials, direct labor, and manufacturing overhead. While the product is in production, the direct materials and direct labor costs are included in the work in process inventory. The direct materials are requested by the production department, and the direct material cost is directly attached to each individual job, as the materials are released from raw materials inventory. The cost of direct labor is recorded by the employees and assigned to each individual job. When the allocation base is known, usually when the product is completed, the overhead is allocated to the product on the basis of the predetermined overhead rate.

Determining the Costs of an Individual Job Using Job Order Costing

When a job is completed, the costs of the job—the direct materials, direct labor, and manufacturing overhead—are totaled on the job cost sheet, and the total amount is transferred to finished goods at the same time the product is transferred, either physically or legally, such as in the case of a home built by a contractor. Finally, when the product is sold, the sale is recorded at the sale price, while the cost is transferred from finished goods inventory to the cost of goods sold expense account. Figure 4.19 shows the flow of costs from raw materials inventory to cost of goods sold.

Pictures of Raw Materials Inventory (rolls of vinyl), Work in Process (an employee creating a sign), Finished Goods Inventory (stacks of signs), Cost of Goods Sold (an installed sign).
Figure 4.19 Flow of Costs during Production and Ultimate Sale or Transfer of Ownership. (credit “Raw Materials Inventory,” “Work in Process Inventory,” “Finished Goods Inventory”: modifications of “160810-F-UY190-027.JPG,” “160810-F-UY190-073.JPG,” and “160810-F-UY190-105.JPG” by Jessica Weissman, Minot Air Force Base Public Affairs, Public Domain; credit Cost of Goods Sold”: “Rustic Sign” by Grace Byrd/Flickr, CC BY 2.0)

At all points in the process, the work in process should include the cost of direct materials and direct labor. When the job is completed and overhead assigned, the overhead allocation increases the cost of the work in process inventory. The cost of each individual job is maintained on a job cost sheet, and the total of all the work in process job cost sheets equals the work in process inventory and the statement of cost of goods manufactured, as you have learned.

A job cost sheet is a subsidiary ledger that identifies the individual costs for each job. Figure 4.20 shows the job cost sheet for Job MAC001.

A Job Cost Sheet. Headings are JOB COST SHEET, Dinosaur Vinyl, Inc. Identifying information is Job No.: 5416, Customer: Macs & Cheese, Units Ordered: 1, Customer No.: 2501723, Date Started: Dec. 22, 2018, Date Completed: Feb. 22, 2019 Costs are shown in 4 columns: Cost classifications, Units, Cost per Unit, and Amount. Direct Materials Costs are: Vinyl, 1, 300, 300; Black printing ink 2, 50, 100; Red printing ink 1, 60, 60; Gold printing ink 1, 60, 60; Grommets 12, 10, 120; Framing wood 40, 1.50, 60; for a total Direct materials of $700. Direct Labor Costs are: Material Handler 1, 15, 15; Print Technician 1, 15, 15; Production Assistants 2, 18, 36; for a total Direct Labor Cost of 66. Manufacturing Overhead Allocation Base: Direct Labor Cost. Base Units 66, Rate is $1.50 for a total overhead allocation of $165. Total job cost is $931.Total Revenue is $2000.
Figure 4.20 Job Cost Sheet for Job MAC001. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Sample Cost Information for Dinosaur Vinyl

Dinosaur Vinyl worked on three jobs during the month: POR143, MAC001, and TRJ441, and a fourth Job SWM505 had been finished and moved to the finished goods inventory account during the previous month.

At the beginning of the month, the company had a beginning raw materials inventory balance of $2,500, and during the month, it purchased an additional $10,500, giving it a total of $13,000 in raw materials available for use in production.

The following example will examine four different production jobs. Each of the four will be at beginning stages at either the beginning of the current month or the end of the current month.

  1. Job POR 143: This job was the only work in process inventory at the beginning of the current month, and it had $1,000 in direct material costs, and $0 of direct labor costs already allocated to the work in process inventory. During the current month, additional direct materials of $200 and direct labor of $150 were added to POR143. An overhead cost of $375 was applied to POR143 at the predetermined overhead rate of $2.50 per direct labor dollar. It was finished during the month and transferred to the finished goods inventory. The sale was not finalized during the month, so it continues to be part of the finished goods inventory.
  2. Job MAC 001: This job was started and completed during the month. Since the job began in and was completed in the same month, there was no beginning balance in the work in process inventory. During the month it incurred $700 in direct materials costs, $66 in direct labor, and $165 of overhead applied to the job before it was transferred to the finished goods inventory upon completion. The sale was finalized during the month at a sale price of $2,000, so the costs were transferred from finished goods inventory to cost of goods sold.
  3. Job TRJ441: This job was started during the current month. Its costs consist of $500 in direct material cost, $150 in direct labor expenses, and $375 in applied overhead. The job remains in the work in process inventory awaiting assembly.
  4. Job SWM505: At the beginning of the month, this job was completed and already in the finished goods inventory at a cost of $1,531. Since it was completed, it did not incur any additional costs in the current month. It was sold during the month for $3,500, and the costs were transferred from the finished goods inventory to cost of goods sold.

The cost of raw materials used is calculated as shown:

Chart showing Raw Materials cost calculation. Beginning Raw Materials Inventory $2,500 plus Purchases of 10,500 equals Material Available for Use of 13,000. Then subtract Ending Raw Materials Inventory of 11,600 to find the Materials Used in Production of $1,400.

The individual job cost sheets show the $1,400 worth of materials used in production:

Chart showing Raw Materials cost for each job. POR143 $200, MAC001 700, TJR441 500, for a total of $1,400.

The cost of goods manufactured is accounted for as shown:

A chart showing the calculation of Cost of Goods Manufactured for jobs POR143, MAC001, TJR441 and the Total. Respectively: Materials added are $200, $700, $500, and $1400; Labor added is 150, 66, 150, and 366; Overhead applied is 375, 165, 375, and 915; for Total added during the month of $725, $931, $1,025, and $2,681. Calculation is Beginning WIP Inventory of $1,000, $0, $0, and $1,000; Material, Labor, and Overhead added is 725, 931, 1,025, and 2,681; Equaling Manufacturing costs incurred of 1,725, 931, 1,025, and 3,681. Subtract Ending WIP Inventory of 0, 0, 1,025, and 1,025; Equaling Cost of Goods Manufactured of $1,725, $931, $0, and $2,656.

Notice the costs for Job TJR441 are included in the work in process inventory, whereas the costs for POR143 and MAC001 were transferred to the cost of goods manufactured. The costs of the jobs transferred are shown in the cost of goods sold and the finished goods inventory:

Chart showing Cost of Goods Sold for SWM505 POR143, MAC001, TJR441, and the Total. Respectively the dollar figures are: Beginning Finished Goods Inventory 1,531, 0, 0, 0, 1,531; plus Cost of Goods Manufactured 0, 1,725, 931, 0, 2,656; equaling Goods Available for Sale 1,531, 1,725, 931, 0, 4,187. Then subtract Ending Finished Goods Inventory of 0, 1,725, 0, 0, and 1,725 to get Cost of Goods Sold of 1,531, 0, 931, 0, and 2,462.

Mechanics of Job Order Costing for Dinosaur Vinyl

The amounts in raw materials, work in process, and finished goods inventories compose the total cost for each account, whereas the job cost sheets contain the costs for each individual job. A summary of the jobs for Dinosaur Vinyl is given in Figure 4.21.

Chart showing a summary of the Jobs: SWM505, POR143, MAC001, TJR441, and Total. Beginning Balance $1,531, 1,000, 0, 0, 2,531 (which is the Beginning WIP for the company) plus Direct Materials 0, 200, 700, 500, and 1,400 plus Direct Labor 0, 150, 66, 150, 366 plus Overhead applied 0, 375, 165, 375, and 915 equals total cost of 1,531, 1,725, 931, 1,025, and 5,212 (which is Total for WIP, FG, and CGS) Status is Sold, Finished, Sold, and Unfinished, Final account location is Cost of Goods Sold, Finished Goods Inventory, cost of Goods Sold, and WIP Inventory.
Figure 4.21 Summary of Dinosaur Vinyl’s Jobs during the Year. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Think It Through

Allocating Costs

A manufacturing company has incurred these costs:

Figure showing costs: Purchase raw materials inventory $15,000, Issue raw materials inventory to Job A 3,000, Factory wage expense incurred 23,000, Factory wage allocated to Job A 2,000, Factory wage allocated to overhead 500, Manufacturing overhead incurred 7,500, Manufacturing overhead allocated to Job A 1,000.

What is the cost allocated to Job A? For any costs not used, explain why they are not used.

Order a print copy

As an Amazon Associate we earn from qualifying purchases.

Citation/Attribution

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
Citation information

© Dec 12, 2022 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.