Mastery Problem: Job Order Costing (Advanced)
Cost flows
The price quoted to the customer is closely tied to the estimated cost in environments in which products are made according to the customer's specifications. Therefore, a company must be able to determine the unit cost of its products for pricing as well as for financial reporting purposes. To track costs in these environments, a Job order costing system is generally used. A job order costing system must be able to identify each individual job and accumulate its costs separately from the costs of other jobs. Recall the flow of costs used to determine cost of goods manufactured and cost of goods sold. The following flowchart illustrates the flow of costs into Work in Process and Finished Goods.
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| In job order costing, the costs in Work in Process and Finished Goods can be related to specific jobs. | ||||||
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APPLY THE CONCEPTS: Determine the costs for Work in Process and Finished Goods
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| Job 1 | Job 2 | Job 3 | Job 4 |
| Materials | $550 | $400 | $315 | $411 |
| Labor | 818 | 525 | 475 | 623 |
| Overhead | 325 | 258 | 126 | 164 |
| Total | $fill in the blank 7da22dff0ff5010_1 | $fill in the blank 7da22dff0ff5010_2 | $fill in the blank 7da22dff0ff5010_3 | $fill in the blank 7da22dff0ff5010_4 |
Complete the table and determine the following account
| Work in Process $fill in the blank 7da22dff0ff5010_5 | Finished Goods $fill in the blank 7da22dff0ff5010_6 |
Feedback
Note that Jobs 1 and 2 have been completed, and so are accounted for in Finished Goods. Jobs 3 and 4 are still in process, and so will be accounted for in WIP until they are complete.
Job Cost Sheets
A job cost sheet is used to accumulate the following costs for each job: direct materials, direct labor and overhead. It is an internal document, so the format varies by company. Some companies prefer a detailed cost sheet that shows the details for direct materials (such as quantity, type, and requisition numbers for each material used) and details for direct labor (such as hours and wage rate for each employee who worked on the job). Other companies prefer a summary showing a total for direct materials and a total for direct labor. Overhead applied is reported on all job cost sheets. Recall that firms use normal costing to determine unit cost. Normal costing requires the use of predetermined overhead rates, which are calculated as follows:
| Predetermined Overhead Rate = | Estimated Annual Overhead |
| Estimated Cost Driver |
APPLY THE CONCEPTS: Complete the job cost sheets for In the Doghouse Company
In the Doghouse Company builds doghouses. They have three sizes: small, medium and large. Each size can be built in one of two styles, standard or deluxe. All doghouses are built with treated lumber and have shingled roofs. The deluxe model is insulated and has a covered porch. In the Doghouse sells mostly to local hardware and garden stores.
The costs for direct materials and direct labor for each type of doghouse are shown in the table below. The direct materials cost includes costs for lumber, shingles, stain or paint, and insulation. Nails and glue are also used in the construction and are considered indirect materials which make them part of overhead. The company employs two carpenters and a part-time student to maintain the equipment and clean the shop. The carpenters' wages are direct labor. The student's wages are indirect labor and, therefore, part of overhead. Other overhead costs include depreciation of equipment and the building, insurance, utilities, and taxes. Overhead is applied at 10% of direct labor cost. In the Doghouse summarizes costs by direct materials, direct labor, and overhead on its job cost sheets.
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| Direct | Direct |
| Standard: |
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| Small | $64 | $60 |
| Medium | 111 | 90 |
| Large | 135 | 150 |
| Deluxe: | ||
| Small | $78 | $120 |
| Medium | 152 | 180 |
| Large | 256 | 240 |
At the beginning of August, the company has one job, job number 706, in progress from the previous month. This job is for an order of 16 medium, deluxe doghouses. As of August 1, $972.80 of direct materials have been used, $1,152.00 of direct labor have been charged to the job and $115.20 of overhead was applied to the job. Click on the link below to get more detail on job number 706.
During August, In the Doghouse received an order for 20 small, standard doghouses. This is job number 801 and was completed by the end of the month.
Another order was received during the month, job 802, for 12 large, deluxe doghouses. At the end of August, job 802 was still in process. $614.4 of direct materials has been used, $576 of direct labor has been charged to the job, and overhead was applied to job 802 using the predetermined overhead rate of 10% of direct labor cost.
Complete the following job cost sheets for the month of August In the Doghouse and answer the following questions.
| Job 706 | ||
| 16 medium, deluxe doghouses | ||
| Direct materials | $fill in the blank a7ff35012f7ff86_5 | |
| Direct labor | fill in the blank a7ff35012f7ff86_6 | |
| Overhead | fill in the blank a7ff35012f7ff86_7 | |
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| Total job cost | $fill in the blank a7ff35012f7ff86_8 |
| Job 801 | ||
| 20 small, standard doghouses | ||
| Direct materials | $fill in the blank a7ff35012f7ff86_9 | |
| Direct labor | fill in the blank a7ff35012f7ff86_10 | |
| Overhead | fill in the blank a7ff35012f7ff86_11 | |
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| Total job cost | $fill in the blank a7ff35012f7ff86_12 |
| Job 802 | ||
| 12 large, deluxe doghouses | ||
| Direct materials | $fill in the blank a7ff35012f7ff86_13 | |
| Direct labor | fill in the blank a7ff35012f7ff86_14 | |
| Overhead | fill in the blank a7ff35012f7ff86_15 | |
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| Total job cost | $fill in the blank a7ff35012f7ff86_16 |
What is the balance in Work in Process on August 1? $fill in the blank a7ff35012f7ff86_17
What is the balance in Work in Process on August 31? $fill in the blank a7ff35012f7ff86_18
Think outside the box:
What element would most likely be missing from a job cost sheet for a service organization?
| - Job number 706 Job number 706: The following job cost sheet was prepared at the end of the previous month and shows the direct materials, direct labor, and overhead costs as of the end of the month. When the job is completed in August, the amounts should show the totals for direct materials, direct labor, and overhead.
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