Job order costing

In the April column, we discussed the essentials of cost or managerial accounting. This month we'll continue with a discussion of the specific methods of cost accumulation using job order costing.

We characterized job order costing as generally appropriate when large, unique or special-order items are produced--for instance, airplanes, grand pianos or a special order for fifty tractors. A job order system can be identified by the following characteristics: 1) all costs are collected and assigned to a specific batch or job; 2) costs are assigned for each completed job, rather than for set time periods; 3) only one Work-in-Process inventory account is required; and 4) the cost of completed goods is transferred to the Finished Goods inventory until the units are sold.

Cost is recorded on a job order cost sheet, which can be either a paper record or an electronic one. Three elements of cost must be combined to determine the final total cost of the items produced and the cost per unit. Those costs are raw materials, labor and factory overhead costs.

When raw materials are purchased, they are recorded as Inventory. As a job is begun, the materials are requisitioned into production. Direct materials are recorded as a debit to the Work-in-Process account and a credit to the materials Inventory. Indirect materials (those that aren't easily traced to finished goods but are necessary for production) are debited to the Factory Overhead account.

Labor costs are treated in two stages. First, labor costs must be collected. Time cards, payroll reports, factory time sheets are all used to collect data on hours worked and associated payroll expense. The time worked is analyzed to determine how many hours were spent working directly on the job, what time was indirect labor and how much time was not production-related. Once this analysis is...