Job Costing and Process Costing

Distinguishing Job Costing from Process Costing

Job costing and process costing are two fundamental methods used to assign costs to products in manufacturing and service industries. Understanding their differences is essential for selecting the appropriate costing system.

• Job Costing: Used for unique, custom-ordered products or small batches. Each job is tracked separately, and costs are assigned to individual jobs. Examples include custom-home builders, high-end jewelers, and commercial plumbing contractors.

• Process Costing: Used for mass production of identical units through uniform processes. Costs are averaged across all units produced. Examples include oil refineries and cereal manufacturers.

Comparison Table:

• Cost Object: Job (Job Costing) vs. Process (Process Costing)

• Outputs: Single units or small batches vs. large quantities of identical units

• Extent of Averaging: Less averaging in job costing; more averaging in process costing

Example Exercise:

Flow of Production and Tracing Costs

Inventory Flow in Manufacturing

The flow of inventory through a manufacturing system involves three main stages: raw materials, work in process, and finished goods.

• Raw Materials Inventory (RM): Materials kept in storeroom until needed

• Work in Process Inventory (WIP): Products currently being worked on in the factory

• Finished Goods Inventory (FG): Completed products awaiting sale

• Cost of Goods Sold (COGS): Recognized when products are sold

Production Scheduling

Production schedules indicate the quantity and types of inventory to be manufactured during a period.

• Custom orders and stock inventory are both scheduled

• Schedules help coordinate production and ensure timely completion

Bill of Materials and Raw Materials Record

• Bill of Materials: Lists all raw materials needed for a job, similar to a recipe

• Raw Materials Record: Tracks each item in stock, including quantities received, used, and remaining

Job Cost Record

The job cost record tracks all direct materials, direct labor, and manufacturing overhead allocated to a job. It provides supporting detail for WIP and Finished Goods Inventory accounts.

Tracing Direct Materials and Labor Costs

• Materials Requisition: Document used to request materials for production

• Labor Time Record: Tracks employee hours spent on jobs

Calculating and Allocating Manufacturing Overhead

Predetermined Manufacturing Overhead Rate

Manufacturing overhead (MOH) includes indirect costs such as depreciation, utilities, and supervisor salaries. These costs are allocated to jobs using a predetermined rate.

• Step 1: Estimate total MOH costs for the coming year

• Step 2: Select an allocation base (e.g., direct labor hours, machine hours)

• Step 3: Calculate the predetermined MOH rate:

• Step 4: Allocate MOH to jobs:

Example: Calculating MOH Rates

• Direct labor hours: per DL hour

• Direct labor cost: of direct labor cost

• Machine hours: per machine hour

Determining Job Cost and Business Decisions

Using Job Cost Records

Job cost records are used by management to:

• Reduce future job costs

• Assess profitability

• Bid for custom orders

• Prepare financial statements

Overallocated and Underallocated Manufacturing Overhead

Identifying Overhead Allocation Issues

At the end of the period, actual MOH is compared to allocated MOH.

• Underallocated: Actual MOH > Allocated MOH

• Overallocated: Actual MOH < Allocated MOH

Correcting Cost of Goods Sold

• If jobs are undercosted, increase COGS by the underallocated amount

• If jobs are overcosted, decrease COGS by the overallocated amount

Example Calculation

• Actual MOH: $25,000

• Allocated MOH: $24,000

• Difference: $1,000 underallocated

Journal Entries in Job Costing

Recording Manufacturing Transactions

Journal entries are used to record the flow of costs through the manufacturing process, including purchases, usage, allocation, and completion of jobs.

• Purchase of raw materials

• Use of direct and indirect materials

• Use of direct and indirect labor

• Incurring other MOH costs

• Allocating MOH to jobs

• Completion and sale of jobs

Key Terms in Job Costing

Definitions and Applications

• Bill of Materials: List of ingredients/materials needed for a job

• Job Cost Record: Accumulates all costs for each job

• Production Schedule: Indicates inventory to be manufactured

• Purchase Orders: Issued to suppliers for needed materials

• Raw Materials Record: Tracks materials in storeroom

• Materials Requisition: Requests materials for production

• Labor Time Record: Tracks employee hours on jobs

• Invoice: Bill from supplier

• Receiving Report: Documents incoming materials

Summary Table: Job Cost Record Example

Additional info:

• Job costing is essential for custom manufacturing and service firms, allowing accurate cost tracking and informed pricing decisions.

• Process costing is more suitable for industries with homogeneous products and continuous production.

• Predetermined overhead rates help allocate indirect costs efficiently, but regular review is necessary to avoid significant over- or underallocation.