How To Start Order Costing Complete Guide

How To Starthttpsyoutubeqjiijchptx4job Order Costing Comprehens

How to start Job Order Costing - Comprehensive Example Including company details, cost calculation steps, journal entries, and financial statements preparation.

Paper For Above instruction

Job order costing is an essential accounting method used by manufacturing companies that produce customized products based on individual customer orders. It involves tracking and accumulating costs for each specific job or order separately, enabling precise calculation of production costs, profitability, and informed managerial decision-making. The comprehensive process includes estimating costs, recording transactions, posting journal entries to T-accounts, preparing schedules such as COGM and COGS, and ultimately preparing financial statements like the income statement. This paper explores each of these steps through a hypothetical scenario involving Thunderduck Custom Tables Inc., a startup specializing in designing and manufacturing custom tables.

Introduction

Job order costing systems facilitate detailed cost tracking for individual jobs, allowing companies to determine the exact cost per product. This approach is particularly beneficial for companies producing unique or custom products, such as the case with Thunderduck Custom Tables Inc. The process begins with estimating manufacturing overhead (MOH), recording raw material requisitions, labor, and overhead costs, then applying these costs to jobs, and finally closing out costs into finished goods and cost of goods sold (COGS). This comprehensive example aims to illustrate each step in a real-world setting, emphasizing accuracy in record-keeping and adherence to accounting principles.

Step 1: Estimating Predetermined Manufacturing Overhead Rate

Thunderduck Inc. estimates 12 direct labor hours per month and an estimated MOH cost of $3,600. Using these estimates, the predetermined MOH rate is calculated as follows:

POHR = Estimated MOH / Estimated Direct Labor Hours = $3,600 / 12 hours = $300 per direct labor hour.

This rate will be used throughout the month to allocate overhead costs to jobs based on actual direct labor hours worked.

Step 2-3: Job Orders and Specifications

The first job involves manufacturing a custom table with a tabletop and four legs (Job #1). The second job is similar but includes an added drawer for a customer request (Job #2). Both jobs are tracked separately to ensure precise cost allocation and profitability analysis.

Step 4: Recording Transactions

The month of December involves multiple financial transactions, including raw material purchases, requisitions, labor costs, rent, salaries, depreciation, and overhead application. Proper journal entries are essential for maintaining accurate financial records.

For example, the purchase of raw materials is recorded as:

Debit Raw Materials $20,000

Credit Accounts Payable $20,000

When raw materials are requisitioned for Job #1 and #2, the entries reflect a transfer from Raw Materials to Work in Process, with specific amounts allocated per job.

Labor costs for assembly workers and supervisors are recorded as incurred, with wages debited to Salaries and Wages Expense and credited to Wages Payable. Overhead costs, including rent, depreciation, and factory salaries, are also recorded, with applied overhead based on actual direct labor hours using the predetermined rate.

Step 5: Posting to T-Accounts

All journal entries are posted to respective T-accounts, including Raw Materials, Work in Process, Finished Goods, Manufacturing Overhead, and COGS. By closing the month, balances in these accounts reflect the month's activity, showing the flow of costs through the production cycle.

Step 6: Schedule of Cost of Goods Manufactured and Sold

Using the T-accounts, calculations for the cost of goods manufactured (COGM) for both jobs are prepared. For Job #1, costs accumulated in Raw Materials, direct labor, and applied overhead are totaled to derive COGM. Similarly for Job #2, with additional costs for the drawer. The total COGM feeds into the Schedule of COGS, considering beginning and ending inventories, which are zero for the first month.

Step 7: Income Statement Preparation

The income statement is prepared utilizing the traditional format, which includes sales revenue, COGS, gross profit, operating expenses (administrative and selling), and net operating income. For this scenario, sales of $25,000 are recorded for Job #1, with associated COGS deducted to determine gross profit.

Step 8: Additional Analytical Questions

Finally, the analysis involves computing ending balances of raw materials, work in process, and finished goods; determining actual manufacturing overhead incurred versus applied; analyzing overapplied or underapplied overhead; adjusting COGS accordingly; and calculating various cost metrics such as prime costs, conversion costs, and contribution margins.

For example, the actual manufacturing overhead incurred is the sum of all actual costs—factory supervisor salary, rent, depreciation, and other overhead expenses—totalling $3,600. The applied overhead is calculated by multiplying the actual direct labor hours worked on each job by the POHR. Any difference between applied and actual overhead indicates overapplied or underapplied overhead, which is closed to COGS at period end.

Conclusion

This detailed example demonstrates the comprehensive nature of job order costing, highlighting its importance in manufacturing environments producing customized products. Accurate record-keeping, careful application of overhead, and precise calculations are critical for measuring profitability and making informed managerial decisions. By following this systematic approach, Thunderduck Custom Tables Inc. can ensure reliable cost management and financial reporting, laying a solid foundation for future growth and operational efficiency.

References

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