4.7 Prepare Journal Entries for a Job Order Cost System
3 min read•june 18, 2024
is a crucial accounting method for tracking production costs in custom manufacturing. It involves recording , , and for specific jobs, allowing businesses to accurately price products and assess profitability.
This system follows the flow of costs through raw materials, work in process, and finished goods inventories. By using journal entries to record each step, companies can maintain detailed records of production costs and calculate the true for each unique job or order.
Job Order Costing Journal Entries
Recording of job order costs
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- Purchase of raw materials debits and credits or Cash, recording the acquisition of materials needed for production (lumber, steel, plastic)
- Issuance of raw materials to production debits and credits , transferring the cost of materials used in a specific job to the work in process account (wood for a custom furniture order)
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- Incurrence of debits and credits or Cash, recording the cost of labor directly attributable to a specific job (wages for workers assembling a custom machine)
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- Incurrence of actual overhead costs debits Manufacturing Overhead and credits Accounts Payable, Wages Payable, or Cash, recording indirect production costs (, , )
- of overhead costs to production debits Work in Process Inventory and credits Manufacturing Overhead, assigning a portion of overhead costs to each job based on the (applying overhead to a job based on used)
- calculates the amount of overhead to allocate per unit of the :
- Allocation base is a measure of production activity, such as , direct labor costs, or machine hours, used to assign overhead costs to jobs (using machine hours to allocate overhead in a highly automated )
- The is used to systematically assign overhead costs to individual jobs
Cost Accumulation and Tracking in Job Costing
- allows for by assigning costs to specific jobs or batches of goods
- in a system follows the production process, from raw materials to work in process to finished goods
- involves recording and monitoring costs throughout the manufacturing cycle to ensure accurate job costing
Transfer of completed job costs
- Completion of job debits and credits Work in Process Inventory, moving the total cost of a completed job from work in process to finished goods (transferring the cost of a completed custom order to finished goods)
- Cost of completed job includes direct materials, direct labor, and allocated manufacturing overhead, representing all costs incurred to produce the finished product (total cost of materials, labor, and overhead for a custom-built machine)
Accounting for finished goods sales
- Sale of finished goods debits and credits , recording the cost of goods sold when a finished product is sold (recognizing the cost of a custom item sold to a customer)
- Revenue from sale debits Accounts Receivable or Cash and credits , recording the income earned from the sale of finished goods (recording the sales price of a custom product sold)
- calculation determines the profit earned from the sale of goods before considering selling and administrative expenses:
- Cost of Goods Sold includes direct materials, direct labor, and manufacturing overhead costs associated with the sold goods, representing the total production cost of the items sold (cost of materials, labor, and overhead for custom products sold during the period)
Key Terms to Review (43)
Accounts Payable: Accounts Payable refers to the short-term obligations or debts that a business owes to its suppliers or vendors for goods and services purchased on credit. It represents the amount a company is required to pay within a given time period, typically within the next year, for the materials, products, or services it has received.
Allocation: Allocation is the process of distributing or assigning costs, revenues, assets, or liabilities to different cost objects, such as products, services, or departments, based on a predetermined basis or driver. It is a fundamental concept in cost accounting and managerial decision-making.
Allocation Base: The allocation base is the measure used to distribute or allocate overhead costs to individual products or jobs in a cost accounting system. It serves as the basis for assigning indirect costs to cost objects in a fair and systematic manner.
Cost Accumulation: Cost accumulation is the process of collecting and organizing costs associated with a specific cost object, such as a product, service, or job, in order to determine the total cost of that object. This term is particularly relevant in the context of job order costing and process costing, where costs are tracked and assigned to individual jobs or production processes.
Cost Flow: Cost flow refers to the way costs move through a company's accounting records as products are manufactured and sold. It is a fundamental concept in managerial accounting that describes how the costs of raw materials, labor, and overhead are tracked and assigned to the final product.
Cost of goods sold: Cost of Goods Sold (COGS) represents the direct costs attributable to the production of goods sold by a company. This amount includes the cost of materials and labor directly used to create the product.
Cost of Goods Sold: Cost of Goods Sold (COGS) represents the direct costs associated with the production or acquisition of the goods or services sold by a business during a specific accounting period. It is a fundamental concept in managerial accounting that helps organizations track and manage their inventory and profitability.
Cost Tracking: Cost tracking is the process of monitoring and recording the various costs associated with a job or project within a job order cost system. It involves the systematic identification, allocation, and documentation of direct materials, direct labor, and overhead costs incurred during the production process.
Direct labor: Direct labor refers to the wages and salaries of employees who are directly involved in the production of goods or services. This cost is directly traceable to specific products or jobs within a manufacturing environment.
Direct Labor: Direct labor refers to the cost of the workforce directly involved in the production of goods or the provision of services. It encompasses the wages and salaries paid to employees who physically transform raw materials into finished products or perform tasks that are essential to the completion of a service.
Direct Labor Costs: Direct labor costs refer to the wages and salaries paid to employees who are directly involved in the production of a specific product or the provision of a specific service. These costs are directly traceable to the individual units being manufactured or the specific jobs being performed.
Direct Labor Hours: Direct labor hours refer to the total number of hours worked by employees directly involved in the production of a specific product or service. This metric is crucial in job order cost systems, traditional overhead allocation methods, cost driver identification, and activity-based costing, as it serves as a key input for various cost accounting calculations and analyses.
Direct materials: Direct materials are raw materials that can be directly traced to the production of a specific product. These materials are essential components in manufacturing and are included in the cost of goods sold.
Direct Materials: Direct materials are the raw materials that can be directly traced to the production of a specific product. They are a key component of product costs, along with direct labor and manufacturing overhead, and are a crucial element in understanding the differences between merchandising, manufacturing, and service organizations, as well as the various costing methods used in managerial accounting.
Finished goods inventory: Finished goods inventory consists of products that have completed the manufacturing process but have not yet been sold to customers. These goods are ready for sale and are accounted for as an asset on the balance sheet.
Finished Goods Inventory: Finished goods inventory refers to the completed products that are ready for sale to customers in a manufacturing organization. It represents the final stage of the production process, where the manufactured goods are held in storage awaiting distribution and sale.
Gross Profit: Gross profit is the difference between a company's net sales and the cost of goods sold. It represents the amount of revenue a business retains after accounting for the direct costs associated with producing or acquiring the goods or services it sells. This metric is crucial in understanding a company's profitability and financial performance across different business models, including merchandising, manufacturing, and service organizations.
Indirect Costs: Indirect costs are expenses incurred in the production of goods or services that cannot be easily traced to a specific cost object, such as a product or a department. These costs are not directly attributable to the manufacture of a particular item but are necessary for the overall operation of a business. Indirect costs are an important consideration in various managerial accounting topics, including the computation of a predetermined overhead rate, the preparation of journal entries for a job order cost system, the application of a job order cost system to a nonmanufacturing environment, the calculation of predetermined overhead and total cost under the traditional allocation method, and the comparison of traditional and activity-based costing systems.
Indirect labor: Indirect labor refers to employee wages that cannot be directly traced to a specific product or job. These are usually costs associated with support staff such as maintenance, security, and administrative personnel.
Indirect Labor: Indirect labor refers to the labor costs associated with production that cannot be directly traced or attributed to the manufacturing of a specific product. These are the labor costs that support the overall production process but are not directly involved in the physical creation of the final product.
Job cost sheet: A job cost sheet is a document that records and accumulates all the costs assigned to a specific job in job order costing. It includes direct materials, direct labor, and manufacturing overhead costs.
Job Cost Sheet: A job cost sheet is a detailed record that tracks and accumulates the direct materials, direct labor, and manufacturing overhead costs associated with a specific job or production order in a job order costing system. It serves as a key document for determining the total cost of a job and the cost of goods manufactured.
Job Costing System: A job costing system is an accounting method used to track and accumulate the costs associated with the production of a specific product or service. It is commonly used in industries where each product or service is unique, such as construction, manufacturing, and professional services.
Job order costing: Job order costing is a costing method used to allocate costs to specific jobs or orders, often for products that are distinctly different from each other. It tracks direct materials, direct labor, and manufacturing overhead costs for each job individually.
Job Order Costing: Job order costing is an accounting method used to track and accumulate the costs associated with the production of specific, distinct products or services. It focuses on tracing the direct costs of materials, labor, and overhead to individual jobs or batches of products rather than to the overall production process.
Machine Hours: Machine hours refer to the total number of hours that a production machine is in operation during a specific period. This metric is crucial in various managerial accounting contexts, as it helps understand and analyze the relationship between machine usage, costs, and production efficiency.
Manufacturing overhead: Manufacturing overhead includes all indirect costs associated with the production process, such as utilities, maintenance, and factory supplies. It does not include direct materials or direct labor costs.
Manufacturing Overhead: Manufacturing overhead refers to the indirect costs associated with the production of goods in a manufacturing organization. These are the costs that cannot be directly traced to a specific product but are necessary for the overall manufacturing process. Manufacturing overhead encompasses a wide range of expenses, including indirect materials, indirect labor, and other factory-related costs.
Materials requisition form: A materials requisition form is a document used to request the transfer of raw materials from the storeroom to the production floor. It ensures accurate tracking of material usage and costs in manufacturing processes.
Materials Requisition Form: A materials requisition form is a document used in a job order cost system to record the transfer of raw materials from the storeroom to a specific job or production order. It serves as a critical link in tracking and allocating the direct material costs incurred for each job or project.
Overhead Application: Overhead application refers to the process of assigning indirect costs, or overhead, to individual products or jobs within a manufacturing or service environment. This term is crucial in the context of job order costing, journal entries for a job order cost system, and calculating predetermined overhead and total cost under the traditional allocation method.
Overhead Application Rate: The overhead application rate is a predetermined rate used to allocate overhead costs to production. It is calculated by dividing the estimated total overhead costs by the expected activity or volume measure, such as direct labor hours or machine hours. This rate is then used to apply overhead to individual jobs or products in a job order cost system.
Predetermined overhead rate: The predetermined overhead rate is a calculation used to allocate estimated manufacturing overhead costs to products or job orders, based on a specific activity base, such as direct labor hours or machine hours. It is determined before the period begins and helps in budgeting and costing processes.
Predetermined Overhead Rate: The predetermined overhead rate is a method used in job order costing to apply overhead costs to individual jobs or products. It is calculated by dividing the estimated total overhead costs for a period by the estimated activity base, such as direct labor hours or machine hours, for that same period. This rate is then used to apply overhead to each job based on the job's actual usage of the activity base.
Production Process: The production process refers to the series of steps, activities, and operations involved in transforming raw materials or inputs into finished goods or services. It encompasses the entire workflow, from the initial procurement of resources to the final delivery of the product to the customer, ensuring the efficient and effective transformation of inputs into desired outputs.
Raw materials inventory: Raw materials inventory consists of the basic materials and components that are used to produce a product but have not yet been processed or assembled. It is one of the three major components of product costs in job order costing systems.
Raw Materials Inventory: Raw materials inventory refers to the stock of unprocessed materials and components that a company holds in anticipation of their future use in the production process. It is a critical component of the inventory system that supports the job order costing method, process costing system, and the overall flow of product costs through a company's accounts.
Rent: Rent is a payment made by a tenant or lessee to the owner or lessor of a property for the temporary use and occupancy of that property. It is a fundamental concept in the context of a job order cost system, where the costs associated with renting or leasing equipment, facilities, or other resources are accounted for as part of the overall job or project expenses.
Sales Revenue: Sales revenue refers to the total amount of money a business earns from the sale of its goods or services during a specific period. It is a critical metric for evaluating a company's financial performance and growth potential.
Utilities: Utilities refer to the basic services and resources necessary for the operation and maintenance of a business or household. These include electricity, water, gas, and other essential services that enable the proper functioning of a facility or organization.
Wages Payable: Wages Payable refers to the liability account on a company's balance sheet that represents the amount owed to employees for work performed but not yet paid. It is an important concept in the context of both job order cost systems and process costing systems, as it helps track and record the accrual of labor costs incurred by the business.
Work in process inventory: Work in process (WIP) inventory consists of partially finished goods that are still in the production process. These items have incurred some costs but are not yet complete and ready for sale.
Work in Process Inventory: Work in Process Inventory, or WIP, refers to the partially completed goods that are in the production stage of a manufacturing process. It represents the cost of raw materials, labor, and overhead that have been incurred for products that are not yet finished and ready for sale.