These lectures cover job order costing that explain the flow of costs for manufacturers from raw material to work in process to finished goods.
Introduction to Job Order Costing
Example: Job Order Costing
Perhaps the most important concept to understand in this chapter is the flow of costs for manufacturers. Raw materials purchased from suppliers are stored in raw materials inventory until requisitioned for use in production. Direct materials are added to work in process along with direct labor and applied overhead. Once units of production are complete, their manufacturing costs are transferred from Work in Process to Finished Goods. When units of production are sold their associated costs are transferred from Finished Goods to Cost of Goods Sold on the income statement. Selling and administrative expenses are not attached to units of production. Instead, they are recorded as expenses on the income statement as incurred.
Job order costing is the process of accumulating, classifying, and assigning direct materials, direct labor, and factory overhead costs to products or services. Product costing provides use- full cost information for both manufacturing and nonmanufacturing companies. Accurate cost information helps a company make better decisions and compete more effectively. Several different product costing systems are available and can be classified on three dimensions: (1) cost accumulation method—job or processing costing systems, (2) cost measurement method—actual, normal, or standard costing systems, and (3) overhead application method— volume- or activity-based costing systems.
The choice of a particular system depends on the nature of the industry and the product or service; the firm’s strategy and its management information needs; and the costs and benefits to acquire, design, modify, and operate a particular system. Job costing uses several accounts to control the product cost flows. Direct materials costs are debited to the Materials Inventory account at time of purchase and debited to the Work-in- Process Inventory account when a production department requests materials. Direct labor costs are debited to the Work-in-Process Inventory account when they are incurred. Actual factory overhead costs are debited to the Factory Overhead account when they are incurred.