The source document we would create to collect cost information in a job order cost system is

Module 5

Job Order Costing

Learning Objectives

1.How do job order costing and process costing systems, as well as their related valuation methods, differ?

2.What are the distinguishing characteristics of a job order costing system?

3. What are the primary documents supporting a job order costing system, and what purposes are served

by each of them?

4.How are costs accumulated in a job order costing system?

5.How does information from a job order costing system support management decision making?

6.How are losses treated in a job order costing system?

7.How are standard costs used in a job order costing system?

Introduction

Cost accumulation systems are used to assign production or performance costs to products or services for

internal and external financial reporting purposes. Such systems range from very simple to very complex. Systems

with greater complexity are more expensive to operate and maintain because they require substantially more

input data. When specifying the details of a costing system, the cost of generating the information must be less

than the benefits of that information to management.

Two principal product costing systems are job order and process. Firms that produce heterogenous and custom

outputs must track product costs to the product or customer level with a job order costing system. In contrast,

firms that produce homogenous output in batch or continuous production process use process costing to compute

an “average” product cost. The average cost can satisfy most reporting needs and track costs by production

process or batch.

Methods of Product Costing

Before product costs can be computed, a determination must be made about the (1) cost accumulation system

and (2) valuation method to be used. The cost accumulation system defines the cost object and method of

assigning costs to production; the valuation method specifies how product costs are measured. Companies must

have both a cost system and a valuation method.

Cost Accumulation Systems

Regardless of the type of business, product costing is concerned with three things:

Cost identification,

Cost measurement, and

Product cost assignment

Job order and process costing are the two primary cost accumulation systems. Job order costing is used by

companies that make relatively small quantities of distinct products or perform unique services that conform to

specifications designated by the purchaser. In contrast, process costing system are used by companies that

make large quantities of homogenous goods such as breakfast cereal, candy bars, detergent, gasoline and bricks.

Given the mass manufacturing process, one unit of output cannot be readily identified with specific input costs

within a given period -making use of a cost-averaging approach necessary.

Valuation Methods

Job order or process costing systems may be based in three alternative valuation methods: actual, normal or

standard. Actual costing system assign the actual costs of direct material (DM), direct labor (DL) and overhead

(OH) to Work in Process (WIP) inventory. Service businesses that have few customers and/or low volume may use

an actual cost system. However, because of the reasons discussed in module 3, many companies prefer to use a

normal cost system that combines actual direct material and direct labor costs with predetermined overhead

rate. If the predetermined OH rate is substantially equivalent to what the actual OH rate would have been for

annual period, predetermined OH rates provide acceptable and useful costs.

What are the source documents used in job order costing?

What is the document used to accumulate the costs of a job called?

Which source documents is used to record the amount of direct materials on the job cost sheet?

What is the purpose of the job cost sheet in a job order costing system?