Description of job costing in accounting

3. Job costing example

Company X manufactures custom engines for professional drag racers. On January 1, the company receives an order for two engines – a Series 3000 engine (Job #1) and a Series 6000 engine (Job #2). The company took a break for the holidays, so no engines are currently being constructed. During the month of January, the company uses $6,000 of parts and shop supplies on the Series 3000 engine and $9,000 of materials on the Series 6000 engine. Six employees work on each engine for a total of 100 labor hours on the Series 3000 engine and 140 labor hours on the Series 6000 engine at a rate of $12.00 an hour. Company X allocates overhead to jobs at a rate of $20 per labor hour. The Series 3000 engine is sold to the client for $13,000, while the Series 6000 engine is sold for $17,000. Both engines are sold for cash.

Job costing simply allocates cost items directly to each item being produced. All costs are first recorded in Work-In-Process (WIP) Inventory (i.e., a separate general ledger account). When the job is completed, those costs are moved to Finished Goods Inventory (i.e., another general ledger account). When the product is sold, the costs are moved to the income statement as Cost of Goods Sold.

Let’s first allocate direct materials and direct labor. Remember that we need to separately track both jobs.

Article Titles

Debit

Credit

WIP Inventory – Job #1

7,200

 

          Raw Materials Inventory

 

6,000

          Salaries Payable (100 hours x $12 per hour)

 

1,200

     

WIP Inventory – Job #2

10,680

 

          Raw Materials Inventory

 

9,000

          Salaries Payable (140 hours x $12 per hour)

 

1,680

Next, we’ll allocate factory overhead. A detailed explanation of how allocation rates are determined is beyond the scope of this article. Briefly, the rate is an estimate based on an expectation of total manufacturing activity for the period. As overhead costs are incurred, they are accumulated in a control account and then passed on to specific jobs based on the predetermined rate.

Account Titles

Debit

Credit

WIP Inventory – Job #1

2,000

 

          Factory Overhead Control (100 hours x $20 per hour)

 

2,000

     

WIP Inventory – Job #2

2,800

 

          Factory Overhead Control (140 hours x $20 per hour)

 

2,800

At this point, $9,200 has been allocated to Job #1 and $13,480 has been allocated to Job #2. Next, those costs are moved to Finished Goods Inventory once the engines are completed:

Account Titles

Debit

Credit

Finished Goods Inventory

22,680

 

          WIP Inventory – Job #1

 

9,200

          WIP Inventory -  Job #2

 

13,480

When the engines are sold, we make a final series of entries as follows:

Account Titles

Debit

Credit

Cash

30,000

 

          Sales Revenue

 

30,000

     

Cost of Goods Sold

22,680

 

          Finished Goods Inventory

 

22,680

Companies usually have many different jobs in various stages of completion at any one time. At the end of a period, WIP Inventory and Finished Goods Inventory are both reported on the balance sheet as current assets.

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