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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