## Problem 1: Job Order Costing Cycle

Excellent Ltd. had the following inventories on 1 April 2019:

 \$ Raw Materials 50,000 Finished Goods 28,000 WIP – Materials 2,000 WIP – Labor 30,000 WIP – FOH 12,000

During the month, the cost of materials purchased was \$120,000. Also, the direct labor cost was \$160,000 and factory overhead applicable to production was \$60,000. On 30 April, the inventories were as follows:

 \$ Raw Materials 46,000 Finished Goods 44,000 WIP – Materials 10,000 WIP – Labor 18,000 WIP – FOH 8,000

Required: Prepare journal entries on April 30 to show the flow of cost through the proper summary accounts, and also give the subsidiary records.

### Solution

Job Order Costing Cycle

### Calculations Explained

Raw Materials Consumed

 \$ Opening Inventory 50,000 + Purchases 1,20,000 Materials Available For Use 1,70,000 – Ending Inventory 46,000 Materials Used 1,24,000

W.I.P. Material

W.I.P Labor

W.I.P. FOH

Finished Goods

## Problem 2: Charging Actual FOH to Jobs

The Moon Manufacturing Co. has a partial job order costing system instead of predetermining a factory overhead rate.

The company computes a separate factory overhead rate at the end of each month. This rate is used to charge the factory overhead to the jobs worked on during the month. The number of direct labor hours used on the jobs is the basis of such allocation.

The table below shows the actual factory overhead costs and the direct labor hours for May and June.

 May June Actual Factory Overhead Costs \$6,000 \$12,000 Actual Direct Labor Hours 15,000 hrs. 20,000 hrs.

During this two-month period, one customer sent in an identical order each month, calling for the production of 1,000 units. This required 400 direct laor hours at \$1 per hour and materials amounting to \$750.

Required:

1. Calculate the total cost and unit cost for the job across the two months
2. Comment on the method of charging actual factory overhead costs to jobs

### Solution

It is clear from the above calculation that charging actual FOH costs to jobs gives inaccurate and misleading results. The company should use predetermined FOH rates for correct calculations and control.

## Problem 3: Journal Entries For Cost Cycle

John Manufacturing Company has a job order costing system. It compiled the following data for 2019.

 Material and Supplies Purchased 242,000 Direct Material Used 190,000 Supplies Used 20,000 Direct Labor 150,000 Other Labor 35,000 Utility Cost for the Year 65,000 Miscellaneous Overhead 40,000 Depreciation Equipment 22,000 Applied Factory Overhead (20% of direct labor costs) Cost of Goods completed (materials, \$170,000; labor, \$130,000) 3,26,000 Sales 5,00,000 Selling and Administrative Expenses 1,10,000

Required:

• Prepare the appropriate journal entries
• Calculate the net income

### Solution

Journal Entries

Net Income

 \$ Sales 500,000 – Cost of Sales 326,000 GP 174,000 – Selling & Administrative Expenses 110,000 Net Income 64,000

### What is job order costing?

Job order costing is a special type of process costing system. Under this system, costs are assigned to jobs based on the number of direct labor hours required to manufacture each job. Costs are accumulated for each different job during the production process.

### What are the major problems of a job order costing?

First, is the difficulty to estimate the cost of jobs when changes are made frequently in job specifications, the estimations can be done by appropriate formulae but if estimates vary frequently it will affect the accuracy of the calculation, etc.

### What is the most common mistake when preparing a job order sheet?

The most common mistake when preparing a job order sheet is the use of the wrong job order number.

### Why is a job order sheet important?

Because once the calculation is done, we will be able to determine how much we spend on each product we produce. This analysis allows us to see if we are making a profit or loss for every product we sell which helps us determine what price point should be set for our products

### What is the disadvantage of job order costing?

The problem with job order costing is that it can get very costly because it assigns product costs using a more complex allocation system, usually requiring more detailed data for each job.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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