Question

Jiffy Lube oil and Danterra Beauty/Spa Salon are both service provider organizations, do a "Comparison/Contrast" for job order cost (i.eg, direct material, direct labor and overhead cost, etc.) Please be detailed.

Answer 1

Job order costing or job costing is a system for assigning and accumulating manufacturing costs of an individual unit of output. The job order costing system is used when the various items produced are sufficiently different from each other and each has a significant cost. (When a company's output consists of continuous flows of identical, low-cost units, the process costing system is more appropriate.)

Since there is a significant variation in the items manufactured, the job order costing system requires a separate job cost record for each item (or each job or special order). The job cost record will report each item's direct materials and direct labor that were actually used and an assigned amount of manufacturing overhead.

The job cost records also serve as the subsidiary ledger or documentation for the manufacturer's cost of the work-in-process inventory, the finished goods inventory, and the cost of goods sold.

Examples of Job Order Costing

A few examples of the use of job order costing are:

• A company that designs and produces custom-made machines and/or machine tooling
• A company that constructs custom-designed buildings
• A company that modifies trucks to meet customers' special needs

Under or Over Estimated Overhead

Because the predetermined overhead rate used by companies is purely based on estimates, the actual overhead cost incurred during the year may be higher or lower than the amount estimated. This is referred to as “under or overapplied overhead.”

When overhead is underapplied, manufacturing overhead costs have been understated and upward adjustments need to be made to inventory and/or expense accounts, depending on which method the company decides to use.

In contrast, when overhead is overapplied, manufacturing overhead costs have been overstated and therefore inventories and/or expenses need to be adjusted downward. There are two ways to adjust for the under or overapplied overhead amounts.

The formula to determine this overhead rate:

Overhead rate = estimated manufacturing overhead / estimated cost allocation base

Where the cost allocation base refers to the estimated machine hours or estimated labor hours, depending on which one the company chooses to estimate its overhead costs by.

Job Order Costing—The Flow of Costs .Exhibit 3-14 in the text provides a model for the cost flows in a job-order costing system.

1. Overview of Cost Flows. The basic flow of costs in a job-order system begins by recording the costs of material, labor, and manufacturing overhead.

a. Direct material and direct labor costs are debited to the Work In Process account. Any indirect material or indirect labor costs are debited to the Manufacturing Overhead control account, along with any other actual manufacturing overhead costs incurred during the period. Manufacturing overhead is applied to Work In Process using the predetermined rate. The offsetting credit entry is to the Manufacturing Overhead control account.

b. The cost of finished units is credited to Work In Process and debited to the Finished Goods inventory account.

c. When units are sold, their costs are credited to Finished Goods and debited to Cost of Good Sold.

2. The Manufacturing Overhead Control Account. Manufacturing Overhead is a temporary control account.

a. As stated above, actual overhead costs are recorded on the debit side of the Manufacturing Overhead control account. Overhead costs applied to Work in Process using predetermined rates are recorded on the credit side of the account.

b. Any discrepancy between overhead costs incurred and overhead costs applied shows up as a balance in the Manufacturing Overhead control account at the end of the period. A debit balance is called underapplied overhead and a credit balance is called overapplied overhead.

Labor. Labor costs are recorded on a document called a time ticket or a time sheet. Each employee records the amount of time he or she spends on each job and each task on a time ticket. The time spent on a particular job is considered direct labor and its cost is traced to that job. The cost of time spent on other tasks, not traceable to any particular job, is usually considered part of manufacturing overhead.