Job-order costing
Accumulate costs by identifiable job, apply overhead explicitly, and reconcile work in process, finished goods, and cost of goods sold.
Tags: costing, management-accounting, manufacturing
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Job-order costing tracks identifiable jobs or batches. Process costing pools costs for similar output, and a hybrid can do both. OpenStax, Principles of Accounting, Volume 2, section 4.1, published February 14, 2019
This reference uses a manufacturing normal-costing model: direct material and direct labor are traced at actual cost, while manufacturing overhead is applied using a predetermined rate. It does not prescribe revenue recognition for construction or service contracts.
In the three-job example, 400 actual machine hours at a predetermined $20/hour apply $8,000 overhead. Actual overhead of $8,500 leaves $500 underapplied. Compare actual overhead with the amount applied to jobs. Use the applicable reporting policy to decide how to close the difference.
What belongs on the job
The manufacturing job cost comprises direct materials, direct labor, and manufacturing overhead. Direct costs are economically traceable to the job; indirect materials, indirect labor, and other factory support costs enter overhead. Product costs accumulate in work in process (WIP), move to finished goods when production finishes, and move to cost of goods sold (COGS) when sold. Period expenses remain separate. Patricia Goedl, Principles of Managerial Accounting, chapter 2, copyright 2020
A job cost sheet is the job-level subsidiary record. The total of the open job sheets should reconcile to WIP. Materials and labor entries identify the job receiving the resources; applied overhead adds the assigned factory support cost. A completed job's total transfers to finished goods. OpenStax, section 4.5
As practical record fields, retain the job identifier, scope, cost period, material quantities and returns, labor hours and rates, overhead base and rate version, units completed, and completion/sale status. Keep purchases separate from issues to production: material still available for future jobs has not become a current job charge merely because it was bought.
Applied overhead is an assignment
The basic predetermined rate is budgeted overhead / budgeted activity. Applied overhead equals that rate multiplied by actual activity in the chosen base, such as direct labor hours. The resulting assignment can differ from actual overhead incurred because expenditure and activity differ from budget. Actual overhead exceeding applied overhead is underapplied or underabsorbed; applied overhead exceeding actual is overapplied or overabsorbed. ACCA, Fixed overhead absorption
Do not compare actual expenditure only with budgeted expenditure and call the difference underapplication. Budget is used to establish the rate; the comparison at closing is actual overhead against the amount actually applied. Two jobs can therefore receive different overhead assignments even while the factory's fixed spending remains unchanged. ACCA
A single organization-wide rate is a simplification. Departmental rates can use different bases where departments consume resources differently—for example, machine hours in one department and labor hours in another. Keep each department's base and rate attached to its job charges. Goedl, chapter 2
Worked example: three jobs and one overhead difference
All figures are invented, in USD for one month. Assume no beginning WIP or finished goods, three jobs only, actual direct charges already valued correctly, and no scrap, rework, tax, selling, or administrative costs. Material purchases and unused raw materials are outside this job-cost reconciliation. All of Job A is completed and sold; all of B is completed but unsold; C remains unfinished.
Before the month, the factory budgets $12,000 overhead and 600 machine hours, establishing a $20/machine-hour rate. Actual job activity totals 400 machine hours.
| Cost or activity | Job A | Job B | Job C | Total |
|---|---|---|---|---|
| Direct materials | $4,500 | $3,000 | $2,500 | $10,000 |
| Direct labor | $3,500 | $2,600 | $1,900 | $8,000 |
| Actual machine hours | 200 | 120 | 80 | 400 |
| Applied overhead at $20/hour | $4,000 | $2,400 | $1,600 | $8,000 |
| Accumulated job cost | $12,000 | $8,000 | $6,000 | $26,000 |
The cost flows are:
- WIP receives $10,000 material, $8,000 labor, and $8,000 applied overhead: $26,000 in total.
- Completing A and B transfers $20,000 from WIP to finished goods. Ending WIP is C's $6,000.
- Selling A transfers $12,000 from finished goods to COGS. Ending finished goods is B's $8,000.
Before the overhead adjustment, $6,000 WIP + $8,000 finished goods + $12,000 COGS = $26,000. Job B is complete, but its cost has not become COGS in this example. No percentage-completion estimate is needed to divide the accumulated cost of C across equivalent units: it remains an identifiable unfinished job.
Suppose actual overhead for the month is $8,500. Underapplied overhead is $8,500 − $8,000 = $500, not the $3,500 difference between actual and budgeted overhead. Total actual manufacturing costs in this example are $10,000 + $8,000 + $8,500 = $26,500.
Closing the overhead difference
OpenStax illustrates closing overhead differences to COGS and also notes that companies may allocate the difference among WIP, finished goods, and COGS. The appropriate treatment needs the applicable reporting policy and circumstances; a teaching shortcut does not establish that every difference can be expensed immediately. OpenStax, section 4.6
For an illustrative COGS-only close, debit COGS $500 and credit manufacturing overhead $500. Adjusted COGS becomes $12,500, and $6,000 + $8,000 + $12,500 = $26,500 reconciles to actual manufacturing costs.
Alternatively, assume for illustration that the $500 is distributed in proportion to applied overhead remaining in each destination: WIP $1,600, finished goods $2,400, and COGS $4,000. Their shares are 20%, 30%, and 50%, producing adjustments of $100, $150, and $250. Adjusted balances are $6,100, $8,150, and $12,250, again totaling $26,500. This example assumes the difference is eligible for that distribution; it is not a universal closing rule.
Reporting and decision limits
Inventory valuation imposes limits beyond job accumulation. Australian AASB 102 paragraph 13 bases fixed production overhead allocation on normal capacity and prohibits increasing unit allocations merely because of low production or idle plant; unallocated overhead is expensed. Paragraph 16 excludes abnormal wasted materials and certain other costs from inventory. The December 20, 2021 compilation applies to periods beginning January 1, 2022 through before January 1, 2027. AASB 102, paragraphs 13 and 16
A job's assigned full cost is also different from the incremental cost of accepting another order. Existing fixed-cost reallocations do not change cash flows; additional commitments and opportunities forgone can matter. Assess those changes separately before using a job sheet for an accept/reject decision. ACCA, Relevant costs
Related: Cost structure and cost bases · Activity-based costing · Consumable cost allocation.