The primary objective in job order costing is to determine the cost of materials

Question

The primary objective in job order costing is to determine the cost of materials, labor, and factory overhead used to produce a specific order or contract. Cost estimates are made when the order is taken, and the job order procedures are designed to reveal costs as the order goes through production, thereby giving an opportunity to control costs. Search the internet and provide an example of a company that is using or could use Job Order Costing. What are the benefits to the organization to use Job Order costing? Are there are disadvantages? Explain.

Explanation / Answer

The three phases of cost accounting (managerial accounting) are: cost determination; cost planning and control through budgets and standards; and cost analysis for decision making. Four control accounts concerned primarily with cost determination are: materials; factory overhead; work in process and finished goods. Materials--materials ledger cards or other forms of perpetual inventory. Factory overhead control--expense ledger and departmental expense analysis sheet. Work in process (WIP)--cost sheets or cost of production reports. Finished goods--finished goods ledger cards. The primary objective in job order costing is to determine the cost of materials, labor, and factory overhead used to produce a specific order or contract. Cost estimates are made when the order is taken, and the job order procedures are designed to reveal costs as the order goes through production, thereby giving an opportunity to control costs. The type of cost accumulation method used by a company will be determined by the type of manufacturing operation performed. A manufacturing company should use process cost accumulation for product costing purposes when like units are continuously mass production, when custom made or unique goods are produced, job order costing would be more appropriate. Process costing is often used in industries such as chemicals, food processing, oil, mining, rubber and clerical appliances. With a continuous mass production of like units, the center of attention is the individual process (usually a department). The unit costs by cost category as well as total unit cost for each process (department) are necessary for product costing purposes. A cost sheet is a convenient printed form for collecting classifying and summarizing the costs incident to a particular job, lot, or contract. In essence, it is a statement of profit or loss for each job, prepared as the work progresses, and is therefore a guide to management in controlling costs. Job order cost sheet serve a control function. Comparisons are made between estimates of a job costs and costs actually accumulated for the job. In addition, cost control is enhanced by accumulating direct materials and labor as well as factory overhead costs by cost centers or departments, and by comparing the actual costs to cost center budgets. The work in process account is a control account in the general ledger, reflecting total costs assigned or applied to jobs. The individual job cost sheets form the work in process (WIP) account's subsidiary ledger, indicating the direct materials, direct labor, and factory overhead charged to job. Factory overhead is all the production costs, other than direct materials and direct labor, necessary to manufacture a product. Actual factory overhead is the actually experienced used-up cost that occurs during a specific time period. Applied factory overhead is an estimated amount of overhead that is assigned to work done.

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