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Cost Accounting

3 Basic Elements of Job Order Costing System



Basic Elements of Job Order Costing SystemA job order costing system is most suitable where the products manufactured differ in materials and conversion requirements. Each product is made according to a customer’s specifications and the price quoted is closely tied to estimated cost. The cost incurred in manufacturing a particular job must therefore be matched to the goods produced. Examples of types of companies that might use job order costing are printing, shipbuilding, aircraft, construction, and engineering firms.

In this post, I am going to overview 3 basic elements of job order costing. Follow on!



Under a job order cost system, the three basic elements of cost—direct materials, direct labor, and factory overhead—are accumulated according to assigned job numbers. The unit cost for each job is obtained by dividing the total units for the job into the job’s total cost. A cost sheet is used to summarize the applicable job costs. Selling and administrative expenses, which are based on a percentage of manufacturing cost, are listed on the cost sheet to arrive at total cost.

In order for a  job order  cost  system  to  function properly,  it must be possible  to  identify  each  job  physically  and  segregate  its  related  costs.

Job Order Costing System

Direct material requisitions and direct labor costs carry the particular job number; factory overhead is usually applied to individual jobs based on a predetermined factory overhead application rate. The profit or loss can be determined for each job and the unit cost computed for purposes of inventory costing. Schedules are prepared to accumulate the information for the required journal entries.


Element-1. Materials

Purchase of Materials – Raw materials and supplies used in production are ordered by the purchasing department. These materials are kept in a materials storeroom under the control of a clerk and are issued only when a properly approved requisition is presented.

Issuance of Materials – The next step in the manufacturing process is to obtain the needed raw materials from the materials storeroom. There is one source document for the issuance of materials in a job order cost system—a materials requisition.Any issuance of materials by the materials clerk must be substantiated by a materials requisition approved by the production manager or the department supervisor. Each requisition form shows the job order number, the department number, and the quantities and description of materials requested. The materials  clerk  enters  the  unit  cost  and  total  cost  on  the requisition form.

On a regular basis, perhaps weekly, materials requisitions are sorted by job number and the totals recorded on a cost summary sheet.


When direct materials are put into production, a journal entry is made to record the addition of materials to work-in-process inventory. When indirect materials are requisitioned, they are generally charged to a departmental Factory Overhead Control account. Indirect materials costs are included in the factory overhead application rate, as it is often impractical to trace these materials to each job.


Element-2. Labor Cost

There are two source documents for labor in a job order cost system—a time card and a labor job ticket:

  • Time (or clock) cards are inserted in a time clock by employees each day when they arrive, go to and return from lunch, take breaks, and leave work for the day. This procedure mechanically shows a record of total hours worked each day by each employee and thus provides a reliable source for the computation and recording of payroll.
  • Labor job tickets are prepared daily by each employee indicating the job worked on and the number of hours worked. The wage rate of the employee is inserted by the payroll department. The sum of the labor cost and hours incurred on various jobs (labor tickets) should be equal to the total labor cost and total labor hours for the period (time cards).


At periodic intervals, time cards are summarized to record the payroll,  and  labor  job  tickets  are  summarized  to  be  charged  to work-in-process inventory or factory  overhead  control.  Time card and job ticket hours should be reconciled.


Element-3. Factory Overhead

The third element to be included in determining the total cost in a job order cost system is factory overhead. There is one source document for the computation of factory overhead costs in a job order cost system—a departmental factory overhead cost sheet, which each department maintains. This is a subsidiary ledger of the Factory Overhead Control account. Reconciliation of the control and subsidiary ledgers should be performed at regular intervals. It should be noted, however, that factory overhead costs may be recorded for the factory in total and then distributed to production departments for ultimate distribution to jobs.

The  distribution  of  factory  overhead  to  jobs  is  based  on  a  predetermined  factory  overhead  application  rate“.  Factory overhead application rates are expressed in terms of direct labor hours, direct labor dollars, direct materials dollars, machine hours, or some other reasonable basis. When factory overhead is not accumulated on a factorywide level for distribution to several departments, each department will generally have a different rate.



Department A’s rate may be $2.30 per direct labor hour while Department B’s rate may be $2.70 per direct labor hour. In addition, each department may use separate bases to determine the rate of application. For example, factory overhead may be based on direct labor hours in Department A and on machine hours in Department B. Application rates vary because of the differences in activity and functions of individual production departments.

To  clarify,  the  production  department  applies  factory  overhead  at  a rate of 75% of direct  labor cost. Assume total direct labor cost for a job amounted to $3,500. Factory overhead applied would therefore be $2,625 (= 75% of $3,500).


Job Order Cost Sheet

A job order cost sheet summarizes the amount of direct materials, direct labor, and applied factory overhead for each job processed. Direct materials and direct  labor  cost  information  is obtained  from materials  requisitions and  labor  summaries,  and  is  posted  to  the  job  order  cost  sheet  daily  or weekly. Factory overhead is usually applied at the end of the job, as are selling and administrative expenses.

Job order cost sheets are designed to provide information needed by management and therefore will vary according to management’s desires or needs. For example: some forms include selling and administrative expenses and selling price so that estimated profit can be readily determined for each job. Other forms provide only basic factory cost data—direct materials, direct labor, and factory overhead. Forms will also vary depending on whether a firm is departmentalized. The next diagram presents a general low of costs in a job order costing system where more than one job order is involved:

Flow of Costs for More Than One Job Order

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