final report job order

8/9/2019 Final Report Job Order

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JOB ORDER COSTINGCost accounting project 1

Imran Umer (0926125)


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JOB ORDER COSTINGCost accounting project 1

Introduction

This project deals with the methodology of job order costing and its application to industry. I have

selected a component manufacturer company and analysed the job order costing for its component named

bracket assembly. The company in this case is M D Engineering Components and is based in Karachi. It is

a major supplier to motor cycle industry and has presence internationally.

Company vision:M D Engineering is (OEM) Original Equipment Manufacturer of Motor Cycle Parts and we supply to

many motorcycle complanies. We especialise in manufacturing of: Fuel Tank, Frame Body, Tail Light

Bracket, Muffler Bracket, Muffler Cover, Top Bridge Plate, Seat Pipe Assembly, Front Monogram Bracket,

Tool Box Bracket, Foot Rest Bar, Side stand, Main Stand, Passenger Hand Grip, Front Fork Upper Sleeve

and Swing Arm (rear fork) .

We do not compromise on quality and today many motorcycles in Pakistan are carrying our product

Company Profile

Basic InformationCompany Name: M D Engineering-Karachi PakistanBusiness Type: Manufacturer

Product/Service(We Sell):

Motor Cycle Cables Sheet Metal Parts

Product/Service(We Buy):

-

Address: B / 1 / 1, Akhter Colony, Korangi Road, Karachi-PakistanBrands: MD

Number of Employees: 11 - 50 People

Company Website URL: ------------


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Ownership & Capital

Year Established:2006

Ownership Type: Individual (Sole proprietorship)Legal Representative/Business Owner: Mr. Asad Kayani

Trade & Market

Main Markets: Southeast AsiaAfricaMid East

Total Annual Sales Volume: Below US$1 Million

Factory Information

Factory Size: Below 1,000 square metersFactory Location: Karachi

QA/QC: In HouseNo. of Production Lines: 1Contract Manufacturing: OEM Service Offered


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Job Order Costing

All companies have to accumulate and allocate costs. Each company has to decide how it is going to do

that. Companies pick a method that works Ill for them, and is cost effective. A Ill designed accounting

system should generate reports for a large variety of uses. Of course, it must provide the necessaryinformation for annual financial statements; and it should also help in the preparation of special reports,

like sales tax and payroll reports. It should help managers track and manage inventories, open orders,

accounts receivable and accounts payable. There are many different types of costing systems that

management and cost accountants may come across. Each of these costing systems may handle certain

entries in a different way. There are two main types of cost accounting systems. Companies select a

method that best matches the flow of work in their business.

Process costing - In process costing, costs are accumulated by departments, operations, or processes. The

work performed on each unit is standardized or uniform where a continuous mass production or assembly

operation is involved. For example, process costing is used by companies that produce appliances,

alcoholic beverages, tires, sugar, breakfast cereals, leather, paint, coal, textiles, lumber, candy, coke,

plastics, rubber, cigarettes, shoes, typewriters, cement, gasoline, steel, baby foods, flour, glass, men'ssuits, pharmaceuticals and automobiles. Process costing is also used in meat packing and for public utility

services such as water, gas and electricity.

Job order costing - In job order costing, costs are accumulated by jobs, orders, contracts, or lots. The key

is that the work is done to the customer's specifications. As a result, each job tends to be different. For

example, job order costing is used for construction projects, government contracts, shipbuilding,

automobile repair, job printing, textbooks, toys, wood furniture, office machines, caskets, machine tools,

and luggage. If you go to an auto repair shop, they will start a job ticket just for the work to be done on

your car. Your job ticket will show charges for labour and materials, just for your job. Let's say they charge

you Rs35 per hour for labour. That charge includes the mechanic's payroll cost. But it also includes an

overhead charge - which is generally not stated separately. The overhead charge covers the costs of

operating the garage-

tools and equipment, rent, insurance, maintenance, utilities, etc. It is a way toallocate overhead (discussed below), and build it in to the amount charged to customers. The garage will

also make a gross profit on the parts they use to repair your car. This gross profit covers the cost of buying

and maintaining a parts inventory, including department employee wages, insurance and warehousing

costs.

Purpose

A. The purpose of a job order cost accounting system is to assign and accumulate costs for each job, i.e.,an order, a contract, a unit of production, or a batch. Job order costing should be used if the production or

service is being performed to meet customer specifications or requirements, if different components are

made for inventory, or projects are undertaken to construct real property. Job order costing allows more

control, less estimation, and more direct and reliable allocation of costs. B. The determination as to the


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need for a formal job order cost accounting module is necessarily a management decision. The decision to

establish such a module should be based upon a recurring need for cost accounting information.

The management information provided by a job order cost accounting system is a tool that aids

management in the guidance of activities and in the attainment of the objective of producing a maximum

of goods and services at minimal costs. The formal cost accounting module is normally designed toaccumulate those costs that are under the control of local management. Typically, management controls

all costs that are funded by appropriations or funds provided to the accounting entity. These costs are

referred to as funded costs.

Job Orders Categories.

Job orders are established in terms of the nature and type of work to be performed.

Following are examples of the criteria that may be used to establish job order categories.

A. End Items: A separate job order should be established for work performed on standalone end items

such as airplanes or trucks.

B. Real Property Construction: A separate job order should be established for each real property

construction project.

C. Real Property Maintenance: A separate job order should be established for each real property

maintenance project.

D. Low Dollar Like Items: A job lot is normally used when low dollar like items are placed into the process

at the same time. HoIver, the estimated cost of any job lot order may not exceed Rs750,000. If the

estimated cost is greater than Rs750,000, a separate job order should be established for each Rs750,000

increment.

The Job-Order Costing Process

When a company operates using job-order costing, a specific set of events will usually occur

with each job. Generally, the process is as follows:

An order (or sales order) is received for the batch of products

A production order is issued from the sales order

Materials and labour are ordered and tracked for the set of products

Manufacturing overhead is allocated to the job using a predetermined rate (usually per labour hour or

per machine hour)


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Actual manufacturing overhead will not affect the work-in-process account, instead it is charged to a

control account

Direct labour and materials are charged by the accountant to the work-in-process accounts using the

actual amounts incurred

These amounts are all tracked using a job-costing sheet, which will most likely be in a computerized

format and a subsidiary ledger is kept for each job

Abnormal spoilage (spoilage that is above and beyond what would be expected from the job) is

considered a period cost and is reclassified from the work-in-process account into a separate account so it

can be addressed by management.


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M D Engineering Components LLC

The company I have chosen for analysis is M D Engineering Components, a firm that manufactures high

quality motor cycle tools. It is the leader in Long Reach and "Special" tooling. I have chosen this specific

company because it is a manufacturing firm that produces built-to

-order tools and equipment, and maybe

large, unique, high cost items. Thus the company would do better if it can trace its costs to specific jobs

unlike other massproduction firms

Stage 1 involves issuing of material stock to different stock lines. The raw material inventory issued is nut

plate (object code: BACQ29VXHG02B) and rivet (object code: ACR31NS02C) with total quantity of

25 and 100, respectively, issued to both the lines.


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To the stock line 1, quantity of nut plate issued is 5 for one kind of nut plate and 7 for another. The unit

cost for both of them is 12Rs where as quantity of nut plate issued for stock line 2 is 13 with a unit cost of

Rs0. Similarly, for rivet I can see, to the stock line 1 rivet is issued twice with a total quantity of 20 and 23

on a unit cost of Rs0.07. For stock line 2 the quantity issued is 57 with the unit cost of Rs7.00. Thus, I can

see

Inventory cost = Nut Plate cost + Rivet cost

= (5x12.00+7x12.00+13x0) + (20x0.07+23x0.07+57x7.00)

= 144.00 + 402.01

= Rs 546.01

Apart from that an extra inventory cost is incurred to build sub-

assembly brackets where 15 quantities areissued at a unit cost of Rs1978.33.

BUILD SUB-ASSY ClosedBILL OF MATERIAL- ISSUED STOCK

PN Description Qty issued Ext. CostGSC27021451 BRACKET 15.00 Rs 29,675

Unit cost Rs 32,978.33Total task parts: Rs29,675.00

Total task labor: Rs0.00

Total task OSP: Rs 0.00

Task total cost : Rs29,675.00

Checkinventory closedInventory required

PN Description Qty issued EXT. costBAC029VXHG02B NUTPLATE 26.00 Rs 144.00

Stock line 1 Qty issue 5 Unit cost Rs12.00Stock line 1 Qty issue 7 Unit cost Rs 12.00

Stock line 2 Qty issue 13 Unit cost Rs 0.00

BACKSINSU2C RIVET 100.00 Rs 402.01

Stock line 1 Qty issue 20 Unit cost Rs 0.07Stock line 2 Qty issue 23 Unit cost Rs 0.07Stock line 3 Qty issue 57 Unit cost Rs 7.00


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Stage 2 talks about how labour cost is incurred. The inventory comes to the CNC machinist who makes the

starting raw material into usable form which involves tasks like CNC drilling and CNC boring. Here, 2

labour hours are allotted at the cost of Rs 500.00

APPLIED LABORSKILL HOUR EXT.COST

CNCMachinist 2 Rs 500Total task parts: Rs5400

Total task labor: Rs 500Total task OSP: RS 0.00

Task total cost: Rs 5900

After that the inventory moves toward the next slot of material verification by the quality inspector. Here

5 labour hours are allotted at the cost of Rs 80,000.

MaterialVerify Closed

Applied LaborSkill Hours EXT. cost

INSPECTOR 13 Rs 80000

Total task parts: Rs0.00Total task labor: Rs80000Total task OSP Rs 0.00

Task Total Cost Rs


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80000

After being inspected by the material inspector sealant inspection takes place at the cost of

Rs 500 with 2 dedicated labour hours.

APPLYPRIMERSEALANTTYPE111 CLOSEDAPLLIED LABOR

SKILL HOURS EXT. COSTINSPECTOR 2 Rs 500

OUTSIDE PROCESSING:An outside processing of the inventory (12 units) is being carried

out at the rate of Rs 1250 per unit.

Outside processingOSP Number64

Item 1 Qty 12 Labor 0 MSC Rs 1250

Total task cost:Rs 0.00

Total Tasklabor: Rs 500Total task OSP:Rs 1,5000Task Totalcost: Rs 1,5500

The final stage involves an assembly of nut plate and rivet and their assembly to the subbracket assembly.For the very purpose, the assembler has been allotted 12 hours at the cost of Rs 18,000 and the G.B.

Mechanic has been given 10 labour hours at the cost of Rs 25,000.

ASSEMBLECOMPONENTSASSEMBLE

APPLED LABOR

Skill Hours Ext.CostAssembler 12 Rs 18,000

G.BMechanic 10 RS 25,000

Total task parts: Rs

0.00Total Task labor:43,000Total Task OSP: Rs 0.00

Task total cost: Rs43,000


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After that the final product is inspected in 2 hours at the cost of Rs 500

Final Inspection ClosedApplied Labor

Skill Hours EXT. costINSPECTOR 13 Rs 500

Total task parts: Rs0.00

Total task labor: Rs 500Total task OSP Rs 0.00

Task Total Cost Rs 500

Cost for product packaging and shipping as per the cost sheet is not applied because the product is yet to

be delivered to client.

Also I note here that the cost sheet has not talked about any overhead application. The company may be

following a policy of not including the fixed overheads in the product costing.

Summary:

Total part cost

Part Cost in Rs

Nut plate 144.00Rivet 402.01

Sub- assembly bracket 29,675Total inventory cost 30,211.01

Total labor cost

Employee Cost in Rs

CNCmachinist 5900Material inspector 80000

Sealant Inspector 500Assembler 18000

GBMechanic 25000

Final inspector 500Total labor cost 129,900

Other Cost:

Outside processing cost= Rs 15,000


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Total cost

Item Cost in Rs

Inventory 30,211.01Labor 129,900

OSP 15,000Total cost 175,111.01

Thus the total cost for the particular job has been found out to be Rs 175,111.01. As a next step the

company could fix its selling price if it already hasnt, by deciding on the required profit margins.

Conclusion:

The Job cost sheet of M D Engineering components consists of job information (date started, completed,

and shipped); individual cost information for materials used, labour, and overhead; and a total job cost

summary. This is a typical example where job order cost system is used when products are made based on

specific customer orders. Each product produced is considered a job. The job order cost system hascaptured and tracked the costs of producing each job, which includes materials, labour, and overhead in a

manufacturing environment.


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Sample of Job Order Cost System Cost Flows

Job cost sheet. This is used to track the job number; customer information; job

information (date started, completed, and shipped); individual cost information formaterials used, labor, and overhead; and a total job cost summary. See Figure 1 .

Figure 1 Sample Job Cost Sheet


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Materials requisition form

To assure that materials costs are properly allocated to jobs in process, a materials

requisition form (see Figure 2 ) is usually completed as materials are taken from the raw

materials inventory and added to work-in-process.

Figure 2 Sample Materials Requisition


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Time ticketLabor costs are allocated to work-in-process inventory based on the completion of time

tickets (see Figure 3 ) identifying what job a worker spent time on.

Figure 3 Sample Time Ticket

Predetermined overhead rateFactory overhead costs are allocated to jobs in process using a predetermined overhead rate.

The predetermined overhead rate is determined by estimating (during the budget process)

total factory overhead costs and dividing these total costs by direct labor hours or direct labordollars. For example, assume a company using direct labor dollars for the allocation of overhead

estimated its total overhead costs to be Rs300,000 and total direct labor dollars to be

Rs250,000. The company's predetermined overhead rate for allocating overhead to jobs in

process is 120% of direct labor dollars, and is calculated as follows:


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If direct labor costs are Rs20,000 for the month, overhead of Rs24,000 (Rs20,000 120%)

would be allocated to work-in-process inventory. Factory overhead would be allocated to

individual jobs based on the portion of the Rs20,000 direct labor cost that is assigned to each

job. If job number 45 had Rs9,000 in direct labor cost for the month, factory overhead of

Rs10,800 (Rs9,000 120%) would also be allocated to the job.

Once a job is completed, the total costs assigned to the job are transferred from work-in-process

inventory to finished goods inventory. Once the job is sold and delivered, the job costs are

transferred from finished goods inventory to cost of goods sold. Figure 4 summarizes the flow of

costs in a job order cost system and Figure 5 summarizes the journal entries required given theflow of costs in Figure 4 . The ending balances in the three inventory accounts would be reported

as inventories on the balance sheet and cost of goods sold would be reported on the income

statement.


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Figure 4 Job Order Cost

System Cost Flows


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Figure 5 Job Order Cost System Cost Flows


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The factory overhead account (see Figure 5 ) has a balance which indicates the amount of

overhead applied to work-in-process inventory is different from the actual overhead incurred.

When there is a debit balance in the factory overhead account, it is called under-applied

overhead meaning not enough overhead was allocated to jobs. If the balance in the factory

overhead account was a credit, the overhead would be over-applied, meaning too much

overhead was allocated to jobs. Factory overhead must be zero at the end of the year. Most

companies transfer the balance in factory overhead to cost of goods sold. An alternative method,

although more complex, is to allocate the under- or over-applied balance among the work-in-

process inventory, finished goods inventory, and cost of goods sold accounts. The Rs2,600

account balance in factory overhead in Figure 5 is relatively small. To zero out the account

balance and transfer it to cost of goods sold, the entry would be:

General Journal

Date Account Title and Description Ref. Debit Cred it20X0Dec. 31 Cost of Goods Sold 2,600

Factory Overhead 2,600

Transfer under-applied overheadKey:

A Purchased raw materials

B Direct material requisition to be used on jobs

C Direct labor payroll based on time ticket

D Indirect materials used

E Indirect labor payroll

F Other overhead costs incurred

G Overhead applied to jobs (direct labor dollars 80% predetermined overhead rate)

H Transfer completed jobs to finished goods inventory

I Transferred sold jobs to cost of goods sold

J Paid wages

The journal entries that follow support the transactions in Figure 5 .


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Job Order Cost SystemJournal EntriesGeneral Journal

Date Account Title and Description Ref. Deb it Credit20X0Dec. 31 Raw Materials Inventory 15,000

(A) Accounts Payable 15,000Purchased raw materials on credit

(B) Work-in-Process Inventory 16,500

Raw Materials Inventory 16,500Raw materials used in jobs 100102

(C) Work-in-Process Inventory 21,000 Wages Payable 21,000

Direct labor incurred jobs 100102(D) Factory Overhead-Indirect Materials 5,700

Raw Materials Inventory 5,700Indirect materials requisitioned

(E) Factory Overhead-Indirect Labor 10,000

Wages Payable 10,000

Indirect labor incurred

(F) Factory Overhead-Factory Rent * 1,200Factory Overhead-Factory Utilities * 2,500

Accounts Payable 3,700Overhead costs incurred

(G) Work-in-Process Inventory 16,800

Factory Overhead 16,800Applied overhead for jobs 100102

(H) Finished Goods Inventory 45,200

Work-in-Process Inventory 45,200Transfer completed jobs 100 & 101

(I) Cost of Goods Sold 35,500

Finished Goods Inventory 35,500** Transfer delivered jobs 99 & 100

final report job order

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