UNIVERSITY OF NUEVA CACERES

City of Naga

JOB ORDER COSTING

HOW TO ACCOUNT FOR DIRECT MATERIALS, DIRECT LABOR AND FACTORY OVERHEAD

COSTING DIRECT MATERIALS AND DIRECT LABOR

Costs of direct materials and labor can easily be traced to the finished product because of the
availability of source documents that established the connection of the linkage. These source
documents are:

a. Materials Requisition for direct materials; and

b. Labor Time Ticket for direct labor

that specify by job number, the corresponding costs of materials and labor incurred in a
particular job.

Examples:

JOB ORDER COST SHEET

Job Number 2B47 Date Initiated March 2

Date Completed March 8
Department Milling
Item Special Order Coupling Units completed 25

DIRECT MATERIALS DIRECT LABOR MANUFACTURING OVERHEAD

Req. No Amount Ticket Hours Amount Hours Rate Amount
14873 Php 662.00 843 5 Php 125.00 27 Php 32/ DLH Php 864.00
14875 506.00 846 8 200.00
14912 238.00 850 4 100.00

Php 1,406.00 27 Php 680.00

COST SUMMARY Units Shipped

Direct Materials Php 1,406.00 Date Number Balance
Direct Labor 680.00 3/8/23 0 25
Manufacturing Overhead 864.00
Total Cost Php 2,950.00
Unit Cost Php 118.00
MATERIALS REQUISITION FORM

Materials Requisition Number 14873 Date March 2, 2023

Job Order Number to be Charged 2B47
Department Milling

Description Quantity Unit Cost Total Cost

M446 2 Php 123.00 Php 246.00
G7 Connector 8 52.00 416.00
Php175.00 Php 662.00

Authorized By:
Signature Bill White

TIME TICKET

Time Ticket No 843 Date March 3, 2023

Employee Mary Holden Station 4

Started Ended Time Completed Rate Amount Job Number

7:00 12:00 5.0 Php 25.00 Php 125.00 2B47
12:30 2:30 2.0 25.00 50.00 2B50
2:30 3:30 1.0 25.00 25.00 Maintenance

TOTAL 8.0 Php 200.00

Supervisor A. Marcaida

COSTING FACTORY OVERHEAD

Manufacturing overhead must be considered along with direct materials and direct labor in
determining the unit cost of production. However, unlike direct materials and direct labor,
factory overhead cannot be linked and measured directly as a cost of any particular production
order for three reasons:

1. Factory overhead is an indirect cost to units or products and therefore cannot be traced
directly to a particular product.
2. It consists of many unlike items, involving both fixed and variable costs. It ranges from
grease used in the equipment to annual salary of the production supervisor.
3. Finally, firms experiencing wide seasonal variation in the volume of production, often
find that while production output is fluctuating, factory overhead costs remain relatively
constant, simply because fixed costs generally constitute a large part of factory
overhead. The presence of fixed costs will distort the production costs in per unit basis
when the output fluctuates. When production increases, fixed cost per unit decreases,
and when production decreases, fixed cost per unit increases.
Given this problem, factory overhead is attached to the products indirectly by means of
a factor or a cost driver that can be directly related to the products. This factor or cost
driver serves as a bridge between factory overhead and the products. Often the factor
or cost driver chosen for factory overhead allocation are direct labor hours, machine
hours or direct labor cost. If the company has only one product, the most appropriate
factor or cost driver will be the number of units produced.

USING PREDETERMINED OVERHEAD RATE. Once a factor or cost driver is chosen, it is

then divided by the budgeted manufacturing overhead of the period in order to obtain
the predetermined overhead rate (POHR). This is the rate that will be used to assign or
charge the cost of factory overhead to Work-in-Process account. The formula for
computing predetermined overhead rate is:

Budgeted Manufacturing Overhead

Factor or Cost Driver or Activity Base

To illustrate, assume that a firm has an estimated/ budgeted factory overhead for the
year in the amount of Php 320,000.00 and has estimated 40,000 direct labor hours. The
predetermined overhead rate is Php 8.00 per direct labor hour.

OVER OR UNDERAPPLIED FACTORY OVERHEAD

While the products were being costed with estimated factory overhead, actual factory
overhead costs were being incurred and recorded as a debit to Factory Overhead –
Control. At the end of the year, the Applied Factory Overhead will be compared with
Factory Overhead – Control account and the difference will be determined. The
difference may be over- or under application of FOH to production.

The difference can be closed to the Cost of Goods Sold at the end of the year, or may be
allocated to Cost of Goods Sold, Finished Goods and Work in Process on the basis of
relative costs.

JOB ORDER COST SYSTEM ILLUSTRATED

Assume that Venell Manufacturing Co has started its operations in October 2023. Below
are the entries summarizing the transactions that occurred in the last quarter of 2023:

Transactions Account Titles Debit Credit

a. Purchase of raw materials on accounts, Php Materials 120,000.00
120,000.00. Accounts Payable 120,000.00

b. Return of defective items to vendor costing Php Accounts Payable 4,000.00

4,000.00 Materials 4,000.00

c. Materials issued to production, Php 84,000.00, Work in Process 72,000.00

of which Php 12,000.00. were indirect Factory Overhead- Control 12,000.00
materials. Materials 84,000.00
d. The payroll incurred during the quarter is Php Payroll 100,000.00
100,000.00, subject to the following allowable SSS Payable 6,000.00
deduction: Philhealth Payable 1,000.00
SSS Contribution Php 6,000.00 Pag ibig Payable 2,000.00
PhilHealth Contribution 1,000.00 Withholding Tax Payable 11,000.00
Pag Ibig Contribution. 2,000.00 Cash 80,000.00
Withholding tax. 11,000.00

e. Payroll distribution, direct labor 50%, indirect Work In Process 50,000.00

labor, 10%, sales, 22% and administration, 18%. Factory Overhead Control 10,000.00
Selling Expenses 22,000.00
Administrative Expenses 18,000.00
Payroll 100,000.00

f. Rental paid Php 24,000.00 and to be Factory Overhead Control 12,000.00

distributed as follows: factory, 50%, Sales, 30% Selling Expenses 7,200.00
and administration, 20%. Administrative Expenses 4,800.00
Cash 24,000.00

g. Purchase factory supplies for cash Php 4,000.00 Factory Overhead Control 4,000.00
and used immediately on the ongoing Cash 4,000.00
production.

h. Accruals for the quarter: Factory Overhead – Control 12,040.00

R&M – Machinery, Php 7,000.00 Selling Expenses 3,720.00
Sales promotion, Php 1,200.00 Administrative Expenses 2,640.00
Office supplies, Php 1,800.00 Accounts Payable 18,400.00
Utilities (factory, 60%, sales, 30% and
administrative, 10%), Php 8,400.00

i. Employer’s share in the benefits required by Factory Overhead Control 9.000.00

law (Factory 60%, Sales 22% and administrative Selling Expenses 3,300.00
18%) Administrative Expenses 2,700.00
SSS Contribution, Php 9,000.00 SSS Payable 9,000.00
Philhealth Contribution, Php 2,000.00 Philhealth Payable 2,000.00
Pag Ibig contribution, Php 4,000.00 Pag Ibig Payable 4,000.00

j. Remitted to government agencies the SSS Payable 15,000.00

contribution of both the employer and the Philhealth Payable 3,000.00
employee. Pag Ibig Payable 6,000.00
Withholding Tax Payable 11,000.00
Cash 35,000.00
k. Factory overhead applied to production at a Work in Process 75,000.00
rate of 150% of direct labor. Applied Factory Overhead 75,000.00

l. Goods completed during this quarter, Php Finished Goods 160,000.00

160,000.00. Work in Process 160,000.00

m. Goods costing Php 120,000.00 were sold at a Cash 140,000.00

gross margin of 40% of sales. Of the total sales, Account Receivable 60,000.00
70% was paid in cash and the balance will be Sales 200,000.00
collected next quarter.
Finished Goods 120,000.00
Cost of Goods Sold 120,000.00

n. Sales return worth Php 8,000.00 from a Sales Returns and Allowance 8,000.00
customer enjoying a credit line. Accounts Receivable 8,000

Finished Goods 4,800.00

Cost of Goods Sold 4,800.00

o. Provision for last quarter’s depreciation. Factory Overhead – Control 17,000.00

Factory machinery and equipment Php Selling Expenses 5,000.00
17,000.00, sales office equipment Php 5,600.00 Administrative Expenses 4,000.00
and administrative office equipment, Php Accumulated Depreciation 26,000.00
4,000.00.
p. Expired insurance premium of Php 3,000.00 to Factory Overhead – Control 1,800.00
be distributed as follows: Factory 60%, Selling Selling Expenses 900.00
30% and administrative 10%. Administrative Expenses 300.00
Prepaid insurance 3,000.00

CLOSING ENTRIES:
1. Factory overhead variance is set up. Applied Factory Overhead 75,000.00
Factory Overhead Variance 2,840.00
Factory Overhead – Control 77,840.00

2. Factory Overhead Variance is closed to Cost of Cost of Goods Sold 2,840.00

Goods Sold. Factory Overhead Variance 2,840.00

3. Nominal accounts are closed to income and Sales 200,000.00

expense summary. Cost of Goods Sold 118,040.00
Selling Expenses 42,270.00
Administrative Expenses 32,440.00
Income and Expense Summary 6,800.00

4. To transfer the net income to retained Income and Expense – Summary 6,800.00
earnings. Retained Earnings 6,800.00

DISPOSITION OF FACTORY OVERHEAD VARIANCE

FACTORY OVERHEAD - CONTROL

ACTUAL APPLIED
c) Indirect Materials 12,000.00 k) Php 75,000.00
d) Indirect labor 10,000.00
f) Rent 12,000.00
g) Supplies 4,000.00
h) Repairs 12,040.00
‘i) Benefits 9,000.00
o) Depreciation 17,000.00
p) Insurance 1,800.00 Variance 2,840.00
Php 77,840.00 Php 77,840.00

** Closed Out to Cost of Goods Sold

If the amount of the factory overhead variance is considered insignificant for all intent and
purpose, the most widely accepted method of disposing it is to close it out to Cost of Goods
Sold account.

Cost of Goods Sold Php 2,840.00

Factory Overhead Variance 2,840.00

** Allocated to Manufacturing Accounts

If the amount of factory overhead variance is considered significant, the preferable method of
disposing it is by allocating it to Work-in-Process, Finished Goods and Cost of Goods Sold in
proportion to their respective balances at the end of the period. Using the transactions of
Venell Manufacturing Company:

Work in Process Php 540.00

Finished goods 653.00
Cost of Goods Sold 1,647.00
Factory Overhead Variance 2,840.00

Supporting Computation:

Year- end balance Percent Allocated Overhead

Variance
Work in Process Php 37,000.00 19% Php 540.00
Finished Goods 44,800.00 23% 653.00
Cost of Goods Sold 115,200.00 58% 1,647.00

SUMMART OF OVERHEAD CONCEPTS

Estimated Overhead Cost The amount of overhead costs that

management estimates will be
incurred.

This estimate is made before the

period begins in order to compute
the predetermined overhead rate.

Actual Overhead Cost The amount of overhead cost that

is actually incurred during a period
(as shown by payments for utilities,
rent, and so forth).

Applied Overhead Cost The amount of overhead cost that The difference between these
is added (applied) to Work in amounts represents under or over
Process. applied overhead.

This amount is computed by

multiplying actual activity during a
period by the predetermined
overhead rate.
Venell Manufacturing Company
Income Statement
For the quarter ended December 31, 2023

Sales Php 200,000.00

Cost of Goods Sold (Schedule A) (118,040.00)
Gross Profit Php 81,960.00
Operating Expenses:
Selling Expenses Php 42,720.00
Administrative Expenses 32,440.00 (75,160.00)
Net income before Tax Php 6,800.00

Schedule A
Materials Used:
Purchases Php 120,000.00
Less: Purchase Returns Php 4,000.00
Indirect Materials 12,000.00
Materials Inventory, end 32,000.00 48,000.00
Materials used in Production Php 72,000.00
Direct labor 50,000.00
Applied Factory Overhead 75,000.00
Manufacturing Costs Php 197,000.00
Less: Work in Process, end (37,000.00)
Cost of Goods Manufactured Php 160,000.00
Less: Finished Goods, End (44,800.00)
Cost of Goods Sold at Normal Php 115,200.00
Add: Underapplied Factory Overhead 2,840.00
Cost of Goods Sold – actual Php 118,040.00

No Raw Materials – beginning, Work in Process - beginning and Finished Goods – beginning
since it is the commencement of operations.

SERVICE DEPARTMENT COST ALLOCATION

Service department costs are considered part of the overhead (indirect costs) and should be
allocated to the production departments that use the service. For example, a plywood
company operates its own electricity generating plant. The cost of operating the power plant
should be assigned to the production departments (e.g., Sawmill, assembly and finishing).

When there are several service departments, which also render services to each other, their
costs are usually allocated to each other before allocation to producing departments. The entry
to record such allocation would be:

Sawmill overhead XX
Assembly overhead XX
Finishing overhead XX
Other XX
Electrical Geenration Cost XX
A basis reflecting cause and effect should be used to allocate service department costs. In the
above example the number of kilowatt hours used by each department is probably the best
allocation base for the plywood company’s electricity costs. However, if exact criteria are not
available (departments often do not have their own electric meters), some other reasonable
base should be used.

DIRECT METHOD

Under this method, the service department costs are allocated directly to production
department without recognition of service provided among the service departments.

Illustration:

Assume that Department Y and Z were the only production departments using service
department B and on a relative basis used 60% and 40% of B’s services. Department B had
costs of Php 82, 000.00. Y and Z would be allocated Php 49, 200.00 and Php 32, 800.00 of the
costs respectively even though B provided services to other departments (or received services
from other departments).

STEP OR STEP-DOWN METHOD

This method recognizes the services provided among the service departments. It included an
allocation of service department costs to other service departments and involves several steps.

1. The first cost to be allocated is those of the service department that provides the highest
percentage of its total services to other service departments.
a. An alternative is to begin with the costs of the service department providing
services to the greatest number of other service departments.
b. A third possibility is start with the service department having the greatest peso
value of services provided to other service departments.
2. The costs of the remaining service departments are then allocated in the same manner
but no cost is assigned to service departments whose costs have already been allocated.

Illustration:

Assume that Marigold Corp has three service departments: K, L and M which provide services to
each of the other producing department’s Y and Z.

TOTAL COSTS PERCENTAGE OF SERVICES

K L M Y Z
Php 100,000.00 K 0 15% 5% 55% 25%
70,000.00 L 10% 0 9% 18% 63%
50,000.00 M 0 0 0 20% 80%
Required: allocate the service departments cost to production departments using the step-
down method:

Solution:

K L M Y Z
Costs prior to allocation 100,000.00 70,000.00 50,000.00 0.00 0.00
Allocation of K (100,000.00) 15,000.00 5,000.00 55,000.00 25,000.00
Allocation of L (85,000.00) 8,500.00 17,000.00 59,000.00
Allocation of M (63,500.00) 12,700.00 50,800.00
Allocated Costs 0.00 0.00 0.00 84,700.00 135,300.00

** End**