Job Cost Accounting

There are two basic cost accounting systems, the job order cost system and the process cost system. The job order cost system is applicable for a company that produces individual and unique products such as a custom cabinet company or a home builder. The process cost system is for a company that produces homogenous products, like a bottling company or an oil refinery. Both assume the use of a perpetual inventory system.

The chapter first focuses on the job order cost system. The application of this system is easiest to understand by using T-accounts. We will work through all the steps in the system using the in-class exercise from your course pak.The job order cost system accumulates costs in three categories--raw materials, factory labor and overhead. These costs are then applied to production as direct materials, direct labor and overhead.

A job cost sheet is used to keep track of the total costs of each "job". A "job" can mean one single product, such as a custom built machine, or a batch of like products, such as an order of chairs for a theater.As costs are applied to production, dollar amounts are transferred from the raw materials, factory labor and overhead accounts to work in process. At the same time, these dollar amounts are posted to the job cost sheets.

The balance in work in process (an inventory account) should be the same as the total cost of all the jobs in process. The job cost sheets act as a subsidiary ledger for work in process (WIP).All costs are accumulated in one of the following: raw materials inventory (when raw materials are purchased), factory labor (when direct and indirect labor costs are incurred, including payroll taxes and benefits), and overhead. These costs are an increase to the respective T-account.