Job Costing Summary
The cost accounting system is used to accurately record, measure and report product manufacturing costs. It is critical to for such system to provide up-to-date information for the product cost. There are two types of cost accounting system, the job order cost system and the process cost system. The former system (job order cost) is suitable for production that will varies in characteristics from job to job. Each production might have different raw materials or a different labor time as well as overhead rate, so it is important to record all these differences and correctly assign costs to specific products. The latter, the process cost system, is a system that is best used for production of a large volume of similar products. With job order cost system, the flow of costs such as raw materials, direct labor, and overhead cost will reflect the actual physical flow of materials into finished goods as detailed below:
Accumulation of direct material, labor and overhead cost – a manufacturer will debit these account to record all the costs.
Assignment of cost to jobs – as the materials and labor has been requested; the company will assign these costs to a specific job (into the work in process account) or into an overhead costs if it is not directly related to a specific job. Then, the company will record the predetermined overhead rate into work in process account (a company might use either direct labor hour, direct labor cost, or machine hour as an activity base depending on the nature of their manufacturing process).
Finished Goods – when a specific job is finished, the company will credit the WIP account and transfer it into the Finished Good account. The WIP and finished good inventory must match.
Cost of goods sold – when the good is sold the company will transfer the cost from finished goods into the COGS account. After all transaction is complete, there might still be a remaining balance in the MOH account either on credit or debit side. The company will adjust that account so that the over-applied MOH will be deducted from COGS or the under-applied MOH will be transferred to COGS.