Comprehensive example of job order costing system

By: Rashid Javed | Updated on: October 24th, 2021

The Fine manufacturing company uses job order costing system. The company uses machine hours to apply overhead cost to jobs. At the beginning of 2012, the company estimated that 150,000 machine hours would be worked and $900,000 overhead cost would be incurred during 2012.

The balances of raw materials, work in process (WIP), and finished goods at the beginning of 2012 were as follows:

  • Raw materials: $40,000
  • Work in process: $30,000
  • Finished goods: $60,000

The Fine manufacturing company recorded the following transactions during 2012:

  • a. Raw materials purchased on account, $820,000.
  • b. Raw materials were requisitioned for use in production, $760,000 ($720,000 direct materials and $40,000 indirect materials).
  • c. Direct labor labor, $150,000; indirect labor, $220,000; sales commission, $180,000; and administrative salaries, $400,000.
  • d. Sales travel costs were $34,000.
  • e. Utility costs incurred in the factory, $86,000.
  • f. Advertising expenses were $360,000.
  • g. Depreciation for the year was $700,000 ($560,000 relates to factory and $140,000 relates to selling and administrative activities).
  • h. Insurance expired during the year, $20,000 ($14,000 relates to factory operations and $6,000 relates to selling and administrative activities).
  • i. Fine manufacturing company worked 160,000 machine hours. Manufacturing overhead was applied to production.
  • j. Goods costing $1,800,000 were completed during the year.
  • k. The goods costing $1,740,000 were sold to customers for $3,000,000.

Required:

  1. Prepare journal entries, T-accounts and income statement from the above information.
  2. Prepare a journal entry to close the balance in manufacturing overhead account (over or under applied manufacturing overhead) to cost of goods sold.

Solution:

1  (a). Journal entries:

job-order-costing-journal-entries

*Application of manufacturing overhead (entry 9):
Manufacturing overhead is applied to production by multiplying actual direct labor or machine hours worked during the year and predetermined overhead rate computed at the beginning of the year. It is shown as follows:

predetermined-overhead-rate-formula

= $900,000 / 150,000 machine hours

=$6 per machine-hour

Manufacturing overhead applied to production = Actual machine hours Γ— Predetermined overhead rate

= 160,000 hours Γ— $6

$960,000

(b) T accounts:

(c) Cost of goods sold statement:

income-statement-job-order-costing

*Over applied manufacturing overhead

2. Journal entry to close the balance in manufacturing overhead account (disposition of over or under applied manufacturing overhead):

Notice that the balance in manufacturing overhead account is credit. It means overhead is over-applied. The following journal entry would dispose it off to cost of goods sold:

Manufacturing overhead—Dr.40,000 
      Cost of goods sold–Cr. 40,000
A D V E R T I S E M E N T
31 Comments on Comprehensive example of job order costing system
  1. Abid Ali

    Very nice dear.

  2. mohammed sami

    Thank you dear.

  3. Donna

    very useful πŸ™‚

  4. Etsay

    I really appreciate your commitment to your profession and your interest to change your students. Carry on with and thanks.

  5. David

    I think you made a slight error in your T-accounts. I think you swapped the values in your sales travel expense and insurance expense T-accounts. (h) should be insurance expense and (d) should be sales travel expense?

  6. Ali Ahsan

    Cleared a lot of confusions

  7. muhammad shafiq

    good nyc all method is

  8. mulugeta

    very useful tnx..

  9. Senetibeb

    Very useful, keep going!!! Tnx!

  10. Syed Farrukh

    Job Order apply any type of Business.
    Thanks Ya habibiee.

  11. abdirizak

    waadku mahadsanrihin qaabka aad uso diyaariseen
    thank you for your good preparing

  12. Tasawar Iqbal

    very helpful. . . . upload balance sheet plzzz.

  13. haris

    can u tell me the how u calculate the raw materials balance in trial balance

  14. Sena

    Thank you….owo…it is clear and easy to understand

  15. Wycliff

    Thank u so much for helping me

  16. Barnabas Issac

    very helpful…….thank you

  17. getachew

    how to prepare CoGS and MANUFACTURING STATEMENT to the above question?

  18. fikiryilkal

    thanks a lot!!

  19. komba J.Pessima

    very understandable, thanks so much

  20. Ayaz Siddiqui

    HARIS
    can u tell me the how u calculate the raw materials balance in trial balance
    good question Mr Haris, I am also concerned, because the balance is $100,000
    Please clear T account of Raw Material.
    Regards,

    1. Accounting For Management

      @Ayaz Siddiqui, @ Haris
      Apologies for the confusion you had to face. The actual balance of Raw Materials A/C was $100,000. It was mistakenly written as 50,000. Has been corrected. Thanks for reporting using our comment box.

  21. Ayaz Siddiqui

    great, thanks a lot for guidance, your efforts are no doubt very useful and practical, I got cleared so many confusions from your guidance.
    regards,

  22. Toufic Noureddine

    thank u extremely helpful πŸ™‚

  23. Natnael

    Nice step by step procedures .

  24. Rebecca Andalu

    Really helpful..Thanks so muchπŸ™πŸ˜

  25. Mark Jun

    You’re so awesome. You help me understand the Cost Accounting. Thank you so much. Looking forward for more example.

  26. Yashwa

    Very helpful. Thank you so much.

  27. Reeba

    Very helpful πŸ‘ thanks.

  28. Alvis Pegara

    Perfectly simplified step by step procedure to calculate job costing. It helps me are lot

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