13.1 Cost Accumulation Systems and Job Order Costing
Key Takeaways
Normal costing charges actual direct materials and labor but applies overhead with a predetermined rate equal to budgeted overhead divided by budgeted activity.
Underapplied overhead (actual exceeds applied) is closed to cost of goods sold if immaterial, or prorated to work in process, finished goods, and cost of goods sold if material.
Cost of goods manufactured equals direct materials, direct labor, and applied overhead plus beginning work in process less ending work in process.
Net spoilage cost stays in the job when caused by its specifications, goes to factory overhead when normal and common to all jobs, and is a period loss when abnormal.
Scrap sales are credited to the job when traceable, otherwise to factory overhead or other income.
Cost Accumulation Systems and Job Order Costing
Cost accounting is the largest single block in AFAR after revenue: ten items (syllabus topic 13.0). This first cost section compares actual, normal, and standard costing, traces a job order system through its journal entries to the statement of cost of goods manufactured and sold, disposes of over- or underapplied overhead, and accounts for scrap, spoiled goods, defective units, and rework. Activity-based costing, process costing, backflush costing, joint products, and service department allocation follow in the next two sections.
1. Actual, Normal, and Standard Costing
| System | Direct Materials and Labor | Factory Overhead | Main Advantage |
|---|---|---|---|
| Actual costing | Actual prices x actual quantities | Actual overhead, known only at period-end | Reflects actual cost, but unit costs fluctuate and come late |
| Normal costing | Actual prices x actual quantities | Applied using a predetermined rate x actual activity | Timely, smooth unit costs; the standard classroom model |
| Standard costing | Standard prices x standard quantities allowed | Standard rate x standard activity allowed | Budgeting and control through variances (covered in Management Services) |
The predetermined overhead rate is set before the year:
2. Job Order Costing: Flow of Costs and Journal Entries
Job order costing accumulates costs by job or batch, which suits custom products (printing, construction, furniture made to order). Each job has a job cost sheet; the total of the job cost sheets for unfinished jobs equals the Work in Process control account.
| Transaction | Journal Entry |
|---|---|
| Purchase of materials | Dr. Materials; Cr. Accounts Payable |
| Direct materials issued | Dr. Work in Process; Cr. Materials |
| Indirect materials issued | Dr. Factory Overhead Control; Cr. Materials |
| Factory payroll distributed | Dr. Work in Process (direct labor); Dr. Factory Overhead Control (indirect labor); Cr. Payroll |
| Other actual overhead | Dr. Factory Overhead Control; Cr. Accumulated Depreciation, Utilities Payable, and others |
| Overhead applied | Dr. Work in Process; Cr. Factory Overhead Applied |
| Jobs completed | Dr. Finished Goods; Cr. Work in Process |
| Jobs sold | Dr. Cost of Goods Sold; Cr. Finished Goods (and Dr. Accounts Receivable; Cr. Sales) |
At period-end, Factory Overhead Control (actual) is closed against Factory Overhead Applied. A debit difference is underapplied overhead; a credit difference is overapplied. If immaterial, it is closed to Cost of Goods Sold; if material, it is prorated to Work in Process, Finished Goods, and Cost of Goods Sold in proportion to their applied overhead (or their balances).
3. Worked Example: Cost of Goods Manufactured and Sold
Cavite Fabricators applies overhead at PHP 40 per direct labor hour (budgeted overhead PHP 2,400,000 / 60,000 hours). For 2026:
- Direct materials issued PHP 1,100,000; indirect materials PHP 90,000
- Direct labor PHP 900,000 for 50,000 hours; indirect labor PHP 150,000
- Other actual overhead PHP 1,780,000
- Work in process: beginning PHP 200,000, ending PHP 250,000
- Finished goods: beginning PHP 300,000, ending PHP 350,000
| Statement of Cost of Goods Manufactured and Sold | PHP |
|---|---|
| Direct materials used | 1,100,000 |
| Direct labor | 900,000 |
| Factory overhead applied (50,000 x 40) | 2,000,000 |
| Total manufacturing costs | 4,000,000 |
| Add: Work in process, beginning | 200,000 |
| Less: Work in process, ending | (250,000) |
| Cost of goods manufactured | 3,950,000 |
| Add: Finished goods, beginning | 300,000 |
| Less: Finished goods, ending | (350,000) |
| Cost of goods sold at normal cost | 3,900,000 |
| Add: Underapplied overhead | 20,000 |
| Cost of goods sold, adjusted | 3,920,000 |
Actual overhead is 90,000 + 150,000 + 1,780,000 = PHP 2,020,000, so overhead is underapplied by PHP 20,000, closed to Cost of Goods Sold here as immaterial.
4. Scrap, Spoiled Goods, Defective Units, and Rework
| Item | Definition | Accounting in Job Order Costing |
|---|---|---|
| Scrap | Residue with small sales value (trimmings, shavings) | Sales value credited to the specific job if traceable; otherwise to Factory Overhead Control (or other income) |
| Normal spoilage due to a job's special requirements | Units that cannot be reworked, caused by the job's specifications | Disposal value to Spoiled Goods; the net loss stays in that job |
| Normal spoilage common to all jobs | Inherent in the process | Disposal value to Spoiled Goods; net loss charged to Factory Overhead Control (anticipated in the predetermined rate) |
| Abnormal spoilage | Beyond normal expectations | Disposal value to Spoiled Goods; net loss to Loss from Abnormal Spoilage (a period expense) |
| Rework (defective units) | Units reworked and sold as good units | Rework cost to the job (special requirements), to Factory Overhead Control (normal, all jobs), or to a loss account (abnormal) |
Worked example. Job 101 is for 1,000 units: direct materials PHP 50,000, direct labor PHP 30,000, and overhead applied at 150% of direct labor, PHP 45,000, total PHP 125,000 (PHP 125 per unit). Fifty units are spoiled and can be sold for PHP 40 each (PHP 2,000).
| Nature of Spoilage | Entry | Cost of the 950 Good Units |
|---|---|---|
| Caused by Job 101's specifications | Dr. Spoiled Goods 2,000; Cr. Work in Process 2,000 | 123,000 / 950 = PHP 129.47 |
| Normal, common to all jobs | Dr. Spoiled Goods 2,000; Dr. Factory Overhead Control 4,250; Cr. Work in Process 6,250 | 118,750 / 950 = PHP 125.00 |
| Abnormal | Dr. Spoiled Goods 2,000; Dr. Loss from Abnormal Spoilage 4,250; Cr. Work in Process 6,250 | 118,750 / 950 = PHP 125.00 |
The PHP 6,250 credited to Work in Process is the full cost of the 50 spoiled units (50 x 125); the PHP 4,250 is that cost net of the disposal value.
A company applies overhead at PHP 60 per machine hour. During the year, actual overhead was PHP 1,290,000 and 21,000 machine hours were worked. Which statement is correct?
Overhead is underapplied by PHP 30,000
Overhead is overapplied by PHP 30,000
Overhead is underapplied by PHP 60,000
Overhead is overapplied by PHP 1,260,000
Job 45 for 500 units has total costs of PHP 100,000 when 20 units are spoiled with a disposal value of PHP 50 each. The spoilage is normal and common to all jobs. What entry records the spoilage?
Dr. Spoiled Goods 1,000; Cr. Work in Process 1,000
Dr. Factory Overhead Control 4,000; Cr. Work in Process 4,000
Dr. Spoiled Goods 1,000; Dr. Loss from Abnormal Spoilage 3,000; Cr. Work in Process 4,000
Dr. Spoiled Goods 1,000; Dr. Factory Overhead Control 3,000; Cr. Work in Process 4,000
Direct materials used were PHP 800,000, direct labor PHP 600,000, applied overhead PHP 900,000, beginning work in process PHP 150,000, and ending work in process PHP 180,000. What is the cost of goods manufactured?
PHP 2,300,000
PHP 2,270,000
PHP 2,330,000
PHP 2,450,000
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