20.3 Use the Job Order Costing Method to Trace the Flow of Product Costs through the Inventory Accounts

Flow of Costs in Job Order Costing

In job order costing, costs flow through several inventory accounts before becoming cost of goods sold. Understanding this flow is essential for proper job costing.

Inventory Accounts

Three Main Inventory Accounts:

1. Raw Materials Inventory: Materials not yet used in production
2. Work in Process Inventory: Jobs in progress (partially completed)
3. Finished Goods Inventory: Completed jobs not yet sold

Cost Flow Sequence

Step 1: Purchase Raw Materials

• Materials purchased and stored
• Debited to Raw Materials Inventory
• Credited to Accounts Payable (or Cash)

Step 2: Issue Materials to Production

• Materials used in jobs
• Debited to Work in Process
• Credited to Raw Materials Inventory

Step 3: Incur Direct Labor

• Labor costs for jobs
• Debited to Work in Process
• Credited to Salaries/Wages Payable

Step 4: Apply Manufacturing Overhead

• Overhead allocated to jobs
• Debited to Work in Process
• Credited to Manufacturing Overhead

Step 5: Complete Jobs

• Jobs finished
• Debited to Finished Goods
• Credited to Work in Process

Step 6: Sell Jobs

• Jobs sold to customers
• Debited to Cost of Goods Sold
• Credited to Finished Goods

Detailed Flow Example

Marie's Catering Business - Job #101 (Office Lunch for 50 people):

Step 1: Purchase Materials

Raw Materials Inventory        €500
    Accounts Payable                           €500
To record purchase of ingredients

Step 2: Issue Materials to Job #101

Work in Process - Job #101     €400
    Raw Materials Inventory                    €400
To record materials used in Job #101

Step 3: Record Direct Labor for Job #101

Work in Process - Job #101     €290
    Salaries Payable                          €290
To record direct labor for Job #101

Step 4: Apply Overhead to Job #101

Work in Process - Job #101     €200
    Manufacturing Overhead                    €200
To apply overhead to Job #101

Job #101 Cost Summary:

• Direct materials: €400
• Direct labor: €290
• Applied overhead: €200
• Total: €890

Step 5: Complete Job #101

Finished Goods                 €890
    Work in Process - Job #101                €890
To record completion of Job #101

Step 6: Sell Job #101 (Revenue €1,500)

Accounts Receivable           €1,755
    Sales Revenue (€1,500)                   €1,500
    VAT Payable (17%)                          €255
To record sale of Job #101

Cost of Goods Sold             €890
    Finished Goods                            €890
To record cost of Job #101 sold

Job Cost Sheet

A job cost sheet is a document that accumulates all costs for a specific job.

Format:

Job Cost Sheet
Job Number: 101
Customer: ABC Company
Description: Office Lunch - 50 people
Date Started: November 1, 2024
Date Completed: November 5, 2024

Direct Materials:
  Ingredients              €200
  Beverages                150
  Packaging                 50
  Total Materials         €400

Direct Labor:
  Chef (8 hours × €25)    €200
  Server (6 hours × €15)    90
  Total Labor             €290

Applied Overhead:
  (Applied at 50% of direct labor)
  €290 × 50%              €145

Total Job Cost            €835

Work in Process Account

The Work in Process account accumulates costs for all jobs in progress.

Example:

Work in Process
─────────────────────────────────────
Materials - Job #101      €400
Labor - Job #101           290
Overhead - Job #101        200
Materials - Job #102       600
Labor - Job #102           400
Overhead - Job #102        200
─────────────────────────────────────
Balance                  €2,090

When Job #101 is completed:

Work in Process
─────────────────────────────────────
Balance (beginning)      €2,090
Less: Job #101 completed   (890)
─────────────────────────────────────
Balance (ending)         €1,200

PCN Account Classifications

Luxembourg PCN Accounts:

Raw Materials:

• 300000: Raw Materials (Matières Premières)

Work in Process:

• 310000: Work in Process (En Cours de Fabrication)

Finished Goods:

• 320000: Finished Goods (Produits Finis)

Cost of Goods Sold:

• 603000: Cost of Finished Goods Sold (Coût des Produits Vendus)

Manufacturing Overhead:

• 610000-619999: Manufacturing Overhead (Charges de Production)

Luxembourg Compliance Note

In Luxembourg:

• Must use PCN account classifications
• Costs must flow properly through accounts
• Job cost records should be maintained
• Support cost of goods sold for tax purposes
• Consider VAT in cost tracking (exclude recoverable VAT)

Think It Through

Why is it important to track costs through the inventory accounts? What happens if costs are not properly tracked through the flow?

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