Journal Entry for Job Order Costing
Introduction
In job order costing, the cost of direct materials that move from the storeroom to the production will need to be recorded to the work in process before it transforms into the finished goods. And it is the same for the direct labor costs involved in the production process.
And for the indirect raw materials and indirect labor costs, we will need to record them to the cost pool of the manufacturing overhead that includes other indirect expenses before they can further go to the work in process account.
And later when the production is finished, we can transfer the costs from work in process account to the finished goods account based on the specific job that is completed. Likewise, the journal entry for job order costing will have several steps of the accounting record that involve assigning costs in an orderly manner to the specific stage of production as below:
- Assign raw material costs to work in process and overhead
- Assign labor cost to work in process and overhead
- Apply overhead cost to production
- Transfer costs from work in process to finished goods
Journal entry for job order costing
Assign raw material costs to work in process and overhead
In the job order costing, the costs of the raw materials inventory will be assigned to the production when those raw materials are requested from the storeroom. And this is usually when we need to start making the journal entry for job order costing in order to account for the cost of the raw materials that go directly to the specific jobs as well as the costs of the indirect raw materials that go to the manufacturing overhead.
In this case, we can make the journal entry for job order costing when assigning the direct raw material costs to the production by debiting the work in process inventory account and crediting the raw materials inventory account.
| Account | Debit | Credit |
|---|---|---|
| Work in process inventory | 000 | |
| Raw materials inventory (direct) | 000 |
In this journal entry, the raw materials inventory account is an account that represents the raw materials we have on the balance sheet. And, this account usually includes both the direct raw materials and the indirect raw materials.
However, indirect raw materials are considered an overhead cost in production. Hence, we need to record them to the cost pool of manufacturing overhead first before they can be applied to the production through work in process account later. This is because the indirect raw materials are related to the production operation as a whole, but they cannot be traced to specific jobs.
Hence, we need to make the journal entry for assigning the cost of indirect materials in job order costing with the debit of the manufacturing overhead account and the credit of the raw materials inventory account as below:
| Account | Debit | Credit |
|---|---|---|
| Manufacturing overhead | 000 | |
| Raw materials inventory (indirect) | 000 |
Example for assigning raw material costs in job order costing
For example, in January, we used a total of $200,000 raw materials in production. And these $200,000 raw materials include $20,000 indirect raw materials that cannot be traced to specific jobs.
This means that there is a $180,000 ($200,000 – $20,000) direct raw materials which we can assign directly to the specific jobs through work in process account.
In this case, we can make the journal entry for job order costing in assigning the $180,000 direct raw materials to production by debiting this $180,000 to the work in process inventory account and crediting the same amount to the raw materials inventory as below:
| Account | Debit | Credit |
|---|---|---|
| Work in process inventory | 180,000 | |
| Raw materials inventory | 180,000 |
And at the same time, we can record the $20,000 indirect raw materials to the cost pool of manufacturing overhead with the journal entry below:
| Account | Debit | Credit |
|---|---|---|
| Manufacturing overhead | 20,000 | |
| Raw materials inventory | 20,000 |
Assign labor costs to work in process and overhead
Similar to the raw materials, we can assign the direct labor costs to the work in process in order to account for the labor costs that are directly related to the specific jobs.
Likewise, we can make the journal entry for assigning the direct labor cost to the production in the job order costing by debiting the work in process inventory account and crediting the labor cost account.
| Account | Debit | Credit |
|---|---|---|
| Work in process inventory | 000 | |
| Labor cost (direct) | 000 |
Similar to indirect materials, indirect labor cannot be directly assigned to specific jobs but they are related to the production operation as a whole. Hence, these indirect labor costs will also need to be recorded in the cost pool of manufacturing overhead before they are further transferred to the work in process account.
In this case, we can make the journal entry to record the indirect labor to the cost pool of manufacturing overhead with the debit of the manufacturing overhead account and the credit of the labor cost account.
| Account | Debit | Credit |
|---|---|---|
| Manufacturing overhead | 000 | |
| Labor cost (indirect) | 000 |
Example for assigning labor costs in job order costing
For example, in January, we have total labor costs of $100,000 which include the direct labor cost of $90,000 and the indirect labor cost of $10,000.
In job order costing, we can assign this $90,000 direct labor cost to the production with the journal entry of debiting the work in process inventory and crediting the labor cost account as below:
| Account | Debit | Credit |
|---|---|---|
| Work in process inventory | 90,000 | |
| Labor cost | 90,000 |
And at the same time, we can record the $10,000 indirect labor to the cost pool of manufacturing overhead as below:
| Account | Debit | Credit |
|---|---|---|
| Manufacturing overhead | 10,000 | |
| Labor cost | 10,000 |
Apply overhead cost to production
In this stage of job order costing, we usually apply the overhead cost after calculating the predetermined overhead rate. In other words, the applied overhead cost that we record in this stage is usually an estimated amount, not an actual amount of overhead that occurred.
In this stage of job order costing, we can make the journal entry to apply the overhead cost to production by debiting the work in process inventory account and crediting the manufacturing overhead account.
| Account | Debit | Credit |
|---|---|---|
| Work in process inventory | 000 | |
| Manufacturing overhead | 000 |
Predetermined overhead rate
In job order costing, the manufacturing overhead is the cost that is related to the production operation as a whole but cannot be directly assigned to specific jobs. And manufacturing overhead includes the indirect materials, indirect labor, and other indirect expenses such as utility, rent, insurance, depreciation expense, etc.
In this stage of job order costing, we usually use the predetermined overhead rate that is based on the estimated annual overhead and estimated annual activities such as estimated annual direct labor cost or direct labor hours.
This is because we usually need to make the journal entry for job order costing on a monthly basis. However, not all the cost information that is related to the manufacturing overhead is available on a monthly basis.
Hence, we usually need to use the predetermined overhead rate that can be calculated by dividing the estimated annual overhead cost by the estimated annual direct labor cost or direct labor hours.
For example, if we estimate the manufacturing overhead cost to be $80,000 for the year and the estimated annual direct labor cost to be $100,000, then the predetermined manufacturing overhead rate can be calculated to be 80% of the direct labor cost ($80,000 / $100,000).
And it is applied the same when we use the direct labor hour. For instance, assuming we still have an estimated annual overhead cost of $80,000, but we have an annual estimate of 10,000 hours of direct labor hour instead. In this case, we can calculate the predetermined manufacturing overhead rate to be $8 per direct labor hour ($80,000 / 10,000 hours).
Of course, sometime we may use the machine hours instead if the manufacturing company is heavily automated. In short, the predetermined manufacturing overhead rate can be a certain percentage of labor cost or a certain dollar per labor hour, etc. The basic concept is to make sure that we have an appropriate application of the overhead cost to specific jobs.
| Predetermined overhead rate = Estimate annual overhead / Estimated annual activities |
Example for applying overhead cost to production
For example, we estimate the annual overhead cost and the annual direct labor cost to be $600,000 and $800,000 respectively for the period. And we have a total of $90,000 direct labor cost that occurred in January.
In this case, we can calculate the predetermined overhead rate to be as below:
Predetermined overhead rate = $600,000 / $800,000 = 75%
As a result, we can apply the overhead cost to the production in January with 75% of the direct labor cost as below:
Applied overhead cost = $90,000 x 75% = $67,500
Hence, we can make the journal entry for the $67,500 applied overhead in job order costing for the January period as below:
| Account | Debit | Credit |
|---|---|---|
| Work in process inventory | 67,500 | |
| Manufacturing overhead | 67,500 |
Transferring costs from work in process to finished goods
When the production is finished, we can transfer the costs in the work in process inventory account to the finished goods inventory. This is the last step in job order costing before the finished goods are available to be sold to customers.
Likewise, in this stage of job order costing, we can make the journal entry for transferring costs from work in process to finished goods by debiting the finished goods inventory account and crediting the work in process inventory account as below:
| Account | Debit | Credit |
|---|---|---|
| Finished goods inventory | 000 | |
| Work in process inventory | 000 |
For example, at the end of June, we completed job A which is one of the jobs that we have in our production. And we have a summary of the costs related to job A below:
| Job A | Costs |
|---|---|
| Direct materials | $400,000 |
| Direct labor | $120,000 |
| Overhead costs: | $80,000 |
| Total costs | $600,000 |
In this case, we can make the journal entry to transfer the $600,000 costs from work in process to finished goods as below:
| Account | Debit | Credit |
|---|---|---|
| Finished goods inventory | 600,000 | |
| Work in process inventory | 600,000 |