Job Order Costing System Exercises and Problems:

 Exercise 1--Cost accumulation Procedure Determination

 Exercise 2--Job order cost sheet
 Exercise 3--Job order costing-T Accounts and Journal Entries
 Exercise 4--Job Order Cycle Entries
 Exercise 5--Journal entries, T Accounts, Over and Under applied overhead Income
Statement
 EXERCISE 1--COST ACCUMULATION PROCEDURE DETERMINATION:
Classify these industries with respect to the type of cost accumulation procedure generally used--job
order costing or process costing.
a. Meat k. Pianos
b. Sugar l. Linoleum
c. Steel m. Leather
d. Breakfast cereal n. Nylon
e. Paper boxes o. Baby foods
f. Wooden furniture p. Locomotives
g. Toys and novelties q. Office machines equipment
h. Coke r. Luggage
i. Cooking utensils s. Paint
j. Caskets t. Tires and tubes
SOLUTION:
 Job order cost procedure: (e), (f), (g), (i), (j), (k), (p), (q), (r)
 Process costing procedure: (a), (b), (c), (d), (h), (l), (m), (n), (o), (s), (t)
EXERCISE 2--JOB ORDER COST SHEET:
Forge Machine Works collects its cost data by the job order cost accumulation procedure. For Job 642,
the following data are available:
Direct Materials Direct Labor
9/14 Issued $ 1,200Week of Sep. 20 180 hrs @ $6.20/hr
9/20 Issued 662Week of Sep. 26 140 hrs @ $7.30/hr
9/22 Issued 480
Factory overhead applied at the rate of $3.50 per direct labor hour. Required:
1. The appropriate information on a job cost sheet.
2. The sales price of the job, assuming that it was contracted with a markup of 40% of cost.

SOLUTION:
1.
Forge Machine Works
Job Order Cost Sheet--Job 642
Direct materials Direct labor Applied factory overhead
Date Issued Amount Date (Week of) Hours Rate Cost Date (Week of) Hours Rate Cost
9/14 $1,200 9/20 180 $6.20 $1,116 9/20 180 $3.50 $630
9/20 662 9/26 140 7.30 1,022 9/26 140 3.50 490
9/22 480
-------- ---------- ----------
$2,342 $2,138 $1,120
===== ====== ======
2.
Sales Price of job 642, contracted with a markup of 40% of cost:
Direct materials $2,342
Direct labor 2,138
Applied factory overhead 1,120

Total factory cost $5,600

Markup 40% of cost 2,240
-------
$7,840
=====
EXERCISE 3--JOB ORDER COSTING:
The Cambridge Company uses job order costing. At the beginning of the May, two jobs were in process:
Job 369 Job372
Materials $ 2,000 $ 700
Direct labor 1,000 300
Applied factory overhead 1,500 450
There was no inventory of finished goods on May1. During the month, Jobs 373, 374, 375, 376, 378, and
379 were started. Materials requisitions for May totaled $13,000, direct labor cost, $10,000, and actual
factory overhead, $16,000. Factory overhead is applied at a rate of 150% of direct labor cost. The only
job still in process at the end of May is No. 379, with costs of $1,400 for materials and $900 for direct
labor. Job 376, the only finished job on hand at the end of May, has a total cost of $2,000.
Required:
1. T accounts for work in process, finished goods, cost of goods sold, factory overhead
control, and applied factory overhead.
2. General journal entries to record:
a. Cost of goods manufactured
b. Cost of goods sold
c. Closing of over or underapplied factory overhead to cost of goods sold.

SOLUTION:
T Accounts
 Work in Process Finished Goods
May1 Balance Finished From Cost of goods sod 38,300
No. 369 4,500 goods 40,300 Work in Process 40,300May31
No. Balance:
372 1,450Materials 13,000 No.376 2,000
Direct labor 10,000
Factory O/H 15,000
43,950 Cost of Goods sold
May31 Balance: From finished
No. 379 3,650* goods 38,300Underapplied
Overhead 1,000
39,300

Applied Factory Overhead

*$1,400 + $900 + ($900 × 150%)
Factory Overhead Control 15,000 15,000
16,000 15,000 1,000
16,000

General journal entries to record:

Cost of goods manufactured: Dr Cr
Finished goods 40,300
Work in process 40,300
Cost of goods sold:
Cost of goods sold 38,300
Finished goods 38,300
Closing of underapplied factory overhead to cost of goods
sold:
Cost of goods sold 1,000
Factory overhead control 1,000
EXERCISE 4--JOB ORDER CYCLE ENTRIES:
Beaver, inc. provided the following data for January, 19B:
Materials and supplies:
Inventory, January 1, 19B $10,000
Purchases on account 30,000
Labor:
Accrued, January 1, 19B 3,000
Paid during January (ignore payroll taxes) 25,000
Factory overhead costs:
Supplies (issued from materials) 1,500
Indirect labor 3,500
Depreciation 1,000
Other factory overhead costs (all from outside suppliers on account) 14,500
Work in process:
Job1 Job2 Job3 Total
Work in process January 1, 19B $ 1,000 -- -- $ 1,000
Job costs during January, 19B:
Direct materials 4,000 $6,000 $5,000 15,000
Direct labor 5,000 8,000 7,000 20,000
Applied factory overhead 5,000 8,000 7,000 20,000
Job 1 started in December, 19A, finished during January, and sold to a customer for $21,000 cash
Job 2 started in January, not yet finished.
Job 3 started in January, finished during January, and now in the finished goods inventory awaiting
customer's disposition
Finished goods inventory January 1, 19B.
Required:
Journal entries, with detail for the respective job orders and factory overhead subsidiary records, to to
record the following transactions for the January:
1. Purchase of materials on account.
2. Labor paid.
3. Labor cost distribution.
4. Materials issued.
5. Depreciation for the month.
6. Acquisition of other overhead costs on credit.
7. Overhead applied to production.
8. Jobs completed and transferred to finished goods.
9. Sales revenue.
10. Cost of goods sold.
SOLUTION:
Journal Entries:
Subsidiary
Debit Credit
Record
1 Materials 30,000
Accounts payable 30,000
2 Accrued payroll 25,000
Cash 25,000
3. Factory overhead control 3,500
Indirect labor 3,500
Work in process (WIP) 20,000
Job1 5,000
Job2 8,000
Job3 7,000
Payroll 23,500
4. Work in process 15,000
Job1 4,000
Job2 6,000
Job3 5,000
Factory overhead control 1,500
Supplies 1,500
Materials 16,500
5 Factory overhead control 1,000
 Depreciation 1,000
Accumulated Depreciation 1,000
6 Factory overhead control 14,500
Other factory overhead costs 14,500
Accounts payable 14,500
7 Work in process 20,000
Job1 5,000
Job2 8,000
Job3 7,000
Factory overhead control (or applied FOH) 20,000
8 Finished goods 34,000
Work in process (WIP) 34,000
Job1 15,000
Job3 19,000
9 Cash 21,000
Sales 21,000
10Cost of goods sold 15,000
Finished goods 15,000
EXERCISE 5 JOB ORDER COSTING--JOURNAL ENTRIES, T ACCOUNTS, INCOME STATEMENT
Hogle Company is a manufacturing firm that uses job order costing system. On January 1, the beginning
of its fiscal year, the company's inventory balances were as follows:
Raw materials $20,000
Work in process $15,000
Finished Goods $30,000
The company applies overhead cost to jobs on the basis of machine-hours worked. For the current year,
the company estimated that it would work 75,000 machine-hours and incur $450,000 in manufacturing
overhead cost. The following transactions were recorded for the year
1. Raw materials were purchased on account, $410,000.
2. Raw materials were requisitioned for use in production, $380,000 ($360,000 direct
materials and $20,000 indirect materials).
3. The following costs were incurred for employee services: direct labor, $75,000; indirect
labor, $110,000; sales commission, $90,000; and administrative salaries, $20,000.
4. Sales travel costs were $17,000.
5. Utility costs in the factory were $43,000.
6. Advertising costs were $180,000.
7. Depreciation was recorded for the year, 350,000 (80% relates to factory operations, and
20% relates to selling and administrative activities).
8. Insurance expired during the year, $10,000 (70% relates to factory operations, and 30%
relates to selling and administrative activities).
9. Manufacturing overhead was applied to production. Due to greater than expected
demand for its products, the company worked 80,000 machine-hours during the year.
10. Goods costing $9,00,000 to manufacture according to their job cost sheets were
completed during the year.
11. Goods were sold on account to customers during the year at a total selling price of
$1,500,000. The goods cost $870,000 to manufacture according to their job cost sheets.
Required:
1. Prepare journal entries to record the preceding transactions.
2. Post the entries in (1) above to T-accounts (don't forget to enter the beginning balances
in the inventory accounts).
3. Is manufacturing overhead underapplied or overapplied for the year? Prepare journal
entry to close any balance in the manufacturing overhead account to cost of goods sold (COGS).
Do not allocate the balance between ending inventories and cost of goods sold (COGS).
4. Prepare an income statement for the year.
SOLUTION:
1: Journal Entries
1 Raw materials 410,000
Accounts payable 410,000
2 Work in process 360,000
Manufacturing overhead 20,000
Raw materials 380,000
3 Work in process 75,000
Manufacturing overhead 110,000
Sales commission 90,000
expense
Administrative salaries 200,000
expense
Salaries and wages 475,000
payable
4 Sales travel expense 17,000
Accounts payable 17,000
5 Manufacturing overhead 43,000
Accounts payable 43,000
6 Advertising expense 180,000
Accounts payable 180,000
7 Manufacturing overhead 280,000
Depreciation expense 70,000
Accumulated 350,000
depreciation
8 Manufacturing overhead 7,000
Insurance expense 3,000
Prepaid insurance 10,000
9*Work in process 480,000
Manufacturing overhead 480,000
10Finished Goods 900,000
Work in process 900,000
11Accounts Receivable 1,500,000
Sales 1,500,000
Cost of goods sold 870,000
Finished goods 870,000
*The predetermined overhead rate for the year would be computed as follows:
Predetermined overhead rate = Estimated total manufacturing overhead cost / Estimated total units in the
allocation base
 = $450,000 / 75,000 machine-hours
= $6 per machine-hour
Based on the 80,000 machine-hours actually worked during the year, the company would have applied
$480,000 in overhead cost to production: 80,000 machine-hours × $6 per machine-hour = $480,000.
2: T Accounts
Accounts Receivable Raw Materials Work in Process
11 1,500,000 Bal. 20,000 (2) 380,000 Bal. 20,000 (10) 900,000
(1) 410,000 (2) 360,000
(3) 75,000
Bal. 50,000 (9) 480,000

Finished Goods Bal. 30,000

Bal. 30,000 (11) 870,000 Prepaid Insurance
Accumulated Depreciation
10 900,000
(8) 10,000 (7) 350,000

Accounts Payable
(1) 410,000
(4) 17,000
(5) 43,000 Salaries and Wages Payable Manufacturing Overhead
(6) 180,000 (3) 475,000 (2) 20,000 (9) 480,000
(3) 110,000
(5) 43,000
(7) 280,000
Sales (8) 7,000
(11) 1,500,000 Cost of goods sold
(11) 870,000 460,000 480,000
Bal. 20,000

Sales Commissions Expenses

(3) 90,000 Administrative Salary Expense
(3) 200,000 Insurance Expense
(8) 3,000

Advertising expense
Depreciation Expenses
(6) 180,000
(7) 70,000 Sales Travel Expense
(4) 17,000

3: Under or Overapplied manufacturing overhead:

Manufacturing overhead is overapplied for the year. The entry to close it out to cost of goods sold is as
follows:
Manufacturing overhead 20,000
Cost of goods sold 20,000
4: Income Statement
HOGLE COMPANY
Income Statement
For the Year Ended December 31
Sales $1,500,000
Less cost of goods sold ($870,000 - $20,000 overapplied O/H 850,000
--------------
Gross margin 650,000
Less selling and administrative expenses:
Commission expense $90,000
Administrative salaries expense 200,000
Sales travel expense 17,000
Advertising expense 180,000
Depreciation expense 70,000
 Insurance expense 3,000 560,000
------------ -------------
Net operating income $90,000
======


THE DIFFERENCES BETWEEN COST ACCOUNTING AND FINANCIAL ACCOUNTING

Cost Accounting

Financial Accounting

1. Nature

Classifies, records, present and interprets in a significant manner the material, labour, overhead costs
involved in manufacturing and selling each product, job and service.

Classifies, records, presents and interprets in terms of financial character and provides the figures for
the preparation of the financial statements.

2. Primary users of information

The users are internal users. They are members of the management.

The users of Financial Accounting statements are mainly external to the business enterprise. External
users include shareholder, creditors, financial analyst and government authorities

3. Accounting method

Does not based on the double entry system

Follows the double entry system.

4. Accounting Principle

Does not bound to use the ‘generally accepted accounting principles’. It can use any accounting
technique that generates useful information.

The ‘generally accepted accounting principles’ are important and are used extensively.
5. Unit of measurement

Applies any measurement unit that is useful in a particular situation; such as labour hours, and machine
hours.

All information is in term of money.

6. Report frequency

Data and statements are prepared whenever needed. Reports may be prepared on a monthly, weekly
or even daily basis.

Data and statement are developed for a definite period, usually a year.

7. Time dimension

Concerned with future information as well as past information

Reports what has happened in the past in an organisation.

Job Order Costing System-Case Study:

 Case A: Job Order Costing; General and Factory Ledger
 Case B: Determination of Cost
 Case C: Improving a Cost Information and Accumulation System
 Case D: Installing a Cost Information and Accumulation System
 Case E: Designing Cost Accumulation Procedures
JOB ORDER COSTING; GENERAL AND FACTORY LEDGER:
On December 31, 19A, after closing, the ledgers of the Vilas-LaMesa Company contained
these accounts and balances:
Cash $47,000 Accounts payable $59,375
Accounts receivable 50,000 Common stock 100,000
Finished goods* 32,500 Retained earnings 34,925
Work in process* 7,500 Factory ledger 62,000
Materials* 22,000 General ledger* 62,000
Machinery* 35,300
*Maintained in the factory ledger
Details of the three inventories are:
Finished goods inventory: Item X--1,000 units @ $12.50 $12,500
Item Y--2,000 units @ $10.00 $20,000
------------
Total $32,500
======
Work in process inventory: Job 101 Job102
Direct materials:
500 units of A @ $5.00 $2,500
200 units of B @ $3.00 $600
Direct labor:
 500 hours @ $4.00 2.00
200 hours @ $5.00 1,000
Factory overhead applied @ $2.00/hour 1,000 400
------------ -----------
Total $5,500 $2,000
====== ======
Materials inventory:
Materials inventory: Materials A-2,000 units @ $5.00 $10,000
Materials B-4,000 units @ $3.00 $12,000
------------
Total $22,000
======
During January, 19B, these transactions were completed:
 Purchase on account: Materials A, 10,000 units @ $5.20; Materials B, 12,000 units
@ $3.75; indirect materials, $17,520.
 Payroll totaling $110,000 was paid. Of the total payroll, $20,000 was
for marketing and administrative salaries. Payroll deductions consisted of $15,500 for
employees' income tax and 6.5% for FICA tax.
 Payroll to be distributed as follows: Job 101, 5,000 direct labor hours @ $4.00; Job
102, 8,000 direct labor hours @ $5.00; Job 103, 6000 direct labor hours @ $3.00; indirect
labor, $12,000; marketing and administrative salaries, $20,000. Employers payroll
taxesare: FICA, 6.5%; state unemployment, 2.7%; federal unemployment, 0.7%.
 Materials were issued on a first in first out (FIFO) basis as follows: Materials A,
10,000 units (charged to Job 101); Materials B, 12,000 units (charged to Job 102);
Materials A, 1,000 units, and Materials B, 2,500 units (charged to Job 103). (Note:
Transactions are to be taken in consecutive order.) Indirect materials amounting to $7,520
were issued.
 Factory overhead was applied to jobs 101, 102, and 103 based on the rate of $2.00
per direct labor hour.
 Jobs 101 and 102 were completed and sold on account for $120,000 and $135,000,
respectively.
 After allowing a 5% cash discount, a net amount of $247,000 was collected on
account receivable.
 Marketing and administrative expenses (other than salaries) paid during the month
amounted to $15,000. Miscellaneous factory overhead of $10,800 was paid and transferred
to the factory. Depreciation on machinery was $2,000.
 Payment on account, other than payroll paid, amounted to $85,000.
 The over- or underapplied factory overhead is to be closed to the cost of goods sold
account.
Required:
1. Trial balances of the general ledger and of the factory ledger as of January 1,
19B.
2. General ledger and factory ledger accounts opened and balances recorded
from the January 1 trial balances.
3. Journal entries to record the January transactions.
4. The posting of January transactions to the general ledger, factory ledger, and
subsidiary ledgers for materials, work in process, finished goods and factory
overhead incurred.
 5. Trial balances of the general ledger and the factory ledger as of January 31,
19B, reconciliation control accounts with subsidiary ledgers.
6. A statement of cost of goods sold for January.
Solution:
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DETERMINATION OF COST:
The presented of the Nola Cola Company has heard rumblings of dissatisfaction among
board of directors about the relatively low net earnings of the company. Several directors
are not satisfied with the accounting reports being issued.
They believe, it appears, that the shipping and delivery expenses are responsible,
that advertising is in line, and that administrative expenses, although possibly somewhat
above normal, are not out of control. Their primary criticism seems leveled at
manufacturing costs.
Consequently, a meeting of the board of directors has been called in order to examine
critically the accounting system is use for determining manufacturing costs; that is, the cost
of a Nola Cola bottle ready for delivery as it comes from the last operation of the bottling
process.
Sensing some of the problems involved, the president has adopted a recognized technique
of executive strategy. Before having the controller explain the accounting system in use, the
president has decided to ask for an opinion as to what item should be included in the proper
determination of the cost of a bottle of Nola Cola. For example, the president believes there
is mutual agreement that such items as syrup, water, carbonation, and bottle caps are
properly part of manufacturing costs.
Required: A list of other items that should be included, and to what extent.
Solution:
A number of specific items may be mentioned:
1. Direct labor cost.
2. Wear and breaking of bottles and cases.
3. A share of manufacturing expenses other than direct materials ad direct
labor, i.e., factory overhead.
As these specific items are mentioned, the discussion should be channeled into a
consideration of several "general" problems of cost accounting:
1. The problem of setting up an equitable and economical cost determination
system.
2. The need for the system also to provide devices and information for control
and decision-making purposes.
3. The problem of measurement and assignment of overhead costs to work
completed.
4. The fact that cost figures are, at best, estimates. Yet, although we may never
know what the exact cost is, we can obtain useful information at a reasonable price.
IMPROVING A COST INFORMATION AND ACCUMULATION SYSTEM:
An examination of costing methods and procedures in the Franklin Printing Company reveals
the following:
1. Costing formulas and ratios prepared a long time ago are still being used by
estimators even though prices for materials have increased, overhead is higher, and
new machinery has been installed.
 2. An estimator in the production department and a cost clerk in the cost
department prepare estimates independently from one another, resulting in widely
divergent cost figures.
3. A profit per individual job or order can never be determined.
4. Each job or order is sold with a definite markup. Yet, instead of a profit of
$100,000 as the president hopped for, the chief accountant prepared an income
statement showing only a $48,000 profit.
5. Determining departmental efficiency and control over expenses is not
possible.
Required: A statement outlining:
A. Possible causes of the existing conditions.
B. Possible steps to remedy the situation.
Solution:
A. Possible causes of the existing conditions:
1. The printing industry makes use of predetermined rates and pricing tables. At
times advancement of materials labor costs is not incorporated quickly enough. The
installation of new machinery requires individual attention to the cost situation.
2. This situation is unusual. estimator, in many firms, operates with future costs
and prices while the cost department bases its calculations on present or experienced
costs. Often the situation is particularly critical with regard to the overhead
rates used by the two parties.
3. This situation is also typical of the printing industry. Generally, a printer has
many jobs: some require only a very short time, others continue over several weeks.
Cost determination becomes a job of averaging costs over the time. Therefore, an
individual profit per job can rarely be calculated on the basis of the books and
records.
4. This result can be traced to the fact that cost estimates are based on
erroneous and outdated costs and percentages. It could also be caused by a steady
increase of fixed costs that consume the imaginary profit calculated in the estimates.
Overhead rates might be out of line with actual experience.
5. The company's management might never have considered the delegation of
authority and responsibility to supervisors. With costs so for out of line it may be
that no manager has been asked to contribute ideas and prepare cost estimates for a
better performance in his or her department.
B. Possible steps to remedy the situation:
1. Check industry rates and prices with company's costs. Revise and keep up to
date, so that estimates can be based on realistic figures.
2. Let estimator prepare bids and estimates, but costs and prices used should be
set in collaboration with the cost department. Differences should be explainable and,
if possible, brought into agreement.
3. The determination of profit per job or order depends greatly upon the
revisions suggested in (1) and (2). Also, a job order cost accumulation of actual
costs may be practical. Many factors might still prevent a completely accurate profit
determination; however, basing the estimates on realistic data and company
overhead rates and modifying these estimates as circumstances change will result in
a more satisfactory job cost and profit picture.
4. Here, too, rates and costs must be examined in the light of present
conditions. It is important to examine fixed costs that have entered into the cost
situation unnoticed. The preparation of a budget with a continuous reporting scheme
 would assist in avoiding the difficulty of this unpleasant report regarding the final
profit.
5. The steps needed in (4) are also part of this answer. Departmental budgets
will permit (1) the calculation of overhead rates and (2) a close watch over actual
expenses by supervisors. Weekly or monthly reports will assist the supervisors in
keeping the costs within the budget limits; that is, within the predetermined profit
range.
INSTALLING A COST INFORMATION AND ACCUMULATION SYSTEM:
A textile manufacturer asks advice concerning the installation of a cost system. The
manufacturer explains briefly that many different cloths are produced, starting with scoured
wool that passes through the following processing before becoming finished cloth: picking
and blending, carding, spinning, weaving, finishing, and dyeing. The company's sales
representatives take orders considerably in advice of the actual production of the cloth,
using samples produced during a special period set aside each season for the manufacture
of samples. Competition is keen and the profit margin is low. The financing is received
through bank loans.
Required:
1. The principle advantages of installing a cost system.
2. The principle additions or alterations necessary to operate a cost system.
(The present accounting system is designated for the purpose preparing annual
financial statements.)
3. An explanation of how matters can be arranged in order to find the cost of the
principle stages of manufacture, such as carding, spinning, weaving, etc. (The
carding machines operate three shifts per day; the spinning machines, two shifts;
and the weaving machines, one shift.)
Solution :
A: The principle advantages of installing a cost system are:
1. The ascertainment of unit costs of the various products. Unit costs are
variable in determining minimum sales prices and in eliminating unprofitable lines.
2. Improvement in efficiency by comparison of cost details at regular intervals.
3. More adequate information, which is available for inventory costing.
4. Establishing control over production
B: To operate a cost system, it would be necessary to amplify the accounting procedure by
providing for:
1. More detailed analysis of disbursements.
2. Perpetual inventory records.
3. Monthly accumulation of detailed figures relating to costs of each operation
and product.
C: Divide the factory into departments for cost accumulating purposes corresponding to
the natural divisions, such as Carding Department, Spring Department, and Weaving
Department. Break down the analysis of factory overhead according to these department
departments. This automatically takes care of the differences in operating shifts.

DESIGNING COST ACCUMULATION PROCEDURES:

A client has asked advice as to a satisfactory system of factory costs for a factory that is
divided into two main divisions:
1. Machine Shop: This division makes steel molds used in the manufacture to
plastic articles. These molds require careful precision work; and frequently, one
 person is employed at machining one mold for several weeks. The finished molds are
used by the Plastic Division of the company. In addition, some other machine work is
done for customers, although this forms the smaller portion of the shop's output.
2. Plastic Division: This division manufactures plastic articles including ash trays,
buttons, knobs, etc. The process of manufacture consists of placing chemical
powders in a mold, which is then placed under a steam press where pressure is
applied for a few minutes. The chemical powders are the only materials used and are
not processed before being placed in the mold. After being processed, a certain
amount of finishing and inspection labor is necessary to complete the articles.
It is ascertained that:
 The company has had no previous cost records.
 Production in both divisions is controlled by job order tickets.
 Materials are kept in one place, but no record has been kept of withdrawals.
 Labor is paid at hourly rates, and a time clock at the factory entrance is used for
determining the hours worked in any day.
 Employees have been preparing satisfactory time tickets showing the hours worked
on each job and, in the case of the plastics division, the number of units produced; but this
record has never been balanced against the wages paid nor the record of production.
 Spoilage is a substantial factor in both divisions.
 The machine shop and the plastic division are in separate parts of the one building.
 The company has a satisfactory system of general ledger accounting.
Required: A method or methods for obtaining factory costs, explaining why they are
considered the most satisfactory under the circumstances.
Solution:
Regardless of what cost system is installed, three changes should be made in the company's
methods:
1. A control should be established over materials. Requisitions should be used.
2. Factory overhead should be segregated between the two divisions. Direct
departmental charges should be made as much as possible. Common costs should be
apportioned to each department on an equitable basis.
3. Clock cards should be balanced with employees' time sheets.
If these matters are resolved satisfactorily, the costs might be obtained as follows:
Machine Shop. The product seems to be custom item so that job costing seems
appropriate. Overhead should be charged to the product on some predetermined basis.
Plastic Division. It seems that job order costing system is also possible here. The
overhead might be charged to the product on different bases if the machine used would
suggest different rates. This might make possible the creation of cost centers.
General. Any cost system should permit comparison with estimated figures.