The most important thing in Job Order Costing is the separation of costs. What was spent in a project is charged to that project.

So, in our simple example, the total cost of the first house is P320,000 + P970,000 + P275,000 = P1,565,000

The second house, P600,000 + P1,778,000 + P540,000 = P2,918,000

The third house, P400,000 + P875,000 + P430,500 = P1,705,500

Alright, now let’s introduce the usual complication in Job Order Costing: the allocation of overhead costs.

If you would remember, overhead costs include:

Rent of factory building

Depreciation of manufacturing equipment

Utilities used in production

Repairs and maintenance of manufacturing equipment and machineries

Etc.

In our example, the company received three orders to build houses. If the time frame and the resources permit, the company can schedule the use of their existing machinery and equipment in the building of the houses. Say, on the first week, the machinery and equipment can be used in house number one. At that time, planning for house number two is still ongoing as it’s a bigger project than house number one. For house number three, it’s also possible that it’s still on planning phase, or the activity involved is to acquire and deliver the materials on the location. Project management is complicated that way. But oh well, we’re only concerned with the costing here, right?

Let the project managers worry about scheduling and whatnot.

So, we have three houses, three different projects, three different orders, which use our existing machinery and equipment. How do we allocate the cost of the equipment or their depreciation between the three houses?

That is our concern.

Now, usually, the allocation used is simple traditional costing. You allocate the total overhead cost based on direct labor hours (or if the basis the company wants to use is specified, then use it).

Or, another thing the problems do, is that they mess up the cost records. They will provide a job with its cost of materials, and direct labor, and they will ask you for the overhead cost. The other information that they will provide are: Another job with the cost of materials, direct labor and overhead.

With only those information, how do you compute for the overhead cost of the job?

Any guess?

Well, it’s simple, really. Job Order Costing has this assumption that: when the overhead allocation is based on direct labor, the direct labor costs has a direct relationship with the overhead cost.

What do I mean?

Let’s say:

Job 101, Materials Cost is P10,000, Direct Labor Cost is P15,000, and the Overhead Cost is P30,000.

Job 102, Materials Cost is P12,000, Direct Labor Cost is P12,000, and the Overhead Cost is ?

Using Job 101 (since all three cost elements are given), the overhead cost on the basis of direct labor costs is 200%.

That’s P30,000 / P15,000 = 2 or 200%. The overhead cost is 200% of direct labor cost.

For Job 102, to compute the Overhead costs, simply multiply P12,000 by 200% = P24,000.

Simple, yeah?

What else do they complicate?

They don’t give you the total overhead costs, but they do give you information you can use to compute for it.

Say, the overhead expenses are itemized. Rent P120,000, Depreciation P55,000, and Utilities P85,000.

(Or maybe they will give you the rent per month and the other information are annual, or they give you the cost of the PPE and the useful life, they can be really creative in providing us with difficulties).

So then, total overhead is P260,000.

The other given information are as follows:

Job 201 – Materials P210,000, Direct Labor hours 12,000.

Job 202 – Materials P90,000, Direct Labor hours 9,550.

Job 203 – Materials P150,000, Direct Labor hours 10,100.

Job 204 – Materials P40,000, Direct Labor hours 2,000.

Direct labor rate per hour is P44.45. Overhead is allocated based on direct labor hours. The company has no other job order received during the year.

Think you can compute for the Overhead cost allocated to each job?

Go ahead and try. Simple pro-rata allocation. Scroll down when you have your answers.

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So yeah, they usually ask for the allocated overhead cost (when not given) and of course, for the total cost of a certain job.

And then, they also ask for the Gross Profit and Net Income. They would give you the price, you compute for the cost. With those two, you compute for the Gross Profit. They provide you with the other operating expenses and you can get the net income.