What kind of companies use job order costing?

Job order costing is also used for service businesses where the service and costs are unique to each customer, such as those of an attorney, accountant, physician, or event planner. Each customer, client, or patient is a separate job or project. Clients, customers, and patients incur direct costs, direct labor and applied overhead costs. And while there are no materials related to inventory for a service business, there may be expenditures associated directly with a particular project, such as travel or supplies.

2.3.1 Comprehensive Example of Job Order Costing Transactions for a Service Company

Creative Compton, Inc. is an advertising agency that designs web sites and promotional materials for medium-sized businesses. For each client project, Creative Compton accumulates the direct labor costs of its professional designersat an hourly rate of $140. The company allocates overhead costs to jobs at a rate of 35% of total direct labor cost incurred. Creative Compton, Inc. earns a 60% profit on each job.

Journalize the journal entries for the direct labor, the overhead, the sale of the project, and the reconciliation of actual to estimated overhead.

1. Job 4 incurs 20 hours of professional direct labor time (20 hours x $140 per hour).

   Account	Debit	Credit
   Development Costs	2,800		▲ Development Costs is an asset account
   Wages Payable		2,800	▲ Wages Payable is a liability account that is increasing

2. The company pays cash for the following costs that are directly related to Job 4: travel, $340; supplies, $60; and domain name filing fees, $120.

   Account	Debit	Credit
   Development Costs	520		▲ Development Costs is an asset account that is increasing
   Cash		520	▼ Cash is an asset account that is decreasing

3. Estimated overhead costs incurred for Job 4 are $980. ($2,800 direct wages cost x 35%)

   Account	Debit	Credit
   Development Costs	980		▲ Development Costs is an asset account that is increasing
   Overhead		980	▼ Overhead is an expense account that is decreasing

4. A customer is invoiced for the completed Job 4.

   Account	Debit	Credit
   Accounts Receivable	6,880		▲ Accounts Receivable is an asset account that is increasing
   Fees Earned		6,880	▲ Sales is a revenue account that is increasing
   Cost of Service	4,300		▲ Cost of Services is an expense account that is increasing
   Development Costs		4,300	▼ Development Costs is an asset account that is decreasing

   There are two journal entries for a sale. The first is to record the project’s selling price to the customer. The second is to reduce the development costs incurred and expense them off to Cost of Services.

   Cost of the project: $2,800 direct labor + $520 direct costs + $980 overhead costs = $4,300

   Selling price of the project: $4,300 costs x 1.6 to include the markup = $6,880

5. Actual overhead for Job 4 is ultimately determined to be $960.

   Account	Debit	Credit	Too much factory overhead was applied in transaction #3
   Overhead	20		▲ Overhead is an expense account that is increasingthat is increasing
   Cost of Service		20	▼ Cost of Services is an expense account decreasing

   In transaction #3, recorded previously, $980 of overhead was applied to Development Costs based on an estimate of 35% of direct labor. The difference between applied factory overhead and estimated factory overhead is $20 ($980 estimated - $960 actual). Since too much had been applied, $20 now needs to be backed out by debiting the Overhead account. Cost of Services is used as the credit account rather than Development Costs in reconciling the Overhead account.