Job Order Costing
What is Job Order Costing?
Job order costing is assigning costs to determine the costs of the production of a good. Job order costs are usually assigned to an individual product or a batch.
Job Order comprises of three costs: Direct Materials + Direct Labour + Factory Overheads
How Do You Calculate Factory Overhead Rates?
When calculating the cost of an individual product or batch it can be sometimes difficult to calculate the factory overhead due to their indirect nature. As a result, factory overheads are often linked to a unit such as labour hours or machine hours.
Factory Overhead Rate can be determined by the following formula:
(Total Factory Overhead Over a Period of Time)/(Total Input Driver Over Same Period of Time)
See the example video above for an overview.
Worked Example: Job Order Costing
TelePeople, are a telephone manufacturing company that produces landline phones. The following costs have been given for the production of a batch of 200 phones.
- Direct materials - 250kg of material at $20/kg
- Direct Labour - 100 hours at $25/hour
- Factory overheads for the year were $175,000 and are linked to direct labour hours.
- Direct labour hours for the year was 25,000 hours
Find the Cost of producing one batch of 200 phones.
Step 1: Calculate the Direct Material
Direct material = 250 * $20 = $5,000
Step 2: Calculate the Direct Labour
Direct labour = 100 * $25 = $2,500
Step 3: Calculate the Factory Overhead Rate
In this example, the factory overhead rate is linked to direct labour hours. We are given the factory overheads for the year and the direct labour hours used for the year. By dividing the direct labour hours used in the year by the factory overhead, we can determine the factory overhead per direct labour hour.
Factory overhead per year = $175,000
Direct labour hours per year = 25,000
Factory overhead per direct labour hour:
= $7 per direct labour hour
Step 4: Calculate the Factory Overhead per Batch
We know that 100 direct labour hours were used in the batch of 200 phones. To find the factory overhead, multiply the factory overhead rate by the direct labour hours used in the batch.
Factory overhead per batch:
= $7 * 100
Step 5: Put it Together
Job Order = Direct Materials + Direct Labour + Factory Overhead
Job Order = $5,000 + $2,500 + $700 = $8,200