The following example will show the flow of costs within a job order cost system. Your company has started three jobs during the current year: Job 1, Job 2, and Job 3. The costs incurred for each job (i.e., the job cost records) are shown below:
| Direct materials | $5,740 |
|---|---|
| Direct labor | $2,500 |
| Factory overhead | $3,000 |
| Total costs incurred | $11,240 |
| Direct materials | $4,210 |
|---|---|
| Direct labor | $1,940 |
| Factory overhead | $2,625 |
| Total costs incurred | $8,775 |
| Direct materials | $8,410 |
|---|---|
| Direct labor | $5,300 |
| Factory overhead | $6,250 |
| Total costs incurred | $19,960 |
Note: The total costs for direct materials, direct labor, and factory overhead are provided in this example. Later in this lesson, you will get a detailed look at the flow of costs for Job 1, including all journal entries and ledger accounts (t-accounts).
All three jobs were started during the current year. Job 1 was completed and sold. Job 2 was completed, but has not yet been sold. Job 3 was started, but has not yet been completed. Figure 11.1 below shows the flow of costs for these three jobs:
As you can see above, the costs for Jobs 1, 2, and 3 have been debited to the work in process inventory account. Costs are added to the work in process account when the job has started. Jobs 1 and 2 were completed, and the costs for these jobs were moved into the finished goods inventory account. This is done by debiting the finished goods inventory account to add the costs and crediting the work in process inventory account to remove the costs. The finished product from Job 1 was sold. The costs for Job 1 were moved from the finished goods inventory account to the cost of goods sold (expense) account using a debit to cost of goods sold (to add the cost) and a credit to the finished goods inventory account (to remove the cost).
The costs are accumulated as the product is being built and flow with the product through the accounting system.