Cost Calculation System

Table of contents :

  • Order-based Cost Calculation
  • Accounting for Raw Materials
  • Purchase of Raw Materials
  • Use of Raw Materials
  • Accounting For Labor
  • Incurred Labor Costs
    • Share this:

Order-based Cost Calculation

In an order-based cost calculation system (job order costing and job costing), this production cost will be accumulated for each separate job order.

An order is an output that will be identified to be able to fulfill an order at a particular customer or to replenish an item from inventory.

This differs from a process-based costing system where costs are accumulated for an operation or a subdivision of a company, such as a department.

In order to neatly calculate the cost based on the order, the order must be identifiable separately,

so that the details of this cost calculation are also based on the order according to the effort that will be required, there must be an important difference in the unit cost of one order with another order.

For example , if a printer is simultaneously preparing orders for labels, colored wrapping paper, and also drawing templates, these orders can also be easily distinguished.

The physical appearance and the cost per unit of the orders are different, so the order-based cost calculation is used.

Details about an order that will be recorded on the cost card of an order, which can be in paper or electronic form. Although many orders can be executed simultaneously,

Each order cost card that collects a single detail for one specific order only. The contents and settings of order charge cards vary from business to business.

This cost calculation is also based on orders, accumulating direct raw material costs, direct labor, and also the overhead that will be charged per order.

As a result, custom cost calculations can also be viewed in 3 interrelated parts.


Also Read:   Understanding Currency Exchange


Accounting for raw materials will maintain records of raw material inventories, load raw materials directly into orders, and also charge raw materials that are not directly overhead.

Labor accounting maintains an account – accounts related to payroll expenses, assigns labor directly to orders, and charges indirect labor to overhead.

Overhead accounting will accumulate overheads, maintain detailed records of overheads, and will also assign a portion of the overhead to each order.

The basis of the order-based costing involves only eight types of accounting entries, one for each of the following items:

  1. Purchase of raw materials
  2. Recognition of factory labor costs
  3. Recognition of factory overhead costs
  4. Use of raw materials
  5. Distribution of worker’s wages
  6. Estimating overhead costs
  7. Order completion
  8. Product sale

Accounting for Raw Materials

Inventory accounts in the general ledger for equipment as well as indirect raw materials can be separated. A common practice is to use a single ledger account entitled raw materials.

Purchase of Raw Materials

Accounting for costs for purchases of raw materials is the same as accounting for raw materials using a perpetual inventory system. When this raw material is received, the raw material account is debited.

The community as well as the unit price of each purchase will be recorded via the raw material log card. One card will be used for each type of raw material.

The card can serve as a perceptual inventory record and is a subsidiary ledger that will support the Raw Material account. These cards as well as other documents can be paper or electronic.

Use of Raw Materials

The direct materials for each of these orders can be issued to the factory based on proof of demand for raw materials, which is a document that will be prepared by the production scheduler or other personnel,


Also Read:   Calculation of Process Costs


Which provides specifications for the order number as well as the type and quantity of raw materials that will be required.

One copy of each proof of request will be sent to the warehouse department, which collects the item. The quantity as well as the cost of each item will be recorded in the proof of request and posted to the raw material record card.

The direct flow of raw materials from the warehouse to the factory is accounted for as shipping costs from raw materials to goods in process. Often this is done in the form of a summary at the end of a month or period.

One copy of each proof of request for raw materials will be sent to the cost department, where all copies of the proof of request for raw materials can be sorted by order number and recorded,

Daily or weekly, the share of raw materials used in each order is accumulated on a timely basis, even if general journal entries are not made that frequently.

If the raw materials for this are returned to the warehouse because they are not used, the raw material account is debited, and the goods account can be processed and credited, as well as the raw material note card and the order cost card are completed.

Proof of demand for raw materials is also used to be able to issue indirect raw materials and equipment.

If not used in the factory, the equipment used is subject to both marketing and administrative expenses.

If it is used in the factory, therefore, it is charged to the factory overhead control key.

Details of overhead costs can also be posted to an overhead subsidiary ledger account, which is called a factory overhead analysis sheet.

Accounting For Labor

In the company, this attendance machine will record the data of each employee on an individual timesheet, when the employee arrives and also when the employee returns.

Thus, this attendance card will show the amount of time worked and is often used to calculate the income of employees with hourly wages.


Also Read:   Definition of Revaluation


In order to be able to identify direct and indirect labor costs, each employee creates one or more employee working hour cards every day.

Each working hour card, is a document that will show the time spent by a worker on certain orders or for other tasks (indirect labor),

Labor that will not be used in the production process can be charged to marketing expense accounts or administrative expenses.

The working hours card which is usually costed and summarized periodically, and the number of hours worked for each employee listed on the working hours card will be matched with the number of hours worked according to the timesheet.

Incurred Labor Costs

For each pay period, obligations for salary or other payments are journalized and posted to the general ledger. Regardless of the amount of liabilities to be recorded,

The counterpart is a debit to wages expense, where this labor cost can be accumulated temporarily until it is distributed to expense accounts, and usually at the end of the month.

it is common to pay some employees on a monthly basis as well as some other employees for periods shorter than a month,

It also means recording payroll expenses several times a month and also making one accrual at the end of the month.

Because the details of labor accounting are numerous and also not unique to the cost calculation based on orders.


Leave a Comment