Question

Job order costing accumulates and records costs by job and assists managers in evaluating actual and expected costs related to direct materials, direct labor, and factory overhead costs.

Select a company that would employ a job order costing system. Research the company and discuss why a job order costing system is the 'correct' fit for that organization. Discuss a product the company sells and discuss what direct and indirect costs would be included on the job cost sheet.

Answer 1

Job costing is a way of costing when the work consists of specific contracts, jobs or batches. In this method cost are collected and accumulated according to jobs, contacts, products or work orders. Each job is treated as a separate entity.

Process of job costing –

1. Prepare a cost sheet for each job
2. Adding cost of materials issued for the job
3. Personnel cost on the basis of material or time to be added.
4. When job is completed overhead charges are added for ascertaining total expenditure.

Type of organisation using Job Costing –

1. If jobs are executed for different customers according to their specifications.
2. If no two orders are alike and each order needs special treatment

There are many organisations following job costing and most of them are either in service industry or in to manufacturing of a niche product.

For our example we would include, a legal firm.

About the company – The firm provides render legal services to different people/companies. The product is the legal service, each of the job/work would be unique. For e.g. the services provided to a person regarding drugs and narcotics case would be different then to a person who want to incorporate and setup a new company.

Each of the services would be unique and further services would be different for same type of customer. For e.g. Incorporating a company services – One company might be involved in some process that might be harmful to environment then the firm would also have to get environmental clearance, however if the company a pure trading business then such unique services wont be rendered. Hence, Job costing is perfect fit for this organisation.

About the Product, Direct Cost & Indirect Cost –

Let’s continue with our example of service to a person who has a trial of drugs & narcotics.

Direct Cost - There are some lawyers that would be involved in preparing for the arguments and case. The total hours spend by the lawyer on any activity would be calculated and as a pro rate to his pay, the amount would be added to the job. For e.g. Lawyer spend 5 hours a day for 4 days then his total hours spent on the case would be 20 hours and let’s suppose his hourly rate is $500 then cost to be added is $10,000. If there are two lawyer working on same case then the cost of other lawyer depending the hourly rate & time spent would be added

While preparing for the case many other cost like, driving to the scenes or police station or to the court etc, printing documents to be submitted, etc all this cost will also be added to the job.

Indirect cost – Indirect costs would include, rent of the premises, cleaning charges, electricity or fuel charges, etc. lets take one example in detail, suppose rent of the premises is $2200 per month then rent per day (assuming 5 days a week and 30 days a month) rent per day would come to $100 and the our job ran for 5 days so cost to be added is $500.

Job costing is costly and laborious method and it involves lot of clerical process hence the chance of error increase, but it facilitates product planning and deriving proper cost and profit.