Question

Question 2 (7.5 marks total) You need a new roof on your old home. You employ William, the owner of a sole trader roofing business, to do the job. Although William's quote was the lowest you received, you picked him because he was highly recommended by several friends. You were sure the low quote did not suggest a low quality job. As it turned out, you were right. William works alone so you chatted with him during lunch breaks to keep him company. During one of these chats, you were surprised to hear that his business was struggling financially, even though William had jobs booked 5 days a week for a year ahead, except for 4 weeks in summer when he wants to take a well-earned break. You thought about that low quote. Was he charging enough to cover all his costs? The answer became clear when you received William's invoice. It included the correct list of materials, all charged at appropriate, going-rate-in-the-market prices (total $10,000). No obvious problems there. It was the other item on the invoice - labour - that suggested a problem. William had charged the correct amount of hours (total 80 hours = 8 hours per day, 5 days per week for 2 weeks) but at only $30 per hour! Clearly such a low rate could only be the direct labour rate. It seemed that no overheads had been incorporated into that rate, as would normally be the case for "tradies'. You guess William's overheads would be around $50,000 per year. You pay the invoice but then decide you want to help William out by explaining how he could apply a job costing approach in the future. In your explanation to William, you will need to include the following: a) A brief description of job costing and its purpose. (1 mark) b) A definition of overheads along with 4 examples of overheads applicable to jobs for William's business. (1.5 marks) c) A numerical example applied to your roofing job that derives the full cost of your job. The example should correctly use the information above, provide any necessary formulas and justify any choices. The example should be well presented in a logical order that will be easy for William to follow and understand. (5 marks) Your Question 2 answer should not exceed 500 words.

Answer 1

Ans-(a)

Job costing is method of determining the costs attributable to specific unit or group of units.Here the cost object is specific job / work order.Example could be a customized car modifier , customized furniture works etc.Here there is no objective of stocking but to complete the work/order as per customer specification.

The main purpose of Job costing is to determine profit/loss per order.Since each job is different the costs involved would also vary and hence the associated profits.It helps in this way to identify the more profitable orders.

Ans-(b)

Overheads refer to costs that are ongoing.In case of Williams irrespective of whether orders are received or not there might be costs that still will have to be incurred like -

• Rent of his workplace
• Electricity expenses
• Telephone expenses
• Equipment depreciation

The true costing of a job cannot ignore the above elements or else an under costed job would result in losses as full cost recovery will not hapeen.

Ans-(c )

Since William has annual overheads of 50000 these also need to be covered from the revenue he generates from various jobs in a year.This will happen only when these overheads are too built in the quote to the Customers or else despite have orders revenues will always fall short and he will be incurring losses by ending up paying for these overheads from his own pocket.

Since he works 48 weeks in a year ( 52 less 4 weeks of vacation) his total working hours = 48*8*5= 1920 hours

O/H charge of = 50000/1920 = 26/Hour have to be considered in his quotes to become profitable.

William should have arrived at Quote by following method:

Component	Calculation	Amount
Direct Material	Actuals	10000
Direct Labour	8*5*2*30	2400
O/H Charges	8*5*2*26	2080
TOTAL JOB COST	14480

* Appropriate markup on the above to be added