Job Costing and Modern Cost Management Systems
Basic Job Casting Concepts
The previous chapters provided an introduction to product costing. You were exposed to the schedule of cost of goods manufactured and the basic cost flow of a manufacturer. In that preliminary presentation, most cost data (e.g., ending work in process inventory, etc.) were "given." In addition, the chapters showed how cost data are used in making important business decisions.
Cost Data Determination
How does one determine the cost data for products and services that are the end result of productive processes? The answer to this question is more complex than you might suspect. Multiple persons, parts, and processes may be needed to bring about a deliverable output. Think about an automobile manufacturer; what is the dollar amount of "cost" for the hundreds of cars that are in various stages of completion at the end of a month? After studying this chapter, and the next, you will have a better sense of how business information systems are used to generate these important cost data.
This chapter focuses on the job costing technique, and the next chapter will look more closely at process costing and other options. At the outset, note that job costing is best suited to those situations where goods and services are produced upon receipt of a customer order, according to customer specifications, or in separate batches (as a result, many companies will refer to this costing method as the job order costing method). For example, a ship builder would likely accumulate costs for each ship produced. An aircraft manufacturer would find this method logical. Construction companies and home builders would naturally gravitate to a job costing approach. Each job is somewhat unique. Materials and labor can be readily traced to each job, and the cost assignment logically follows.
Conceptualizing Job Costing
Begin to develop an understanding of job costing by thinking about a simple illustration. Jack Castle owns an electrical contracting company, Castle Electric. Jack provides a variety of products and services to clientele. Jack has four employees, maintains a neat (rented) shop, a broad inventory of parts and equipment, and a fleet of five service trucks. On a typical day, Jack will arrive at the shop early and line out the day's work assignments for his four electricians. Around 8:00 a.m., his electricians begin to arrive, and he gives them their assignments, as well as the necessary parts and equipment they will need. They are then dispatched to the various job sites.
One of Jack's electricians is Donnie Odom. On July 14, Donnie arrived at the shop at 8:00 a.m. He first spent thirty minutes getting his assignments and loading a service truck with necessary items to complete the day's work. His three tasks for the day included:
o Job A: Cleaning and reconnecting the electrical connections and replacing a flood light atop a billboard (materials required include one lamp at $150).
o Job B: Replacing the breakers on an old electrical distribution panel at an office building (materials required include 20 breakers at $20 each).
o Job C: Pulling wire for a new residence under construction (materials required include 500 feet of wire at $0.14 per foot).
Donnie successfully completed all three tasks on July 14. He spent 1 hour on the billboard, 2 hours on the electrical panel, and 3 hours on the residential installation. The other 2 hours of his 8-hour day were spent on indirect job administration and travel. During the day, Donnie also used a roll of electrical tape ($3) and a box of wire nuts (60 nuts at $0.05 each). Donnie is paid $18 per hour. Donnie drove the truck 100 miles on July 14, and he used a variety of tools, ladders, and other specialized equipment. Jack is paid $25 per hour, and he does not usually work on any specific job. Instead, his time is spent doing spot inspections of work, getting permits, managing inventory, and tending to the various other tasks associated with these jobs.
The "job costing" question is: How much did it "cost" to change the light on the billboard, etc.?
Obviously, the job cost included the direct costs of the job; specifically, Donnie's direct labor time (1 hour) and the direct material (one lamp at $150). But, the job could not have gotten done without the shop, equipment, trucks, indirect labor time, Jack's efforts, tape and wire nuts, and so forth. These latter items constitute the indirect costs, or overhead, for the job. How then, are we to assign costs to a specific job?