Job Costing: Methods and Applications

• Costing involves accumulating, classifying, and assigning direct materials, direct labor, and factory overhead expenses to cost objects like products, services, or projects.
• Management accountants selects a costing system that fits a specific firm by making three choices:

Cost Accumulation Method

• Job costing or process costing

Cost Measurement Method

• Actual, normal, or standard costing

Overhead Application Method

• Volume-based or activity-based costing

Job Costing

• It is used for individual products or batches, suitable when costs are easily identified with a specific job (product, batch, order, contract, or project).
• Job costing is common in construction, printing, special equipment manufacturing, shipbuilding, custom furniture, professional services, medical services and advertising agencies.
• Examples of companies that use job costing include FedEx and Accenture.
• A job might consist of a single product or multiple products in a batch or consist of the quantity of products ordered by a particular customer.
• The "push method" involves planning products for distribution to a warehouse for future sale.
• The "pull method" uses direct customer demand.

Process Costing

• Firms that produce homogenous products and/or services use process costing.
• It is common for continuous mass production where tracing costs to individual products is impractical.
• This method is used in the chemical industry, bottling companies, plastics, food products and paper products.
• Coca-Cola Company uses a process costing system.

Actual Costing

• Actual costing uses actual costs for all product costs, including direct materials, direct labor, and factory overhead.

Normal Costing

• Actual costs are used for direct materials and direct labor.
• Normal costs are used for factory overhead.
• It estimates a portion of overhead to be assigned to each product as it is produced.
• It provides a timely estimate of the cost of producing products or jobs.

Standard Costing

• Standard costs and quantities are used for all three manufacturing costs: direct materials, direct labor, and factory overhead.
• Standard costing systems provide a basis for cost control, performance evaluation, and process improvement.

Advantages of Actual Costing

• It has accuracy of cost per unit

Disadvantages of Actual Costing

• Costs can only be identified at the end of the period
• Unit costs fluctuate every period

Advantages of Normal Costing

• Estimated unit costs can be provided if direct costs for materials and labor are available
• There is consistency of overhead cost per unit

Disadvantages of Normal Costing

• Overhead costs are based on estimates

Advantages of Standard Costing

• Estimated unit costs can be provided immediately
• There is consistency of cost per unit

Disadvantages of Standard Costing

• Direct and overhead costs are based on estimates

Volume-Based Product Costing

• It allocates overhead to products or jobs using only volume-based cost drivers, such as units produced.
• It assumes each product uses the same amounts of overhead because each product is charged the same amount.
• Overhead is proportional to the direct labor hours needed to manufacture the unit.
• A single volume-based driver may not accurately capture differences in overhead consumption.

Activity-Based Costing (ABC)

• It allocates factory overhead costs to products using cause-and-effect criteria with multiple cost drivers.
• ABC systems use both volume-based and non-volume-based cost drivers.
• It accurately allocates factory overhead costs to products based on resource consumption during various activities.

Strategic Role of Costing

• Firms need accurate cost information.
• Effective management of manufacturing costs requires timely and accurate cost information.
• Firms choose a cost system that matches their competitive strategy.
• Cost leadership firms that produce a commodity product are likely to be in a process industry and will likely use process costing systems.
• These firms are likely to use activity-based costing and choose a standard costing system.
• Firms may use a combination of process costing, activity-based costing, and standard costing.

Job Cost Sheet

• Job costing accumulates costs and assigns them to specific jobs, customers, projects, or contracts.
• The basic supporting document in a job costing system, records and summarizes the costs of direct materials, direct labor, and factory overhead for a particular job.
• Job costing is typically done by a database software system, and prepares a variety of reports, including financial statements and tax returns.
• A job cost sheet includes all three cost elements: direct materials, direct labor, overhead, as well as other detailed data required by management.
• The job cost sheet follows the product through the production process, recording direct materials and direct labor costs.

Materials Requisition

• The purchase of additional materials for the job includes direct materials (lumber, fabric, and other direct materials) and indirect materials (glue, nails, and other indirect materials).
• A materials requisition is used to request materials for production, which indicates the specific job charged with the materials used.

Direct Labor Costs

• It is recorded on the job cost sheet using a time ticket prepared for each employee.
• Time tickets include the amount of time an employee worked on each job, the pay rate, and the total direct labor cost chargeable to each job.

Factory Overhead Costs

• Overhead application is a process of allocating factory overhead costs to cost objects.
• Allocating overhead is necessary, because overhead costs are not traceable to individual jobs.
• The two approaches to allocating overhead costs covered in this handout are actual costing and normal costing.

Actual Costing

• It incurs each month for indirect materials, indirect labor, and other indirect factory costs, including factory rent, insurance, property tax, depreciation, repairs and maintenance, power, light, heat, and employer payroll taxes for factory personnel.
• Actual costing system records all job costs at the end of the accounting period.

Normal Costing

• It uses actual costs for direct materials and direct labor.
• It applies factory overhead to jobs by adding an estimated amount of overhead using a predetermined rate.
• The predetermined factory overhead rate is an estimated rate used to apply factory overhead cost to a specific cost object or job.
• The amount of overhead applied to a job using a predetermined factory overhead rate is called factory overhead applied.

Job Costing in Service Industries

• Service industries use job costing such as: advertising agencies, hospitals, and repair shops, as well as consulting, architecture, accounting, and law firms.
• Accounting and consulting firms use the term client or project, hospitals and law firms use the term case, and advertising agencies use the term contract or project.
• Project costing indicates the use of job costing in service industries and is also to track the costs and progress of non-recurring tasks that take place within companies
• Job costing in service industries uses recording procedures and accounts, with the primary focus on direct labor.
• The overhead costs are usually applied to jobs based on direct labor cost.