Chapter 19

Learning Goals

• Understand basic concepts in job costing.

• Explore information systems for job costing environments.

• Learn how to track job costs in the corporate ledger.

• Understand accounting for actual and applied overhead.

• Examine job costing in service, not-for-profit, and governmental environments.

• Develop knowledge on modern management of costs and quality.

Cost Accounting Systems

• Job Costing: Ideal for unique/custom products or projects.

  • Examples: Custom homes, services for clients, hospitals.

• Process Costing: Used for homogeneous products that flow through processes.

  • Examples: Beverages, petroleum products.

• Operations Costing: A hybrid system using aspects of both job costing and process costing.

  • Examples: Auto manufacturing, clothing manufacturing.

• Activity Based Costing (ABC): A supplemental costing system allocating costs to various activities driving costs.

Job Costing Concepts

• Job costing is suitable when goods/services are produced based on customer orders and specifications.

• Each job is somewhat unique; materials and labor are easily traced.

  • Example: A shipbuilder collects costs per ship produced.

Job Costing Example: Castle Electric

• Jack Castle's company indicates various job assignments to electricians on arrival.

• Jack’s pay is $25/hour; tasks include inspections, permits, and inventory management.

Specific Tasks on July 14

1. Job A: Cleaning and reconnecting electrical connections.

   • Materials: 1 lamp costing $150.

2. Job B: Replacing breakers on an electrical panel.

   • Materials: 20 breakers at $20 each.

3. Job C: Pulling wire for a new residence.

   • Materials: 500 feet of wire at $0.14/foot.

Employee Details

• Donnie Odom: Electrician paid $18/hour working 1 hour on Job A, 2 on Job B, 3 on Job C, and 2 on indirect tasks.

• Additional materials: Electrical tape ($3), wire nuts (60 nuts at $0.05 each).

• Tools and equipment also contribute to job overhead costs.

Job Costing Components

• Direct Costs:

  • Direct labor (Donnie's time, materials).

  • Direct materials (lamp, breakers, wire).

• Indirect Costs (Overhead):

  • Includes shop expenses, equipment, and administrative time.

Tracking Job Costs

• Labor Costs: Tracked through time reports documenting job durations.

• Material Costs: Tracked on materials requisition forms, indicating what was put into production.

• Overhead Costs: Difficult to trace; usually applied at the beginning of the year using predetermined rates.

  • Example: Jack estimated $150,000 for overhead and 7,500 direct labor hours.

  • Overhead Rate Calculation: $150,000/7,500 hours = $20 per direct labor hour.

Job Cost Sheets

• Daily time sheets and material requisitions inform job cost sheets.

• Information compiled includes direct labor, direct materials, and calculated overhead.

Job Costing and Technologies

• A shift to electronic databases enhances job cost tracking, reduces input errors, and facilitates report generation.

• Unique identifiers (serial numbers, barcodes) enhance tracking of direct materials.

Cost Drivers

• Factors that cause costs to be incurred, need careful selection for allocating overhead costs effectively.

Corporate Ledger Overview

• Costs flow through accounting systems as:

  1. Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold.

  2. Tracking of job costs includes ensuring accuracy with actual versus applied overhead.

Applying Overhead

• Overapplied: Indicates less spending than anticipated—favorable.

• Underapplied: Indicates more costs incurred than applied—unfavorable.

  • Underapplied overhead often requires adjustment to cost accounts.

Job Costing in Different Environments

• Applicable across sectors, including private, non-profit, and governmental entities.

• Overhead allocation becomes increasingly critical in less tangible jobs.

Modern Management Practices**

• Emphasis on metrics such as quality, customer satisfaction, and employee involvement.

• Systems like Kaizen, Lean Manufacturing, and Total Quality Management (TQM) enhance cost management and efficiency.

Kaizen method

• An approach focusing on continuous improvement from employees for efficiency gains.

Lean Manufacturing

• Aims to trim waste and improve response time and customer value.

Just in Time (JIT) inventory management

• Ensures raw materials arrive as needed, minimizing stock and potential obsolescence.

Six Sigma

• Strategy focused on achieving near-zero defects in processes and products.