For any one of the companies from the previous chapters, discuss the following:

Question

For any one of the companies from the previous chapters, discuss the following: A) What overhead costs do you believe would have to be allocated to either jobs or products? MB)  How would these costs be allocated under       1) Traditional accounting methods       2)  Activity-based costing Be sure to include examples and the include a discussion of what you believe would be appropriate cost drivers. For any one of the companies from the previous chapters, discuss the following: A) What overhead costs do you believe would have to be allocated to either jobs or products? MB)  How would these costs be allocated under       1) Traditional accounting methods       2)  Activity-based costing Be sure to include examples and the include a discussion of what you believe would be appropriate cost drivers.

Explanation / Answer

introduced product costing, 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 %u201Cgiven.%u201D Chapter 18 showed how cost data are used in making important business decisions. 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 complex.

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 %u201Ccost%u201D for the hundreds of cars that are in various stages of completion at the end of a month? This chapter, and the next, will provide a 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.

BASIC JOB COSTING

Job costing (also called job order 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. 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.

JOB COSTING EXAMPLE

Jack Castle owns an electrical contracting company, Castle Electric. Jack provides a variety of products and services to clientele. Jack has 4 employees, a rented shop, a broad inventory of parts, and a fleet of 5 service trucks. On a typical day, Jack will arrive at the shop early and line out the day%u2019s work assignments. Around 8:00 a.m., his electricians 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%u2019s electricians is Donnie Odom. On July 14, Donnie arrived at the shop at 8:00 a.m. He first spent 30 minutes getting his assignments and loading a service truck with necessary items to complete the day%u2019s work. His 3 tasks for the day included:

Job A: Cleaning and reconnecting the electrical connections and replacing a flood light atop a billboard (materials required include one lamp at $150).

Job B: Replacing the breakers on an old electrical distribution panel at an office building (materials required include 20 breakers at $20 each).

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. 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 a truck and he used a variety of tools, ladders, and other specialized equipment. Jack is paid $25 per hour, and he does not work on any specific job. Instead, his time is spent doing inspections, getting permits, managing inventory, and other tasks.

How much did it %u201Ccost%u201D to change the light on the billboard? Obviously, the job cost included the direct costs of the job; specifically, Donnie%u2019s 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, tape, wire nuts, and so forth. These latter items constitute the indirect costs, or overhead. How are these costs assigned to a specific job?

TRACKING LABOR

A logical starting point is to specifically track labor cost. Donnie, and the other electricians, fill out a time report documenting time spent on each job, as well as the time spent on other tasks:

Tracking Labor example

TRACKING MATERIAL

Jack keeps detailed records of the material released to each job. When Donnie gathered up the light bulbs, breakers, wire, tape, and wire nuts on the morning of the 14th, some system needed to be in place to %u201Ccheck out%u201D this material. The document that is used for this process is called a %u201Cmaterials request%u201D or materials requisition form. This form will show what material is leaving the available raw materials stock and being put into production. Sometimes a separate form is prepared for each item, and sometimes a running list similar to the following is used:

Tracking Material example

This form provides essential documentation to track inventory. It also reveals that the %u201Cdirect material%u201D for the billboard task (Job A) was $150 (the light bulb). The wire nuts and tape that might have been used on the billboard will be dealt with as overhead, which is discussed later.

Although the illustrated form lists the material cost, that will not always be the case. Sometimes, a business will not be particularly interested in letting employees see cost information, or cost information may not be readily available.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.