JOB COSTING Your goals for Job Order Costing System are to learn about 1. Basic concepts in job costing 2. Information systems for job costing environments 3. Tracking job costs in the corporate ledger BASIC JOB COSTING CONCEPTS 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 the month? After this study you will have a better sense of how business information systems are used to generate these important cost data. 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 would 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 job costing approach. Each job is somewhat unique. Material and labour 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 electrician 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: • 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 (material 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 ofelectrical 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 labour 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 labour 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? Tracking Direct Labor A logical logical starting point for job costing is to track the direct labor to specific jobs. Donnie, and the other electricians, fill out a time report documenting time spent on each job, as well as the time spent on tasks that cannot be traced to a specific job: Castle Electric Daily Time sheet Employee: Donnie Odom Date: 7/14/X5 Start/Stop Time Job Name Task client Admin Hours Direct Labour Hours 8:00 8:30 Admin Assignment and load n/a 0.5 8:30 8:45 Travel n/a 0.25 8:45 9:45 Job A Service and replace bulb Image Advertising 1.00 9: 45 10:15 Travel n/a 0.5 10:15 12:15 Job B Replace breakers TechWay Office Park 2.00 12:15 1 Lunch n/a n/a 1:00 4:00 Job C Pull wiring Mr/Mrs Lybrand Home 3.00 4:00 4: 45 Travel and Admin Return to shop and unload n/a 0.75 Total Hours 2.00 6.00Not only will this time sheet form the basis for payroll, but it will also allow cost assignment to specific jobs. The direct labor for the billboard task (Job A) was one hour of Donnie’s time (at $18 per hour). The “direct labor” for Job A will be compiled by reference to the time sheet on the previous page. Tracking Direct Materials 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 “check out” this material. The document that is used for this process is called a materials request” 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: Castle Electric Material Requisition Employee: Donnie Odom Date: 7/14/X5 Material Job Name Quantity Per Unit Cost Extended Cost Light Bulbs Job A 1 Unit $150 $150 Breakers Job B 20 Units $20 each $400 Wire Job C 500 feet $0.14 per foot $70 Electrical Tape Indirect Material 1 Roll $3 per roll $3 Wire nuts Indirect Material 60 Nuts $0.05