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MANAGEMENT ACCOUNTING II

T.E.R.M P.R.O.J.E.C.T

JOB ORDER COSTING

Submitted by: Guide:

Abhmanyu Kumar Singh 01 Prof. Anil Misra


Amal Mohan 04
Astha Chaturvedi 13
Deeptodip Sen 19
Sudhanshu Kumar 43
Introduction

This project deals with the methodology of job order costing and its application to industry.
We have selected a component manufacturer company and analysed the job order costing
for its component named bracket assembly. The company in this case is Precision
Components and is based in Washington. It is a major supplier to airline industry and has
presence internationally.

Job Order Costing

All companies have to accumulate and allocate costs. Each company has to decide how it is
going to do that. Companies pick a method that works well for them, and is cost effective. A
well designed accounting system should generate reports for a large variety of uses. Of
course, it must provide the necessary information for annual financial statements; and it
should also help in the preparation of special reports, like sales tax and payroll reports. It
should help managers track and manage inventories, open orders, accounts receivable and
accounts payable. There are many different types of costing systems that management and
cost accountants may come across. Each of these costing systems may handle certain
entries in a different way. There are two main types of cost accounting systems. Companies
select a method that best matches the flow of work in their business.

Process costing - In process costing, costs are accumulated by departments, operations, or


processes. The work performed on each unit is standardized or uniform where a continuous
mass production or assembly operation is involved. For example, process costing is used by
companies that produce appliances, alcoholic beverages, tires, sugar, breakfast cereals,
leather, paint, coal, textiles, lumber, candy, coke, plastics, rubber, cigarettes, shoes,
typewriters, cement, gasoline, steel, baby foods, flour, glass, men's suits, pharmaceuticals
and automobiles. Process costing is also used in meat packing and for public utility services
such as water, gas and electricity.

Job order costing - In job order costing, costs are accumulated by jobs, orders, contracts, or
lots. The key is that the work is done to the customer's specifications. As a result, each job
tends to be different. For example, job order costing is used for construction projects,
government contracts, shipbuilding, automobile repair, job printing, textbooks, toys, wood
furniture, office machines, caskets, machine tools, and luggage. If you go to an auto repair
shop, they will start a job ticket just for the work to be done on your car. Your job ticket will
show charges for labour and materials, just for your job. Let's say they charge you $35 per
hour for labour. That charge includes the mechanic's payroll cost. But it also includes an
overhead charge - which is generally not stated separately. The overhead charge covers the
costs of operating the garage - tools and equipment, rent, insurance, maintenance, utilities,
etc. It is a way to allocate overhead (discussed below), and build it in to the amount charged
to customers. The garage will also make a gross profit on the parts they use to repair your
car. This gross profit covers the cost of buying and maintaining a parts inventory, including
department employee wages, insurance and warehousing costs.

Purpose
A. The purpose of a job order cost accounting system is to assign and accumulate costs
for each job, i.e., an order, a contract, a unit of production, or a batch. Job order costing
should be used if the production or service is being performed to meet customer
specifications or requirements, if different components are made for inventory, or projects
are undertaken to construct real property. Job order costing allows more control, less
estimation, and more direct and reliable allocation of costs.

B. The determination as to the need for a formal job order cost accounting module is
necessarily a management decision. The decision to establish such a module should be
based upon a recurring need for cost accounting information.
The management information provided by a job order cost accounting system is a tool that
aids management in the guidance of activities and in the attainment of the objective of
producing a maximum of goods and services at minimal costs. The formal cost accounting
module is normally designed to accumulate those costs that are under the control of local
management. Typically, management controls all costs that are funded by appropriations or
funds provided to the accounting entity. These costs are referred to as funded costs.

Job Orders Categories.

Job orders are established in terms of the nature and type of work to be performed.
Following are examples of the criteria that may be used to establish job order categories.

A. End Items: A separate job order should be established for work performed on
standalone end items such as airplanes or trucks.
B. Real Property Construction: A separate job order should be established for each real
property construction project.
C. Real Property Maintenance: A separate job order should be established for each real
property maintenance project.
D. Low Dollar Like Items: A job lot is normally used when low dollar like items are
placed into the process at the same time. However, the estimated cost of any job lot
order may not exceed $750,000. If the estimated cost is greater than $750,000, a
separate job order should be established for each $750,000 increment.

The Job-Order Costing Process

When a company operates using job-order costing, a specific set of events will usually occur
with each job. Generally, the process is as follows:

• An order (or sales order) is received for the batch of products


• A production order is issued from the sales order
• Materials and labour are ordered and tracked for the set of products
• Manufacturing overhead is allocated to the job using a predetermined rate (usually per
labour hour or per machine hour)
• Actual manufacturing overhead will not affect the work-in-process account, instead it is
charged to a control account
• Direct labour and materials are charged by the accountant to the work-in-process
accounts using the actual amounts incurred
• These amounts are all tracked using a job-costing sheet, which will most likely be in a
computerized format and a subsidiary ledger is kept for each job
• Abnormal spoilage (spoilage that is above and beyond what would be expected from the
job) is considered a period cost and is reclassified from the work-in-process account into
a separate account so it can be addressed by management.

Precision Components LLC


The company we have chosen for analysis is Precision Components, a firm that
manufactures high quality machine tools. It is the leader in Long Reach and "Special"
tooling.
We have chosen this specific company because it is a manufacturing firm that produces
built-to-order tools and equipment, and maybe large, unique, high cost items. Thus the
company would do better if it can trace its costs to specific jobs unlike other mass-
production firms.

In the following sections we have taken a job cost sheet and explained the contents:
Inventory Required for:

STAGE 1: BRACKETASSEMBLY
BACQ29VXHG02B

NUT PLATE: NUT PLATE: NUT PLATE:

For LINE 1 For LINE 1 For LINE 2

RIVET: RIVET: RIVET:

For LINE 1 For LINE 1 For LINE 2

Stage 1 involves issuing of material stock to different stock lines. The raw material inventory
issued is nut plate (object code: BACQ29VXHG02B) and rivet (object code: BACR31NS02C)
with total quantity of 25 and 100, respectively, issued to both the lines.

Costing of the Inventory Issued:

To the stock line 1, quantity of nut plate issued is 5 for one kind of nut plate and 7
for another. The unit cost for both of them is 12$ where as quantity of nut plate issued for
stock line 2 is 13 with a unit cost of $0. Similarly, for rivet we can see, to the stock line 1
rivet is issued twice with a total quantity of 20 and 23 on a unit cost of $0.07. For stock line
2 the quantity issued is 57 with the unit cost of $7.00. Thus, we can see

Inventory cost = Nut Plate cost + Rivet cost


= (5x12.00+7x12.00+13x0) + (20x0.07+23x0.07+57x7.00)
= 144.00 + 402.01
= $ 546.01

Apart from that an extra inventory cost is incurred to build sub-assembly brackets where 15
quantities are issued at a unit cost of $1978.33.

STAGE 2:

APPLIED LABOUR:

MATERIAL INSPECTOR
CNC MACHINIST
INSPECTOR (SEALANT)

FINAL INSPECTOR
ASSEMBLER G.B. MECHANIC
Stage 2 talks about how labour cost is incurred. The inventory comes to the CNC machinist
who makes the starting raw material into usable form which involves tasks like CNC drilling
and CNC boring. Here, 2 labour hours are allotted at the cost of $50.00.

After that the inventory moves toward the next slot of material verification by the quality
inspector. Here 5 labour hours are allotted at the cost of $125.

After being inspected by the material inspector sealant inspection takes place at the cost of
$50 with 2 dedicated labour hours.

OUTSIDE PROCESSING: An outside processing of the inventory (12 units) is being carried
out at the rate of $125 per unit.
The final stage involves an assembly of nut plate and rivet and their assembly to the sub-
bracket assembly. For the very purpose, the assembler has been allotted 12 hours at the
cost of $180.00 and the G.B. Mechanic has been given 10 labour hours at the cost of
$250.00.

After that the final product is inspected in 2 hours at the cost of $50.00

Cost for product packaging and shipping as per the cost sheet is not applied because the
product is yet to be delivered to client.

Also we note here that the cost sheet has not talked about any overhead application. The
company may be following a policy of not including the fixed overheads in the product
costing.
Summary
Total part cost

Part Cost (in $)


Nut Plate 144.00
Rivet 402.01
Sub-assembly bracket 29,675.00
Total inventory cost 30,221.01

Total labour cost

Employee Cost (in $)


CNC Machinist 50.00
Material Inspector 125.00
Sealant Inspector 50.00
Assembler 180.00
GB Mechanic 250.00
Final Inspector 50.00
Total labour cost 705.00

Other costs

Outside processing cost = $ 1500

Total Cost

Item Cost (in $)


Inventory 30,221.01
Labour 705.00
OSP 1,500.00
Total cost 32,426.01

Thus the total cost for the particular job has been found out to be $32,426.01. As a next
step the company could fix its selling price if it already hasn’t, by deciding on the required
profit margins.
Conclusion: The Job cost sheet of Precision components consists of job information (date

started, completed, and shipped); individual cost information for materials used, labour, and
overhead; and a total job cost summary. This is a typical example where job job order cost
system is used when products are made based on specific customer orders. Each product
produced is considered a job. The job order cost system has captured and tracked the costs
of producing each job, which includes materials, labour, and overhead in a manufacturing
environment.
References:

http://www.defenselink.mil/comptroller/fmr/04/04_20.pdf

www.pctooling.com/index.php

http://www.cliffsnotes.com

Accounting text and cases by-Anthony & Hawkins

Appendix
Sample of Job Order Cost System Cost Flows