MANAGEMENT ACCOUNTING II

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

JOB ORDER COSTINGJOB ORDER COSTINGJOB ORDER COSTINGJOB 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:

STAGE 1:

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

Inventory Required for:

BRACKETASSEMBLY BACQ29VXHG02B

NUT PLATE:

For LINE 1

NUT PLATE:

For LINE 1

NUT PLATE:

For LINE 2

RIVET:

For LINE 1

RIVET:

For LINE 1

RIVET:

For LINE 2

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:

CNC MACHINIST

G.B. MECHANIC

MATERIAL

INSPECTOR

INSPECTOR

(SEALANT)

FINAL INSPECTOR ASSEMBLER

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