THE COSTS
JOB ORDER COST SYSTEMS

• Financial Information
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• Introduction to Cost Accounting
• Cost definition
• Use of Costs
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• Cost-Volume-Profit Analysis
• Break-Even Point
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7 STEPS TO MAKE A JOB ORDER COSTING

1.- Identify the chosen cost-object
2.- Identify the direct costs the job
3.- Select the cost allocation bases
4.- Identify the indirect costs
5.- Calculate the rate per unit
6.- Calculate the indirect costs
7.- Calculate the total cost of the job

EXAMPLE OF A JOB ORDER COSTING

A manufacturing company is planning to sell a batch of 25 special machines (Order 650) to a retailer for \$114,800.

Step 1.  IDENTIFY THE OBJECT COST

The cost-object is Order 650.

Step 2. IDENTIFY THE DIRECT COSTS OF THE JOB

 Direct Materials \$50,000 Direct Labor (DL) \$19,000

Step 3.
SELECT THE DISTRIBUTION BASES FOR COST ALLOCATION

The distribution of costs is based on machine-hours. The order 650 used 500 machine hours. The total machine hours used in all jobs was 2,480.

Step 4. IDENTIFY THE INDIRECT COSTS

The manufacturing indirect costs (overhead) were \$ 65,100.

Step 5. CALCULATE THE RATE PER UNIT

The indirect cost rate is \$ 65100 ÷ 2480 = \$ 26.25 per machine-hour.

Step 6. CALCULATE THE INDIRECT COSTS

\$26.25 per machine-hour x 500 hours = \$ 13,125

Step 7. CALCULATE THE TOTAL COST OF THE JOB

 Direct Materials \$50,000 Direct Labor (DL) 19,000 Indirect costs (Overhead) 13,125 TOTAL \$82,125

What is the contribution margin of this work?

 Revenue \$114,800 Cost of Sales 82,125 Contribution margin \$32,675

What is the percentage of contribution margin?

\$32.675 ÷ \$ 114.800 = 28.5%

ACTUAL OR CURRENT COSTING VS NORMAL COSTING

Actual costing is a system that uses current costs to determine the cost of individual orders (see Step 7 in the example above).

Normal costing is a method that distributes indirect costs based on their budgeted rate by the actual amount of the cost distribution base.

EXAMPLE: Assuming that the manufacturing company of the example above budgeted a total of \$60,000 for manufacturing indirect costs and 2400 machine-hours. Which would be the rate of indirect costs budgeted?

Ans = \$60,000 ÷ 2,400 = \$25 per hour.

How much indirect cost was distributed to the Order 650?

Ans = 500 machine-hours X \$25.00 = \$12,500

Then the cost of the Order 650 under normal costing would be:

 Direct Materials \$50,000 Direct Labor (DL) 19,000 Indirect costs (Overhead) 12,500 TOTAL \$81,500

ACCOUNTING FORUM

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