THE COSTS
JOB ORDER COST SYSTEMS

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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




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