4.8 Explain How a Job Order Cost System Applies to a Nonmanufacturing Environment
3 min read•june 18, 2024
isn't just for factories. Service companies use it too, tracking costs for specific jobs or projects. They assign unique job numbers, track , and allocate using predetermined rates. It's all about knowing how much each job really costs.
The lingo changes a bit in service settings. "" replaces "Work in Process," and "" takes over for "Cost of Goods Sold." But the core idea stays the same: accurately tracking costs to price services right and stay competitive.
Job Order Costing in Nonmanufacturing Environments
Adaptation of job order costing
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- adapt principles to track costs and allocate overhead for specific jobs or projects
- Assign a unique or identifier to each job or project
- Track and assign direct costs (labor, materials) to the specific job
- Allocate (overhead) to jobs based on a predetermined allocation rate
- Determine allocation rate using a (labor hours, machine hours)
- Adapt the manufacturing overhead account to a
- Include indirect costs related to providing the service (rent, utilities, administrative salaries) in service overhead
- Use a to allocate service overhead costs to individual jobs
- Calculate : \text{Predetermined overhead rate} = \frac{\text{Estimated total service overhead costs}}{\text{Estimated total [cost driver](https://www.fiveableKeyTerm:Cost_Driver) amount}}
- Record actual overhead costs in the service overhead account, assign allocated overhead to individual jobs using the predetermined rate
- Calculate under- or at the end of the period by comparing actual overhead costs to allocated overhead
- Close out any difference to the Cost of Services Provided account
Terminology in nonmanufacturing contexts
- Use the term "job" instead of "product" or "work order" in nonmanufacturing environments
- Replace "Work in Process" account with "Services in Progress" account
- Track costs of incomplete jobs at the end of the period in Services in Progress account
- Replace "Finished Goods" account with "" account
- Track costs of completed jobs not yet delivered to the customer in Completed Services account
- Replace "Cost of Goods Sold" account with "Cost of Services Provided" account
- Represent total cost of jobs delivered to customers during the period in Cost of Services Provided account
- Replace "Manufacturing Overhead" account with "Service Overhead" account
- Track indirect costs related to providing the service in Service Overhead account
Job order costing for service companies
- Service companies (IFixIT, computer repair) use job order costing to track costs and price services for customers
- Assign a unique job number to the repair project when a customer brings in a device
- Create a to track all direct costs (labor, replacement parts) associated with the repair
- Track direct labor costs using or , record hours worked by each technician on the specific repair job
- Assign labor rates based on the technician's skill level and experience
- Track direct materials (replacement parts) using a , assign to the specific repair job
- Allocate indirect costs (rent, utilities, administrative salaries) to each repair job using a predetermined service overhead rate
- Calculate the predetermined rate:
- Calculate the total cost of the job by summing direct labor, direct materials, and allocated service overhead once the repair job is completed
- Determine the price charged to the customer using the job cost information
- Include a in the price to ensure profitability
- Accurately track costs associated with each repair job and make informed pricing decisions to remain competitive in the market by using job order costing
- Perform to evaluate the financial performance of individual jobs
Advanced Cost Management Techniques
- (ABC) can be applied to nonmanufacturing environments to more accurately allocate overhead costs
- focuses on the time required to perform activities, improving accuracy
- Cost allocation methods can be refined to better reflect resource consumption in
- integrates analysis to improve cost management in nonmanufacturing settings
Key Terms to Review (36)
Activity-based costing: Activity-Based Costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. It identifies specific activities within an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.
Activity-Based Costing: Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to the various products and services according to the actual consumption by each. It is a more accurate way of allocating overhead costs compared to traditional volume-based costing methods.
Capacity Utilization: Capacity utilization refers to the extent to which a company is using its available productive capacity. It is a measure of how efficiently a company is utilizing its resources, such as machinery, equipment, and labor, to meet current levels of demand for its products or services.
Completed Services: Completed Services refers to the final delivery of services to customers in a nonmanufacturing environment, where the costs associated with providing those services are recorded and recognized as revenue. This term is particularly relevant in the context of a job order cost system, which is used to track and allocate costs for specific service-based projects or jobs.
Cost Allocation: Cost allocation is the process of assigning indirect or overhead costs to specific cost objects, such as products, services, or departments, based on a rational and systematic method. It is a crucial concept in managerial accounting that helps organizations accurately determine the true cost of their operations and make informed decisions.
Cost driver: A cost driver is a factor that causes or influences the cost of an activity. It helps in identifying and allocating costs more accurately in cost accounting and management.
Cost Driver: A cost driver is a factor or activity that directly influences the incurrence of a particular cost within an organization. It is a key concept in understanding and managing costs, as it helps identify the underlying causes of cost behavior and guides decision-making processes.
Cost of Services Provided: The Cost of Services Provided refers to the total costs incurred by a nonmanufacturing organization in delivering its services to customers. This term is particularly relevant in the context of a job order cost system, which is used to track and accumulate the costs associated with providing specific services or completing unique projects.
Direct Costs: Direct costs are expenses that can be directly attributed to the production of a specific product or service. These costs are easily traceable to the individual unit or cost object and are essential in determining the total cost of manufacturing a product or providing a service.
Fixed factory overhead variance: Fixed factory overhead variance is the difference between the budgeted fixed manufacturing overhead and the actual fixed manufacturing overhead incurred. It measures how well a company controls its fixed overhead costs in comparison to its budgeted expectations.
Indirect Costs: Indirect costs are expenses incurred in the production of goods or services that cannot be easily traced to a specific cost object, such as a product or a department. These costs are not directly attributable to the manufacture of a particular item but are necessary for the overall operation of a business. Indirect costs are an important consideration in various managerial accounting topics, including the computation of a predetermined overhead rate, the preparation of journal entries for a job order cost system, the application of a job order cost system to a nonmanufacturing environment, the calculation of predetermined overhead and total cost under the traditional allocation method, and the comparison of traditional and activity-based costing systems.
Job cost sheet: A job cost sheet is a document that records and accumulates all the costs assigned to a specific job in job order costing. It includes direct materials, direct labor, and manufacturing overhead costs.
Job Cost Sheet: A job cost sheet is a detailed record that tracks and accumulates the direct materials, direct labor, and manufacturing overhead costs associated with a specific job or production order in a job order costing system. It serves as a key document for determining the total cost of a job and the cost of goods manufactured.
Job Number: A job number is a unique identifier assigned to a specific project or task within a job order cost system. It serves as a way to track and accumulate the costs associated with that particular job or project, allowing for accurate costing and profitability analysis in a nonmanufacturing environment.
Job order costing: Job order costing is a costing method used to allocate costs to specific jobs or orders, often for products that are distinctly different from each other. It tracks direct materials, direct labor, and manufacturing overhead costs for each job individually.
Job Order Costing: Job order costing is an accounting method used to track and accumulate the costs associated with the production of specific, distinct products or services. It focuses on tracing the direct costs of materials, labor, and overhead to individual jobs or batches of products rather than to the overall production process.
Job Profitability Analysis: Job profitability analysis is the process of evaluating the financial performance and profitability of individual jobs or projects undertaken by a business, particularly in a nonmanufacturing environment. It involves tracking and analyzing the costs, revenues, and margins associated with each job to determine its overall profitability and contribution to the company's overall financial success.
Labor Tickets: Labor tickets are a fundamental component of a job order cost system in a nonmanufacturing environment. They serve as a record of the time and effort expended by employees on specific jobs or projects, enabling accurate tracking and allocation of labor costs.
Markup Percentage: Markup percentage is the amount added to the cost of a product or service to determine its selling price. It represents the difference between the cost and the selling price, expressed as a percentage of the cost. This concept is particularly important in nonmanufacturing environments where a job order cost system is used to track and allocate costs.
Materials requisition form: A materials requisition form is a document used to request the transfer of raw materials from the storeroom to the production floor. It ensures accurate tracking of material usage and costs in manufacturing processes.
Materials Requisition Form: A materials requisition form is a document used in a job order cost system to record the transfer of raw materials from the storeroom to a specific job or production order. It serves as a critical link in tracking and allocating the direct material costs incurred for each job or project.
Nonmanufacturing Environment: A nonmanufacturing environment refers to business operations that do not involve the physical production of goods. These environments typically focus on the provision of services, management, or other non-production related activities. Understanding how a job order cost system applies in a nonmanufacturing setting is crucial for effectively tracking and allocating costs in these types of organizations.
Operating overhead: Operating overhead consists of indirect costs that are not directly tied to a specific job or product but are necessary for running business operations. These can include utilities, rent, and administrative salaries.
Over-applied Overhead: Over-applied overhead refers to a situation where the actual overhead costs incurred by a business exceed the predetermined overhead rate used to allocate overhead to production. This results in a surplus or credit balance in the overhead control account, indicating that more overhead was applied to production than was actually incurred.
Overhead: Overhead refers to the indirect costs associated with operating a business that cannot be directly attributed to the production of a specific product or service. These costs are necessary for the overall functioning of the organization but are not directly related to the manufacturing or delivery of a particular item.
Predetermined overhead rate: The predetermined overhead rate is a calculation used to allocate estimated manufacturing overhead costs to products or job orders, based on a specific activity base, such as direct labor hours or machine hours. It is determined before the period begins and helps in budgeting and costing processes.
Predetermined Overhead Rate: The predetermined overhead rate is a method used in job order costing to apply overhead costs to individual jobs or products. It is calculated by dividing the estimated total overhead costs for a period by the estimated activity base, such as direct labor hours or machine hours, for that same period. This rate is then used to apply overhead to each job based on the job's actual usage of the activity base.
Resource Consumption Accounting: Resource Consumption Accounting (RCA) is a cost management system that focuses on the efficient use of resources within an organization. It aims to provide a more accurate and detailed understanding of how resources are consumed in the production or delivery of goods and services, enabling better decision-making and cost control.
Service industries: Service industries are sectors of the economy that provide intangible goods and services to consumers or businesses. These industries include healthcare, education, finance, and professional services among others.
Service Industries: Service industries are economic sectors that provide intangible products and services rather than physical goods. These industries focus on meeting the needs of customers through the provision of professional expertise, advice, or labor-intensive activities rather than the production of tangible commodities.
Service Overhead Account: The service overhead account is an account used in a job order cost system to record and accumulate the indirect costs associated with providing services to customers in a nonmanufacturing environment. These indirect costs, known as service overhead, are then allocated to individual jobs or projects based on an appropriate cost driver to ensure accurate costing and pricing decisions.
Services in Progress: Services in Progress refers to the costs associated with partially completed services in a nonmanufacturing environment. It represents the value of work that has been started but not yet fully delivered to the customer, similar to Work in Process in a manufacturing setting.
Sony: Sony is a multinational conglomerate corporation specializing in electronics, gaming, entertainment, and financial services. Known for its innovative product lines and diverse business units, Sony operates in both manufacturing and non-manufacturing environments.
Time-Driven Activity-Based Costing: Time-Driven Activity-Based Costing (TDABC) is a costing methodology that estimates the cost of resources used by each activity or process within an organization. It uses time as the primary driver to allocate overhead costs, rather than the traditional volume-based cost drivers used in standard activity-based costing.
Timesheets: Timesheets are records that document the time an employee spends working on specific tasks or projects within a nonmanufacturing environment. They are a crucial tool for tracking labor costs and ensuring accurate job costing in a job order cost system.
Under-Applied Overhead: Under-applied overhead refers to a situation where the actual overhead costs incurred by a business exceed the amount of overhead that has been applied to the products or services produced. This occurs when the predetermined overhead rate used to allocate overhead to production is lower than the actual overhead rate.