Essay: Job order cost systems

Job Order Cost System
The job order cost system is used when each product is made according to a customer’s specifications. Each product produced is considered a job. Costs are tracked by job. The job order cost system must capture and track by job the costs of producing each job, which includes direct materials, labor, and factory overhead in a manufacturing process. The following documents are used to tracking data.
Job cost sheet
Job cost sheet may be defined as a document used for accumulating costs incurred to produce a job.
Job cost sheet is one of the basic documents used in job order costing. This is used to find the job number, customer information, job information (date started, completed, and shipped) individual cost information for materials used, labor, and factory overhead and a summary of total job cost.
Direct Materials
Direct material includes raw material, purchased parts which is used to manufacture and assemble a complete product. Examples of direct materials are leather and wood where the finished product or result can still be seen. Indirect material which is not used directly to manufacturing the product. Cleaning products are an indirect material cost.
Direct Labor
The wages of the people that actually manufacture a specific product. Those people who are directly involves to creating the product, is called direct labor. Direct labor is also direct cost. On Job Time Tickets primary labor cost data are accumulated. Job time tickets contain names of departments and job numbers for which labor time is used. The wages of anyone who does not directly participate to making a product, but who are still needed to run the factory.
Factory Overheads
Factory overhead, also called manufacturing overhead or factory burden. The cost of running a factory. Factory overhead involves indirect material, indirect labor, and fixed or miscellaneous expenses. Factory overhead is applied to jobs on the basis of predetermined departmental factory over head applied rates. Factory overhead is also periodically applied to the jobs and record in job cost sheets.
Predetermined overhead rate
The predetermined overhead rate is determined by estimating (during the budget process) total factory overhead costs and dividing these total costs by direct labor hours or direct labor dollars. For example, suppose a company using direct labor dollars for the allocation of overhead estimated its total overhead costs to be $300,000 and total direct labor dollars to be $250,000. The company’s predetermined overhead rate for allocating overhead to jobs in process is 120% of direct labor dollars, and is calculated as follows:
Predetermined overhead rate =
Predetermined overhead rate =
Importance of job order cost systems
Job order cost system is very important on the following basis:
‘ Every order has its own specifications therefore every job is different from the other and required different material, labor and manufacturing overhead.
‘ Each job is generally high value. The job costing system allows to calculate the profit margin that will be getting on each job.
‘ A job order costing provides sufficient information to help evaluate individual performance like productivity, efficiency and cost control.
‘ Job order costing system is flexible to help calculate particular indirect costs, such as factory overhead.
‘ Job order costing allows monitor continuously production process.
‘ The job order costing system provides access to the expenses incurred on each job.
APPLICATIONS OF JOB ORDER COSTING SYSTEM
Job order costing is a system that monitor the expenses in which business just manufacture products to fill each customer orders. Companies in many industries can use job order costing, though a variety of products offerings complicates the tracking of products.
Manufacturing companies
Manufacturing companies incorporate job order costing as a means of controlling usage of raw materials, equipment of production and labor hours.
These businesses consider a separate job of each customer order for the purposes of job order costing. Alternatively, smaller value projects may be grouped under a single job heading.
White collar businesses
Companies in the white collar sector of business, including accounting businesses, law firms and private investment companies can use job order costing to manage client accounts individually. For example, accounting firms can consider each client as an individual job. On daily basis cost order sheet prepare contain detail about client dealing and hours spend by client.
Medical services businesses
Medical services businesses including hospitals, medical billing companies and small doctor’s offices, can use job order costing to consider each patient or bill as an individual job. In service industries, including the medical field, record-keeping for job order costing can be more complex than in other industries because these businesses offer a wide array of services.
Retail companies
Retail companies, including clothing producers and retail outlets, in clothing company every job incurred expense according to size, color design and style. Retail companies and other businesses to track expenses to create a variety of job order cost models to show how costs vary from product to product.
Film studio
Businesses in the entertainment industry, including film studios, can prepare a separate job order cost sheets for each film. Costs of direct materials (costumes, props, set design fees, etc.) and direct labor (actors salaries, directors payments, and extras) are charged to each film’s job cost sheet.