Question

Find a small business in your area that uses job order costing (JOC) - Choose one product they make and discuss:

1. Why you think they use job order costing.
2. What does the product sell for?
3. What costs would be included in direct materials - make a guess as to what direct materials cost?
4. Estimate how long it takes to make this product. Make a guess as to what direct labor costs.
5. Identify at least 5 costs that would be included in Overhead for the month; list these and guess a total
6. Discuss how the overhead costs would be allocated to the each job.

Answer 1

Generally, the application of job costing method is followed in industries such as printing press, automobile garage, repair workshops, shipbuilding, foundry, and other similar manufacturing units, which manufactures according to customer’s specific requirements. A business that applies costing method usually has the following characteristics:

• Production is carried out based on the customer's specification
• Products are manufactured in distinguishable lots
• Products produced are of not uniform nature
• It is practical to maintain a separate record of each lot from the time production is begun until it is completed.

Advantages of job costing(Reasons to use Job Costing)

1) Profitability of each product can be determined individually.

2) Provides a detailed cost analysis of materials, labour and overheads for each job as wnen required.

3) Helps in preparation of estimates

4)Comparison of actual cost with estimated cost and calculation of variances.

5) Hepls in identifying unprofitable work(jobs)

6)Hepls in precise quotation of product

Eg: Direct Material= $50,000

Direct Labour= $40,000

Overhaeads

Manufacturing Overhead= $10,000

Administrative Overhead= $15,000

Selling and Marketing Overhead= $20,000

Distrbution Overhead= $25,000

Research and Development Overhead= $35,000

Total Cost= $195,000   

The formula to determine the overhead rate:

Overhead rate = estimated manufacturing overhead / estimated cost allocation base

Where the cost allocation base refers to the estimated machine hours or estimated labor hours, depending on which one the company chooses to estimate its overhead costs by.

As per the example given above, we can calculate overhead rate as-

Company estimates that for the current year, it will work 75,000 machine hours and incur $105000 in manufacturing overhead costs. The company applies overhead cost on the basis of machine hours worked.

This means that the company would estimate $1.4 in manufacturing overhead costs for every one machine hour worked. So, if the company actually worked 5000 machine hours, the estimated overhead costs would be $7000.