Question

Job order costing accumulates and records costs by job and assists managers in evaluating actual and expected costs related to direct materials, direct labor, and factory overhead costs.

An excellent example is provided in the opening vignette of the textbook for this chapter, Washburn Guitars. A job order cost system is ideal due to the nature, design, and uniqueness of each guitar built for a musician, such as Paul Stanley from the rock band KISS. Costs associated with the creation of a guitar include direct materials such as wood and strings, direct labor of the employees who build, assemble, and test the guitar. Additionally, the factory overhead costs such as the plant where the guitar is manufactured, the insurance on the plant, taxes, and all other indirect costs. After the costs are accumulated for Mr. Stanley's guitar, Washburn Guitars would then price the guitar to achieve a profit (selling price greater than the costs).

Select a company that would employ a job order costing system. Research the company and discuss why a job order costing system is the 'correct' fit for that organization. Discuss a product the company sells and discuss what direct and indirect costs would be included on the job cost sheet.

Answer 1

Solution: example in case of a automobile repairing company

In a service sector like automobiles repairing requirements of each customer differ from each other lets say a customer want to replace the engine of the vehicle , or another customer want its air conditioning of its car gets replaced. Due of the different requirements of different customer it is a good option for such organisations to follow job order costing method , to charge different prices from different customers depending upon the expenditure of a particular job order.

Direct costs which shall be included in a job cost sheet:-

Direct materials: the cost of material which is to replaced needs to be taken care of because cost of each material has a worthy value in a particular job.

Direct labor: cost of labor shall be determined according to the time sheet of a employee.

Overheads: overheads are charged on the basis of pre determined overhead rate similarly as charged in a manufacturing organisation.

Indirect costs will be as following:-

Indirect costs would include rent of the premises , electricity expenses, water charges ,etc.