Question

Job order costing was originally developed for use in manufacturing environments but equally applies in organizations that provide services instead of manufactured goods.

Give an example of a service-based business and explain the ‘product’ that they offer to their clients/customers.

List two costs that would be incurred to provide this product (i.e. deliver the service) and classify each as direct or indirect (i.e. overhead).

Answer 1

Instead of being dependent on materials, service industries depend on labor. Since their work is labor intensive, it makes sense to use labor as an activity base with billable hours often as the best allocation base. For example, in an audit, there often will be several accountants, with differing levels of experience and expertise involved in the assignment. The accounting firms have more billable hours at the staff level and fewer billable hours at the partner level. And since the firm bills the partner’s time at a significantly higher rate than the staff, it makes sense to apply overhead at the billable hours instead of the billable costs.

In service industries, there is no manufacturing overhead because they are not manufacturing a product, but instead are providing a service. Accordingly, overhead is called operating overhead.

Another terminology difference is the inventory accounts. The jobs are considered movies or assignments in process, and are transferred to a cost of service sold account instead of to a finished goods inventory.

Tracking Costs in Healthcare

Healthcare is one of the industries that keeps track of materials, such as medicine. In this industry, direct labor is shown to the patient as the cost of the provider, such as a physician, physician assistant, or nurse practitioner. Indirect labor includes all other personnel from front desk staff to the nurse who gathers vital signs or a technician who performs tests. Patients do not see the overhead cost on their bill, but it is built into the invoice as part of the practitioner or testing fees