Question

Address all of the following as your Main Post, using at least 250 words: What is a job order cost system? Describe how you think a job order cost system might be used for professional service businesses. Describe factory overhead costs and give one example of an overhead cost. Lastly, write about one definition or additional concept related to job order costing

Answer 1

Job Order Cost System:

Definition:

Job Order Cost System is a system wherein manufacturing cost is assigned to the individual product or set of products when each product manufactured is different than other.

Explanation:

Using this system the entity can find out the true cost of manufacturing each variety of product along with its individual profitability. It is very critical for the entity to know its product viability in order to continue manufacturing the product.

For e.g an entiity provides shop fitting solutions. The entity manufactures its products as per customer specific orders. In this case, each product is unique in terms of design and prices. Hence, each product manufactured shall be considered as a job and costs will be seen job-wise. It will be beneficial for the entity to use Job Order Cost system, in which direct material cost and direct labour cost job will be included in the Job Order Cost which will be further added by factory overheads incurred during production.

Factory Overhead Cost:

Factory Overheads, also known as manufacturing overheads means expenses incurred for conversion of raw material into finished product. To elaborate further, it includes all the factory related expenses except direct material cost and direct labour costs.

Examples of factory overheads include electricity, power, machinery maintenance, indirect material, indirect labour, depreciation on machineries and other production equipments, factory maintenance and property taxes, etc.