Question

I want you to pick a service company and imagine how this firm could apply job order costing. Start by briefly describing the business model of your service company. Then ask yourself what the “product” and what the “job” is so that you can differentiate “Product Costs” (direct materials, direct labor, overhead) and “Period Costs”. Give a few examples for each cost type. Afterwards, put yourself in the shoes of an executive of that business who is trying to determine a way to allocate (apply) overhead costs – what would be a good activity driver to apply overhead for your chosen company? Lastly, think about why Job Costing can be difficult for service companies – what are common challenges and other considerations unique to service businesses?

Minimum of 250 words and use references if needed.

Answer 1

ANSWER:-

Example of a service company:-

1. Accenture is a leading consulting, technology and outsourcing service firm. It provides advisory services towards strategy formulation, operational improvement, operational excellence, cost reduction, process improvement etc across the platform of management consulting and technology consulting.
2. For the purpose of this exercise, let's assume that Accenture is hired by one of Fortune 500 companies to provide some management consulting.
3. So, it's final deliverable is a strategy book clearing narrating the recommendations to the client.

Execution: How it will be executed:-

1. Accenture undertakes management consulting assignment. Fortune 500 companies are their typical clients. Every consulting assignment is led by a Partner and manned by one senior manager along with consultants, who are module managers and associates, who work under a consultant on a module.
2. A partner is generally responsible for fetching the mandates and hence he is working on multiple things at any point of time. A senior manager is the overall delivery head for the assignment and works in focused way on the assignment he is staffed along with consultants and associates.
3. Production team in Accenture is responsible for drafting, formatting, printing and binding the final report before submission to the client. The audit team that reviews the final report for compliance with internal benchmarks and quality checks before delivery. Explain how costing of an assignment should be done.

Hence the product is: Strategy Document

Job is: All the intermediate steps involved in completing this:

1. Consultants deployed by Accenture for Interaction and data analysis - Direct labour
2. Consultants billing hours here will be similar to direct labour hours in manufacturing set up
3. Paper, colour print outs, booklets, book binding materials etc are minor but direct material costs
4. Production team in Accenture is responsible for drafting, formatting, printing and binding the final report before submission to the client. The audit team that reviews the final report for compliance with internal benchmarks and quality checks before delivery. Their costs are overheads.

How will the costing and cost allocation be done:-

1. Senior manager, consultants and associate costs should be fully charged to the assignment as they are the direct labour
2. A partner’s cost should be apportioned basis total numbers of mandates he has budgeted to bring in a year
3. Production team’s costs (printing& binding materials, manpower, stationary, printer, maintenance, general and administrative) should be allocated to the assignments on the basis of total assignments Accenture has budgeted to undertake in this year
4. Audit team’s costs (manpower, general & administrative) should be allocated to the assignments on the basis of total assignments Accenture has budgeted to undertake in this year.
5. Overall organisational overheads (office rent, power, insurance premium, vehicle, maintenance, general, administrative, selling, marketing, advertisements etc) should be apportioned to assignments on the basis of direct labour hour.
6. Total cost of an assignment should be sum total of all the costs from 1 to 5 above.