Job Order Cost Systems | Steps

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7 STEPS TO MAKE A JOB ORDER COSTING

1.- Identify the chosen cost-object
2.- Identify the direct costs the job
3.- Select the cost allocation bases
4.- Identify the indirect costs
5.- Calculate the rate per unit
6.- Calculate the indirect costs
7.- Calculate the total cost of the job

EXAMPLE OF A JOB ORDER COSTING

A manufacturing company is planning to sell a batch of 25 special machines (Order 650) to a retailer for $114,800.

Step 1. IDENTIFY THE OBJECT COST

The cost-object is Order 650.

Step 2. IDENTIFY THE DIRECT COSTS OF THE JOB

Direct Materials	$50,000
Direct Labor (DL)	$19,000

Step 3. SELECT THE DISTRIBUTION BASES FOR COST ALLOCATION

The distribution of costs is based on machine-hours. The order 650 used 500 machine hours. The total machine hours used in all jobs was 2,480.

Step 4. IDENTIFY THE INDIRECT COSTS

The manufacturing indirect costs (overhead) were $ 65,100.

Step 5. CALCULATE THE RATE PER UNIT

The indirect cost rate is $ 65100 ÷ 2480 = $ 26.25 per machine-hour.

Step 6. CALCULATE THE INDIRECT COSTS

$26.25 per machine-hour x 500 hours = $ 13,125

Step 7. CALCULATE THE TOTAL COST OF THE JOB

Direct Materials	$50,000
Direct Labor (DL)	19,000
Indirect costs (Overhead)	13,125
TOTAL	$82,125

What is the contribution margin of this work?

Revenue	$114,800
Cost of Sales	82,125
Contribution margin	$32,675

What is the percentage of contribution margin?

$32.675 ÷ $ 114.800 = 28.5%

ACTUAL OR CURRENT COSTING VS NORMAL COSTING

Actual costing is a system that uses current costs to determine the cost of individual orders (see Step 7 in the example above).

Normal costing is a method that distributes indirect costs based on their budgeted rate by the actual amount of the cost distribution base.

EXAMPLE: Assuming that the manufacturing company of the example above budgeted a total of $60,000 for manufacturing indirect costs and 2400 machine-hours. Which would be the rate of indirect costs budgeted?

Ans = $60,000 ÷ 2,400 = $25 per hour.

How much indirect cost was distributed to the Order 650?

Ans = 500 machine-hours X $25.00 = $12,500

Then the cost of the Order 650 under normal costing would be:

Direct Materials	$50,000
Direct Labor (DL)	19,000
Indirect costs (Overhead)	12,500
TOTAL	$81,500

ACCOUNTING FORUM