When dealing with manufacturing and serving a diverse clientele, any company should account for the product diversity catalyzed by the customers’ preferences. Thus, to obtain a realistic picture of the product cost, the firm’s primary goal is to make this cost unique and relevant for every single product presented by the company. Since the product cost encompasses direct material, direct labor, and material overhead, it is reasonable to assume that these provisions will be different for two unique products, and using the average of product costs may become a hazard for the company. Hence, in terms of the present presentation, the phenomenon of job order costing will be discussed as a solution for embracing cost diversity among existing products.
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What Is Job Order Costing?
Essentially, the notion of job order costing stands for the process of allocating an individual product cost to a single quantity to manage the costs and the financial performance of a company. Job order costing may be used by both managers and accountants, with the latter calculating the foundation for managerial decisions in terms of estimating a market cost and presenting a certain product to the market. Essentially, job order cost comprises direct material, direct labor, and manufacturing overhead that includes such notions as utilities, rent or property tax, indirect labor, and materials (Davis & Davis, 2019).
Application to the Workplace
As an accountant, I deal with all types of calculations and costs daily. Thus, to differentiate between the company’s clients, I tend to use different product cost spreadsheets for every client based on their product requests and customized preferences in terms of manufacturing and deadlines. In such a way, I see the individual product cost and send invoices and estimates based on the job cost sheet information as well as define whether a certain customer’s request is possible to satisfy without any financial losses for the company. On the next slide, a template for a job order sheet may be observed.
Job Order Costing Sheet
The job cost sheet I use to manage individual clients consists of a detailed description of the labor and material required for the number of product units requested by the customer. Such a product cost administration facilitates the process of calculating revenue and generating invoices for clients. An important detail in this spreadsheet that is highly individual for the manufacturer is the estimated base used for the calculation of manufacturing overhead. In my case, I use direct labor cost, but it may be replaced with either direct labor hours or machine hour-based costs (Taschner & Charifzadeh, 2020).
When Is Job Order Costing Used?
The application of job order costing systems may be applicable in various company scenarios. Thus, according to Taschner and Charifzadeh (2020), for instance, a company may employ job order costing in case it deals with an assortment of products that require different combinations of materials and labor or when the manufacturing process is separated into production stages. In the case of my workplace, we deal with a variety of customer-specific requests, catalyzing a need to create a multifunctional and personalized approach to every individual client.
When accountants employ the job order costing method, their primary goal is to make sure that every unique job, or every quantity of manufactured products, is objectively and fairly priced. Hence, the application of job order costing to my workplace is an essential tool for serving a substantial number of individual clients. Furthermore, when applied, the flow of costs does not differ significantly from the process costing, as the flow is tracked from the material inventory to a complete sale of the product.
Cost accumulation is an asset for any accountant, as it stands for the system of collecting information on the cost of a particular product. While two primary approaches to cost accumulation include job cost and process cost, the latter cannot be employed in my workplace. Process costing presupposes collecting costs from a particular department and then allocating an average to a product. As an accountant who manages various individual clients simultaneously, average estimation is financially hazardous and inefficient. Thus, I accumulate cost by a job, which encompasses labor, material, and overhead for a certain batch of units requested by each client.
Typology of Job Order Costing
There exist various types of job order costing systems that are employed according to the specifics of jobs accounted for during manufacturing. Hence, one of the fundamental types of job order costing is simple. Simple job order costing does not modify manufacturing overhead because it does not differentiate indirect costs. As a result, the allocation base for the products remains universal for all the products, whereas the costs of direct labor and materials vary according to the product’s specifics. Such a model, although easy to apply, does not secure productive results, which makes it an inappropriate option for my workplace.
On the other hand, an extended model of job order costing takes into account the diversity of indirect costs allocated for every product presented by the company. For example, when two products are kept at a warehouse for different periods, the cost of their storage will differ significantly as well, making simple job order costing irrelevant to the case. The model of extended job order costing is employed in my workplace, as it helps me ensure that every individual client deals with reasonable and justified costs, whereas our company works with real figures to estimate whether the manufacturing of a certain product is healthy for the firm.
Another type of job order costing is generally more applicable to larger companies that are physically incapable of allocating indirect costs for every job. For this reason, this model implies the allocation of indirect costs according to the cost centers such as departments or groups of departments. Such a phenomenon is complex for my workplace because managing individual clients willing to purchase goods in small, customized batches is more relevant for an extended model of job order costing.
Naturally, particular attention has now been paid to the notion of technology and its impact on cost allocation. According to Taschner and Charifzadeh (2020), the current pattern of manufacturing is divided into two parts: jobs and indirect costs that rely heavily on technological advancement and manufacturing acceleration, and jobs and indirect costs that remain relatively unaffected by machine usage such as salaries of salespeople. For this reason, embracing machine hour-based indirect costs may be essential for large-scale manufacturers that invest in automatization. For my workplace, such an option may be a beneficial solution in the long term, but there is no current demand for such a complex system.
The phenomenon of job order costing has been proven explicitly beneficial for business entities that deal with a variety of products customized according to the customers’ needs. As an accountant, I have been using this tool for a long time, which allowed me to see some of its benefits, such as realistic product cost allocation and increased customer satisfaction.
Davis, C. E., & Davis, E. (2019). Managerial accounting (4th ed.). John Wiley & Sons.
Taschner, A., & Charifzadeh, M. (2020). Management and cost accounting: Tools and concepts in a Central European context. John Wiley & Sons.
Warren, C. S., Jonick, C., & Schneider, J. (2020). Accounting (28th ed.). Cengage Learning.