4.8 Explain How a Job Order Cost System Applies to a Nonmanufacturing Environment

Job order costing isn't just for factories. Service companies use it too, tracking costs for specific jobs or projects. They assign unique job numbers, track direct costs, and allocate overhead using predetermined rates. It's all about knowing how much each job really costs.

The lingo changes a bit in service settings. "Services in Progress" replaces "Work in Process," and "Cost of Services Provided" takes over for "Cost of Goods Sold." But the core idea stays the same: accurately tracking costs to price services right and stay competitive.

Job Order Costing in Nonmanufacturing Environments

Adaptation of job order costing

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• Service industries adapt job order costing principles to track costs and allocate overhead for specific jobs or projects
  • Assign a unique job number or identifier to each job or project
  • Track and assign direct costs (labor, materials) to the specific job
  • Allocate indirect costs (overhead) to jobs based on a predetermined allocation rate
    • Determine allocation rate using a cost driver (labor hours, machine hours)
• Adapt the manufacturing overhead account to a service overhead account
  • Include indirect costs related to providing the service (rent, utilities, administrative salaries) in service overhead
• Use a predetermined overhead rate to allocate service overhead costs to individual jobs
  • Calculate predetermined overhead rate: \text{Predetermined overhead rate} = \frac{\text{Estimated total service overhead costs}}{\text{Estimated total [cost driver](https://www.fiveableKeyTerm:Cost_Driver) amount}}
• Record actual overhead costs in the service overhead account, assign allocated overhead to individual jobs using the predetermined rate
• Calculate under- or over-applied overhead at the end of the period by comparing actual overhead costs to allocated overhead
  • Close out any difference to the Cost of Services Provided account

Terminology in nonmanufacturing contexts

• Use the term "job" instead of "product" or "work order" in nonmanufacturing environments
• Replace "Work in Process" account with "Services in Progress" account
  • Track costs of incomplete jobs at the end of the period in Services in Progress account
• Replace "Finished Goods" account with "Completed Services" account
  • Track costs of completed jobs not yet delivered to the customer in Completed Services account
• Replace "Cost of Goods Sold" account with "Cost of Services Provided" account
  • Represent total cost of jobs delivered to customers during the period in Cost of Services Provided account
• Replace "Manufacturing Overhead" account with "Service Overhead" account
  • Track indirect costs related to providing the service in Service Overhead account

Job order costing for service companies

• Service companies (IFixIT, computer repair) use job order costing to track costs and price services for customers
  1. Assign a unique job number to the repair project when a customer brings in a device
  2. Create a job cost sheet to track all direct costs (labor, replacement parts) associated with the repair
• Track direct labor costs using timesheets or labor tickets, record hours worked by each technician on the specific repair job
  • Assign labor rates based on the technician's skill level and experience
• Track direct materials (replacement parts) using a materials requisition form, assign to the specific repair job
• Allocate indirect costs (rent, utilities, administrative salaries) to each repair job using a predetermined service overhead rate
  • Calculate the predetermined rate: $\text{Predetermined rate} = \frac{\text{Estimated total service overhead costs}}{\text{Estimated total cost driver amount (labor hours)}}$
• Calculate the total cost of the job by summing direct labor, direct materials, and allocated service overhead once the repair job is completed
• Determine the price charged to the customer using the job cost information
  • Include a markup percentage in the price to ensure profitability
• Accurately track costs associated with each repair job and make informed pricing decisions to remain competitive in the market by using job order costing
• Perform job profitability analysis to evaluate the financial performance of individual jobs

Advanced Cost Management Techniques

• Activity-based costing (ABC) can be applied to nonmanufacturing environments to more accurately allocate overhead costs
• Time-driven activity-based costing focuses on the time required to perform activities, improving cost allocation accuracy
• Cost allocation methods can be refined to better reflect resource consumption in service industries
• Resource consumption accounting integrates capacity utilization analysis to improve cost management in nonmanufacturing settings