Cost Estimation and Profit Planning Discussion
In a job costing system, the jobs consist of individual products or batches of products or services. A job costing system is appropriate when most costs incurred for the job can be readily identified with a specific product, batch of products, customer order, contract, or project (Blocher et al., 2019). On the other hand, a process costing system consists of gathering costs for a much larger number of units being produced. Costing methods are selected based on the process for production and its intentions are to provide the most precise representation of the costs sustained during the production process.
The job-order cost method is appropriate when the products are manufactured in identifiable lots or batches, or when the products are manufactured to customer specifications. Job-order costing is widely used by custom manufacturers such as printing, aircraft, construction, auto repair, and professional services (Anta & Romania, 2018). The job costing system is typically used in areas where personalized services are offered, such as custom home building. The main characteristics of job costing include the following: 1) products/services produced when customer orders, instead of keeping a stockpile, 2) the costs are accumulated to each job individually, 3) job is performing specifically for the customer’s specifications, 4) each job performed differs from others and 5) each job requires special attention and skill in order to complete. advantages. A job order costing system uses a job cost sheet to keep track of individual jobs and the direct materials, direct labor, and overhead associated with each job (Franklin & Graybeal, 2019). Because each job in this system is unique and differs, this allows the organization to keep track of the costs per individual job. Maintaining this information is typically more expensive than process costing, and it is often used for the production of smaller, more individualized jobs because the benefit of knowing the cost of each product outweighs the additional cost of maintaining a job order costing system (Franklin & Graybeal, 2019).
Two local companies that use the job costing system are Thrive Home Builders and Bui Accounting Firm, both providing customized services. Job costing is the most accurate way to determine the costs and break down specific labor and material needs in order to perform the job. A custom home building contractor might work with a client to nail down the specific expectations for the finished product. Once the details are known, the contractor would use a job costing system to approximate the cost of building the home specified by the customer (Hood, 2020). At Thrive Home Builders, the company first reviews material costs, as these costs differ significantly based on the size of the home, the materials requested from the customer (brick, for example) and where the home is to be built. Labor costs are also considered during this process. The number of workers needed for the job and the hours that are needed to complete the work are considered in the labor costs. The location of the job can also impact labor costs by requiring you to provide transportation and potentially lodging to workers. Additionally, you may need to hire local workers instead – labor laws and taxes can vary depending on the location as well (Hood, 2020). Afterwards, overhead costs are then calculated for the job – however, these expenses typically do not fluctuate much. One overhead cost that can vary from one custom home build to another would be depreciation on company-owned equipment (not every job will require a bulldozer or a crane) (Hood, 2020). Sales and marketing expenses are also costs that could differ from job to job. Through the use of the job costing system, Thrive Home Builders can calculate all expenses involved for each project and provide their clients with consistent and accurate proposals. This process is similar at Bui Accounting Firm. Because accountants work with different clients, each with different and unique accounts/situations, using job process costing helps the company to track the time and resources used for each customer.
With process costing, companies determine item cost by tracking the cost of each stage in the production process, instead of tracking costs for each individual item – after adding up the cost of all the steps in the process, they divide the total cost by the number of items (cost per unit) (Clancey, 2020). Companies producing mass-produced goods are ideal for using the process costing system. Two local companies using process costing are Alpine Lumber Company and Northside Paint and Decorating (paint manufacturer). Because lumber and paint are made in uniform, the process costing system is ideal for these organizations. During the production process of lumber and paint, the products are required to move through more than one department – from procurement to manufacturing, for example. This system allows for better managerial control because each process can be evaluated at shorter intervals, it also allows for more overall flexibility.
From a biblical perspective, there are a few instances where the Bible mentions cost control and planning. Luke 14:28-30 states, “For which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish – lest, after he has laid the foundation, and is not able to finish, all who see it begin to mock him saying, ‘This man began to build and was not able to finish.’”
Anta, D., & Romania, A. (2018). Job order-costing versus process-costing. Pennsylvania State University. Retrieved from https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.523.3194&rep=rep1&type=pdf
Blocher, E., Stout, D., Juras, P., & Smith, S. (2019). Cost management: A strategic emphasis
(8th edition). McGraw-Hill.
Clancey, J. (2020). Process costing: Manufacturing accounting. Management Accounting. https://doi.org/10.24053/9783739880280-328
Franklin, M., & Graybeal, P. (2019). Principles of Accounting (Vol. 2). Open Stax.
Hood, E. (2020). Costing basics. Apparel Costing, 3(1), 3–14. https://doi.org/10.5040/9781350065437.0006