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I'm Larry Walther,
this principlesofaccounting.com Chapter 19,
in which we're looking at job costing and modern cost management systems.
In the previous module, we looked at a job cost sheet in a manual setting.
I gave a little bit of insight in terms of how a database computerized system can be
used to capture and manage those costs, and
develop reports from that information set.
There's other implications to the modern information system environment
that plays into job costing.
One of those is simply how we keep up with direct materials.
Many direct material items, if they're really expensive at all,
will have a direct identifying serial number.
If you look at your computer,
you'll probably notice there's a serial number on it.
But if you were to take that computer apart and
look at the various circuit boards, and chips, and so forth that are installed
within each, you'll also find that there are serial numbers attached to those.
Probably the manufacturer of that computer could tell you exactly the parts,
not only just the types of parts, but the exact specific part by serial number
that's installed within that computer as it comes out of the factory.
So barcodes and serial numbers are easily scanned electronically.
The computer can match the component IDs to the finished unit.
And that's particularly useful in terms of preparing not only a listing of the cost
of materials that went into a particular item.
Clearly we need it for cost accounting purposes, but
we also have the possibility of doing warranty processing.
If we guarantee a component for 90 days, the serial number's gonna allow us to know
when the part was manufactured, and how long the customer's had it, and so on.
It's helpful for product recall, all forms of inventory management.
In a similar fashion, direct labor costs can be tracked electronically.
You're probably familiar with a time clock, you may have seen a time clock.
There may be one where you work, or
maybe you've seen it in an old movie where people are lined up, clocking into work.
Those time clocks were used to track time and prepare payroll, but
also used to assign time to particular jobs that are worked.
Modern technology has moved beyond that by biometric controls, fingerprint scans,
things of that nature, and that can also be attributable on a job-by-job basis.
So we'll know how much time was actually worked on a particular job and
who had access to the inventory that was used in that particular job.
On assembly lines, sometimes it takes more cost to measure labor for
a particular job than is worth the trouble to track, even in an electronic context.
If we're manufacturing automobiles, and 60 cars an hour roll by the assembly line,
and a person is in charge of installing a door handle on the car, for example.
One time it may take 50 seconds to put a handle on, and the next time maybe there
was a fumble, and it took a minute and 10 seconds to screw on the handle.
In any event, if we stopped and told the employee to stop at each job, and
write down the time spent on each job, and get the serial number on that job, and
do a direct match, we'd spend more time than it's worth, perhaps, to do that.
Plus there would be some inequity in terms of the costing process, so
we may use standards instead.
We may say, look, in an hour 60 cars go by, every car gets a door handle.
So let's assume that it's one minute per door handle, and use an average or
standardized cost to track labor in that fashion.
But once again, there are a number of ways we can go about this tracking process.
Let's consider a term that you'll need to know, the term is cost driver.
It's the factor that is viewed as causing costs to be incurred
within an organization.
It really relates to the assignment of overhead, or
the overhead application base.
In the previous module,
we saw how we applied overhead based on direct labor hours.
The job that took two hours received twice as much overhead
application as the job that took one hour.
In any event, the cost driver is an abstract concept.
There are really too many variables within an organization to fully explain how
costs are to be created and absorbed by our production.
But labor hours can be a significant logical factor.
However, in an automated environment, perhaps we would look at machine hours or
number of barcode scans.
In other businesses, maybe it's the amount of fuel that's consumed that would be our
primary cost driver.
But the cost driver should be logical and
bear an association to the actual output that's created.
It's the base on which overhead is allocated.
We touched on overhead allocation in the previous module,
we're giving some more insight now into that.
And this will become a significant part of our costing
process as we continue through this chapter,
as well as into the next chapter on process costing.
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