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I'm Larry Walther.
This is principlesofaccounting.com chapter 19 in
which we cost job costing and modern cost management systems.
The first module looks at a job costing system or basic concepts in job costing.
Now job costing is best suited to those situations
where we are producing goods and services upon receipt of a customer order or
according to customer specifications, or perhaps in separate batches.
Examples could be the manufacture of aircraft or automobiles or
something large, significant, according to customer specifications.
In a future chapter we'll look at process costing, which is an alternative model
that's applied to goods that are produced in continuous processes.
If we manufacture paint, for example, you could imagine a process where the paint is
produced and packaged continuously.
And so it's hard to identify discrete jobs.
Here we're talking about jobs that are discreet in nature.
Each job is unique and materials and labor can be readily identified with each job.
And each job perhaps entails a unique amount of material and labor.
So a good example of this would be an electrician.
I've got an example, Jack Castle owns an electrical company called Castle Electric.
And on a typical day, Jack arrives early at the office and
starts lining out the day's work.
He's paid $25 an hour for his time.
He doesn't really do any work directly on jobs.
He does inspection work, pulling permits, managing inventory, customer relations,
things of this nature.
He's got a number of electricians who work for him, and they typically arrive at
about 8 o'clock in the morning, and he gives them their assignments and
equipment, and the parts and so forth that they'll need for the day.
And so let's look at Donnie Odom.
On July the 14th, one of his electricians, he came in.
And Jack said, well, I've got three jobs for you today.
Job A is gonna be to work on this billboard.
We need to clean and replace the lightbulb,
clean the electrical connections and so forth.
And by the way, this is going to require a lightbulb, and
the cost of the bulb is $150.
When you finish that,
go to Job B which is replacing the breaker panel at an office building.
And it's gonna take 20 breakers and they're $20 apiece.
And Job C is going to be pulling wire at a new residence that is under construction,
and we're expecting to use about 500 feet of wire that costs $0.14 per foot.
And so if Donnie is paid $18 an hour and
his time on July 14th turned out to be one hour working on the billboard,
two hours on the electric panel, and three hours working on a residential job.
He also had two hours getting ready at the shop in the morning, driving from location
to location, filling out his time report, things of this nature.
He also used some indirect materials that are by themselves not significant in cost,
but cumulatively the cost can mount up.
And so he used a roll of electrical tape that cost $3, and he used a box of wire
nuts, the little plastic screw-on caps that go on electrical fittings,
60 of those at a nickel apiece.
Donnie also, of course, uses tools, and the truck, and the equipment, and
so forth.
And so we need to track the three cost components, labor,
materials, and overhead.
Let's start with labor.
Labor cost is tracked on a report documenting the time spent on each job.
It's just a daily timesheet.
It might look something like this.
So here's for July the 14th daily timesheet for Donny.
You can see it's got the start and stop time, the job name, the tasks,
the client, and so forth.
And so here is Job A, Donnie was there from 8:45 to 9:45.
We've labeled it Job A, service and replace the bulb,
we've got the name of the client, and the one hour that was spent on the job.
We accounted for all of our time during the day.
Six hours of our time for Donny was attributable to direct labor and
two hours was the administrative overhead time.
So this is just a daily time sheet.
It's going to be an input into our job
cost sheet that we'll see in just a moment.
We also need to do a similar process for our materials.
We will use a form called a material requisition form.
It shows the material that's put into production.
And so here's a listing, the light bulb, the breakers, the wire,
the electrical tape and so forth.
Notice how we're going to keep detailed track that we used a light bulb on Job A,
1 unit at $150, so there's the cost for that particular item or material.
We would do that for all the material we use during the day.
Now thinking about the overhead,
the third cost component, it's difficult to trace all items of overhead.
How many wire nuts were used on the billboard?
How many inches of electrical tape were used?
Should the cost of Donnie's two hours of travel time and
administrative time be spread equally over the three jobs, or some other basis?
Obviously, it's a cost that's incurred by the business.
What about the cost of the truck and equipment?
So what normally occurs to these overhead items is that we determine an application
rate.
So for Jack at the beginning of the year he got with his accountant and
they estimated the total cost of all of their overhead items, rent, vehicles,
insurance, taxes, indirect labor, and on and on, an extensive list.
And Jack estimated the cost of $150,000.
Jack also estimated that there would be 7500 hours of
direct labor time during the year, so Jack and his accountant decided that it was
reasonable to allocate indirect costs based on direct labor hours.
And so the 150,000 in indirect costs divided by the 7,500 hours
gave us $20 per hour for the overhead application rate.
All right, and we'll see how that plays into our costing model in just a moment.
But let's think a little bit more about overhead application rates.
They are arbitrary, they are estimates.
Jack decided to allocate his overhead based on direct labor hours.
But normally we seek to establish a relationship where there is
a correlation between the application of overhead and the consumption of overhead.
We could have thought about using feet of wire, for example.
And so we'll allocate overhead based on feet of wire used.
What's the problem with that?
Well, obviously, in our case for Donnie's day, only one job entailed use of wire.
And all of the overhead would have been loaded only on that job.
So that would probably not be a good basis in this case.
So one needs to be thoughtful about their overhead application base so that it tries
to associate the costs that are being generated with their actual consumption.
But it is ultimately an estimate.
And recognize that we do expect differences between the application of
overhead and the actual costs that are eventually incurred.
We're not going to worry about those differences for
the moment, but subsequently, I'm going to show you in another module
how we're going to deal with differences between actual and applied overhead.
Now the information that we've seen is now drawn together in a job cost sheet.
And here's the job cost sheet for Job A.
It was a fairly short job.
There's the direct labor hour,
one hour from the direct time sheet from July 14th for Donnie Odom.
I've got a reference number, DTS, Daily Time Sheet, the date, and then DO for
Donnie Odom.
This is just pulled from the Daily Time Sheet.Similarly,
the material requisition form, we pulled the one bulb from there and
applied it to the direct material cost.
The overhead we applied,
we knew we had one hour of direct labor, we applied $20 of overhead.
And so totaling it up, we have $18 of direct labor, $150 of direct material,
$20 of applied overhead, and a total job cost of $188.
That $188 gives us the basis for billing our client, obviously,
more than $188 or we wouldn’t have any margin to be profitable in the business.
But that's our cost capture for what was incurred on Job A.
Now I've shown a manual system for
capturing these costs into a job cost sheet.
Obviously, we can use an electronic database to do this.
An electronic database is more powerful, data can be entered via user friendly
input forms with predetermined slots for entering information.
The information's only entered once, then the computer would allow you to sort and
capture data.
And not only could you say, I wanna know the cost for Job A, you could say,
I want to know how many lightbulbs have been used in the last 18 months.
You could pull a lot of extra information from the electronic database that would be
hard to gather from just a manual system.
So there's clearly advantages to the database type system.
So here's an example of a screenshot of a typical
database system that could be used to capture information.
I've got a number of options from the main switchboard.
I'm selecting the view, time and materials.
It brings up another window here where I can enter the time and materials worked.
In this case, I'm showing how you had one billable hour of direct labor time for
this particular project.
I also have the light bulb that was used, the total material.
So I've entered different components within the slots in the database.
And once it's entered then I'm able to move forward and manipulate and
manage that data for decision making purposes.
Let's move on next and look at another job.
This is Job D, it's a home construction project that spans many days.
And so you can see for July 14th,
I had a couple of different electricians working there.
They used wire and junction boxes, capturing the cost.
I went on July 15th, July 16th, this could span months or
years even for very significant large jobs.
But I now know through the process how much cost I've incurred on
this particular job $2,351 during this three-day window for Job D.
So you can see you don't have a job cost sheet for every day.
You've got daily timesheets, perhaps daily material requisition forms.
That all rolls up into the job cost sheet that can span days, weeks, months and
years, and allow you to track the data very effectively.
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