{"id":150,"date":"2021-01-26T22:15:52","date_gmt":"2021-01-26T22:15:52","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=150"},"modified":"2021-05-13T23:47:54","modified_gmt":"2021-05-13T23:47:54","slug":"job-order-costing-for-a-service","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/job-order-costing-for-a-service\/","title":{"raw":"Job Order Costing for a Service","rendered":"Job Order Costing for a Service"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Calculate job costs for a service business<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"size-medium wp-image-1655 alignleft\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13234708\/stil-D4jRahaUaIc-unsplash-240x300.jpg\" alt=\"Purse with items spilling out\" width=\"240\" height=\"300\" \/>Before we dive into using job costing for a manufacturing firm, let\u2019s look at a simpler example: a service business.\r\n\r\nJob order costing can be used for service businesses where the service and costs are unique to each customer, such as those of an attorney, accountant, physician, or event planner. Each customer, client, or patient is a separate job or project. Clients, customers, and patients incur direct costs, direct labor, and applied overhead costs. And while there are no materials related to inventory for a service business, there may be expenditures associated directly with a particular project, such as travel or supplies.\r\n\r\nCreative Compton, Inc. is an advertising agency that designs web sites and promotional materials for medium-sized businesses. For each client project, Creative Compton (CC) accumulates the direct labor costs of its professional designers at an hourly rate of $140. The company allocates overhead costs to jobs at a rate of 35% of total direct labor cost incurred.\r\n\r\nLet\u2019s keep it really simple and assume that CC only has two clients and the marketing manager sent them the following proposals based on her best-estimate of the amount of time each would take, applying a rate of $200 per hour to come up with the amount she would charge each client:\r\n\r\nIceBurg Drive-in Burgers: $44,000 (220 hours of work at $200\/hour)\r\n\r\nLaney\u2019s Fashions: $18,000 (90 hours of work at $200\/hour)\r\n\r\nThe companies accepted the bids and the work was passed on to staff.\r\n\r\nThe data for each project as completed is as follows:\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\"><\/th>\r\n<th scope=\"col\">IceBurg Drive-in Burgers<\/th>\r\n<th scope=\"col\">Laney\u2019s Fashions<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Actual Direct Labor<\/td>\r\n<td class=\"r\">200 hours<\/td>\r\n<td class=\"r\">100 hours<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Software Licensing<\/td>\r\n<td class=\"r\">$500<\/td>\r\n<td class=\"r\">$2,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Travel<\/td>\r\n<td class=\"r\">$160<\/td>\r\n<td class=\"r\">$0<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nWhat is the total calculated cost of each job?\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\"><\/th>\r\n<th scope=\"col\">IceBurg Drive-in Burgers<\/th>\r\n<th scope=\"col\">Laney\u2019s Fashions<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Direct costs<\/td>\r\n<td>200 labor hours * $140\/hour = $28,000\r\n\r\nLicenses and travel = $660\r\n\r\nTotal direct costs = $28,660<\/td>\r\n<td>100 labor hours * $140\/hour = $14,000\r\n\r\nLicenses and travel = $2,000\r\n\r\nTotal direct costs = $16,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Indirect costs @35% of DL$<\/td>\r\n<td>$28,000 * 0.35 = $9,800<\/td>\r\n<td>$14,000 * 0.35 = $4,900<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total costs, direct and indirect<\/td>\r\n<td class=\"r\">$38,460<\/td>\r\n<td class=\"r\">$20,900<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nDid the company make or lose money on these jobs?\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\"><\/th>\r\n<th scope=\"col\">IceBurg Drive-in Burgers<\/th>\r\n<th scope=\"col\">Laney\u2019s Fashions<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Revenue<\/td>\r\n<td class=\"r\">$44,000<\/td>\r\n<td class=\"r\">$18,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Costs, direct and indirect<\/td>\r\n<td class=\"r\">$38,460<\/td>\r\n<td class=\"r\">$20,900<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Made\/(Lost)<\/td>\r\n<td class=\"r\">$5,540<\/td>\r\n<td class=\"r\">($2,900)<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nAlthough the contract for Laney\u2019s of $18,000 covered the $16,000 direct costs, it did not contribute sufficiently to overhead, and so the company lost money on that bid.\r\n\r\nManagement will have to determine what action to take if any, but this illustrates the power of full absorption costing and job costing to help determine the actual cost of a project.\r\n\r\nBefore we apply these basic job costing concepts to a manufacturing environment, check your understanding of job costing with regard to a service company.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]219037[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Calculate job costs for a service business<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-1655 alignleft\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13234708\/stil-D4jRahaUaIc-unsplash-240x300.jpg\" alt=\"Purse with items spilling out\" width=\"240\" height=\"300\" \/>Before we dive into using job costing for a manufacturing firm, let\u2019s look at a simpler example: a service business.<\/p>\n<p>Job order costing can be used for service businesses where the service and costs are unique to each customer, such as those of an attorney, accountant, physician, or event planner. Each customer, client, or patient is a separate job or project. Clients, customers, and patients incur direct costs, direct labor, and applied overhead costs. And while there are no materials related to inventory for a service business, there may be expenditures associated directly with a particular project, such as travel or supplies.<\/p>\n<p>Creative Compton, Inc. is an advertising agency that designs web sites and promotional materials for medium-sized businesses. For each client project, Creative Compton (CC) accumulates the direct labor costs of its professional designers at an hourly rate of $140. The company allocates overhead costs to jobs at a rate of 35% of total direct labor cost incurred.<\/p>\n<p>Let\u2019s keep it really simple and assume that CC only has two clients and the marketing manager sent them the following proposals based on her best-estimate of the amount of time each would take, applying a rate of $200 per hour to come up with the amount she would charge each client:<\/p>\n<p>IceBurg Drive-in Burgers: $44,000 (220 hours of work at $200\/hour)<\/p>\n<p>Laney\u2019s Fashions: $18,000 (90 hours of work at $200\/hour)<\/p>\n<p>The companies accepted the bids and the work was passed on to staff.<\/p>\n<p>The data for each project as completed is as follows:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<tbody>\n<tr>\n<th scope=\"col\"><\/th>\n<th scope=\"col\">IceBurg Drive-in Burgers<\/th>\n<th scope=\"col\">Laney\u2019s Fashions<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Actual Direct Labor<\/td>\n<td class=\"r\">200 hours<\/td>\n<td class=\"r\">100 hours<\/td>\n<\/tr>\n<tr>\n<td>Software Licensing<\/td>\n<td class=\"r\">$500<\/td>\n<td class=\"r\">$2,000<\/td>\n<\/tr>\n<tr>\n<td>Travel<\/td>\n<td class=\"r\">$160<\/td>\n<td class=\"r\">$0<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>What is the total calculated cost of each job?<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<tbody>\n<tr>\n<th scope=\"col\"><\/th>\n<th scope=\"col\">IceBurg Drive-in Burgers<\/th>\n<th scope=\"col\">Laney\u2019s Fashions<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Direct costs<\/td>\n<td>200 labor hours * $140\/hour = $28,000<\/p>\n<p>Licenses and travel = $660<\/p>\n<p>Total direct costs = $28,660<\/td>\n<td>100 labor hours * $140\/hour = $14,000<\/p>\n<p>Licenses and travel = $2,000<\/p>\n<p>Total direct costs = $16,000<\/td>\n<\/tr>\n<tr>\n<td>Indirect costs @35% of DL$<\/td>\n<td>$28,000 * 0.35 = $9,800<\/td>\n<td>$14,000 * 0.35 = $4,900<\/td>\n<\/tr>\n<tr>\n<td>Total costs, direct and indirect<\/td>\n<td class=\"r\">$38,460<\/td>\n<td class=\"r\">$20,900<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Did the company make or lose money on these jobs?<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<tbody>\n<tr>\n<th scope=\"col\"><\/th>\n<th scope=\"col\">IceBurg Drive-in Burgers<\/th>\n<th scope=\"col\">Laney\u2019s Fashions<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Revenue<\/td>\n<td class=\"r\">$44,000<\/td>\n<td class=\"r\">$18,000<\/td>\n<\/tr>\n<tr>\n<td>Costs, direct and indirect<\/td>\n<td class=\"r\">$38,460<\/td>\n<td class=\"r\">$20,900<\/td>\n<\/tr>\n<tr>\n<td>Made\/(Lost)<\/td>\n<td class=\"r\">$5,540<\/td>\n<td class=\"r\">($2,900)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Although the contract for Laney\u2019s of $18,000 covered the $16,000 direct costs, it did not contribute sufficiently to overhead, and so the company lost money on that bid.<\/p>\n<p>Management will have to determine what action to take if any, but this illustrates the power of full absorption costing and job costing to help determine the actual cost of a project.<\/p>\n<p>Before we apply these basic job costing concepts to a manufacturing environment, check your understanding of job costing with regard to a service company.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm219037\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=219037&theme=oea&iframe_resize_id=ohm219037\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-150\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Introduction to Managerial Accounting Defined. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Managerial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php\">https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t 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Jonick\",\"organization\":\"\",\"url\":\"https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-150","chapter","type-chapter","status-publish","hentry"],"part":29,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/150","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":7,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/150\/revisions"}],"predecessor-version":[{"id":1657,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/150\/revisions\/1657"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/29"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/150\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/media?parent=150"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=150"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=150"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/license?post=150"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}