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Job costing (Reference book-cost accounting by Horngren and Datar)

Job costing- in this system, the cost object is a unit or multiple units of a distinct product or

service call a job. Each job generally uses different amount of the resources. the product or

services is often a single unit , such as specialized machine made at Hitachi, a construction

project managed by LnT , a repair job done at Honda service center or an advertising campaign

produced by Saatchi and Saatchi. Each special machine made by Hitachi is unique and distinct.

Advertising campaign for one client at Saatchi and Saatchi is unique and distinct from

advertising campaign for other clients. Job costing is also used to cost multiple units of the Agni

missile for the ministry of defense. Because the products and services are distinct, job costing

system accumulate costs separately for each products or service.

Process costing- in this system, the cost object is masses of identical or similar units of products

or service. For example, Citibank provides the same service to all its customer when process

customer deposits. Intel provides the same product (say Pentium 4 chips) to each customer.Customers of reliance fresh all receive the same frozen orange juice product. in each period ,

process costing system divide the total costs of producing an identical or similar product pr

service by the total number of units produced to obtain a per unit cost. This per unit cost is the

average unit cost that applies to each of the identical or similar units produced in that period.

Exhibit 1 presents job costing and process costing.

Cost object-anything for which a measurement of cost is desired- for example, a product a such

as Imac computer, or a service, such as the cost of repairing an Imac computer.

Direct cost of a cost object-costs related to a particular cost object that can be traced to that

cost object in an economically feasible (cost effective) way- for example the cost of purchasing

the main computer board or the cost of parts used to make an Imac computer. Costs can be

traced because making more computers directly causes more computer board costs to be

incurred.

Job costing system

Distinct units of a product or services

Process costing system

Masses of identical or similar units of

a product of service

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Indirect cost of cost object-costs related to a particular cost object that can not be traced to

that cost object in an economically feasible way-for example, the cost of supervisors who

oversee multiple products, one of which is the IMac , or the rent paid for the repair facility that

repairs many different apple products besides the iMac. Indirect costs are allocated to the cost

object using a cost allocation method.

Cost pool-a cost pool is grouping of individual indirect cost items. Costs pools can range from

broad, such as all manufacturing plant costs, to narrow, such as the costs of operating metal

cutting machines. Cost pools are often organized in conjunction with cost allocation base.

Cost allocation base-how should a company allocate costs to operate metal cutting machine

among different products? One way would be to allocate the costs based on the number of

machine hours used to produce different products. The cost allocation base is a systematic way

to link an indirect cost or group of indirect costs (for example operating costs of all metal

machines) to a cost object (different products). For example , if overhead costs of operatingmetal cutting machines is Rs 50,00,0000 based on running these machines for 10000 hours , the

cost allocation rate is Rs50,00,000/10000 hrs= Rs500 per machine hr , where machine hour is

cost allocation base. If product uses 800 machine hrs , it will be allocated Rs 400000 , (Rs 500*

800).companies often uses the cost driver of indirect costs as the cost allocation base because

of cause and effect relationship between change in the level of the cost driver and changes in

indirect cost over long run. A cost allocation base can be either financial (such as direct labor

costs) or nonfinancial (such as the number of machine hrs). When the cost object is a job,

product, or customer, the cost allocation base is also called a cost application base.

Actual costing- is a costing system that traces direct cost to a cost object by using actual direct

cost rates times the actual quantities of the direct cost inputs. It allocates indirect cost based

on the actual indirect costs rates times the actual quantities of the cost allocation base.

General approach to job costing

Commonly used approach by the companies in the manufacturing, merchandising and service

sector.

1. Identify the job that is the chosen as cost object.2. Identify the direct costs of the job.3. Select cost allocation bases to use for allocating indirect costs to the job.4. Identify the indirect costs associated with each cost allocation base.5. Compute the rate per unit of each cost allocation base used to allocate indirect cost

to the job

6. Compute the indirect costs allocated to the job.

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7. Compute the total cost of the job by adding all indirect and indirect costs assigned tothe job

Balance Score card

The balance score card translates an organization mission and strategy into set of performancemeasure that provides framework for implementing its strategy.

The balance scorecard does not focus solely on achieving financial objectives. It also highlights

the non financial objectives that an organization must achieve to meet and sustain its financial

objectives.

The scorecard measures an organizations performance from four perspectives:

1. Financial2. Customer3. Internal business processes4. Learnings and growth

Why is this tool called a balanced score card?

Because it balances the use of financial and nonfinancial performance measure to evaluate

short term and long term performance in single report. The balance scorecard reduces

managers emphasis on short-term financial performance, such as quarterly earnings. Thats

because the key strategic nonfinancial and operational indicators, such as product quality and

customer satisfaction, measure changes that a company is making for the long run. The

financial benefits of these long run changes may not appear immediately in short term

earnings, however given the companys strategy, strong improvement in nonfinancial measures

usually indicates the creation of future economic value .for example, an increase in customer

satisfaction, as measured by surveys and repeat purchases, signals a strong likelihood of higher

sales and income in the future. By balancing the mix of financial and nonfinancial measures, the

balanced scorecard broadens managements attention to short run and long run performances.

Four perspectives of Balanced Scorecard

1. Financial perspectives- this perspectives evaluates the profitability of the strategy and itfocuses on how much of operating income results from reducing costs and selling more

units.

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2. Customer perspectives- this perspectives identifies targeted customer and marketsegments and Measures Companys success in these segments such as market share,

number of new customer and customer satisfaction ratings.

3. Internal business process perspectives- focuses on internal operations that create valuefor customer that , in turn , furthers the financial perspective by increasing shareholdervalue. For ex. benchmarking the process

a. Innovation process-creating products services and processes that will meet theneeds of customers i.e. constantly design and develop innovative new products

to remain competitive in the market place.

b. Operation process-1)continuous improving manufacturing quality 2)reducingdelivery time to customer and c) meeting specified delivery dates

c. Post sales service process- Providing service and support to the customer aftersales of product or service.

4. Continuous Learning and growth perspectives-this perspective identifies the capabilitiesthe organization must excel at to achieve superior internal process that create value for

customers and shareholders.