Consequences of Incorrect Job Order Costing
Causes of Failure of Job Order Costing: The following is the list of the most probable causes that would cause the job order costing system of the company to fail: Adequate System Not In Place: Job order costing requires an elaborate system in place. In earlier times this was done with the help of paperwork…
Constraints and Contribution Margin Analysis
Hidden Assumption: The cost volume profit analysis has a rogue assumption. This rogue assumption believes that the cost volume profit analysis is completely scalable. We know that this is not the case. We operate in a finite world and have finite resources. We show this in our analysis when we write down the relevant range…
Allocating Overheads in Job Order Costing
Tracking direct labor and materials that have been used in a job can be done with a fair degree of precision. That is not the real problem when it comes to costing. The real problem is with allocation of overheads. Usually, they have very little correlation to any specific activity. They are the result of…
Job order costing is the only way that companies can appraise the jobs that they are about to take up. In the absence of a job order costing system, companies will not have enough data to ascertain whether or not the job will be profitable.
Job order costing system enables a company to make reliable estimates about the monetary values of materials, labor and overheads that will be spent while performing a job. A more efficient job order costing system enables companies to make quotes that are low enough to be competitive and high enough to be profitable.
Over a period of time, a job order costing system becomes a valuable database. This is because there are thousands of jobs that get stored in the system. These jobs can be used by companies as empirical data. This data can be used in multiple ways. One way is related to quotations as listed in the point above. Another use is when companies can conduct in depth analysis into their own efficiency. A job order costing system provides the data that is required to conduct the analysis by product or by function and aids significantly in decision making.
Companies can use the job order costing system to find the jobs that they are competitive at and the ones that they are not. This system helps conduct in depth analysis such as cost of materials and even the cost of scrap and rework that has been done in the specific job. This cost information helps the company financially. But it also helps the company to streamline its operations.
From the costs of scrap and rework, the causes of scrap and rework can be narrowed down and even eliminated. While implementing measures like six sigma and lean manufacturing many companies use the data collected as a result of job order costing.
Job order costing also helps the company identify use its fixed assets appropriately. Since the cost of machinery is allocated amongst different jobs, accurate identification of the cost incurred for those jobs is possible. In the absence of job order costing, it would be impossible to identify the manufacturing overheads associated with particular jobs as well as allocate these costs amongst different jobs.
In conclusion, the benefits mentioned above can only be realized if the system is implemented correctly. Job order costing system can be fairly difficult to maintain, but there are tremendous financial incentives for companies to do so.
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