Instructor – Donald Frey
February 8, 2015
Week 5 – Assignment
Job costing systems leverage units or multiple units of a specific product or service, which is typically referred to as the job. There are seven basic steps to the assignment of a cost to a particular job:
1. Recognize the given job and its associated cost object
a. The job that I am selecting to use as part of this assignment is going to be a baker. The cost objects would be the specific baked goods; mass produced sheet cakes, specialty made to order cakes, cookies, cupcakes, etc.
2. Identify the direct costs for the job
a. The direct costs would be the ingredients used to make the baked goods. Certain baked goods will need to be decorated as well, these will be direct costs. Direct labor would be considered a direct cost as well. Another direct cost to the product would be the cost of packaging.
3. Determine the cost allocation base for indirect costs
a. The cost allocation base is a method for taking indirect costs and assigning them to a process or activity they support indirectly. The cost-allocation base (number of oven-hours or mixer hours) is a systematic way to link an indirect cost or group of indirect costs (operating costs of all the ovens or electric mixers) to cost objects (different baked goods). The ideal cost-allocation base is the cost driver of the indirect costs, because there is a cause-and-effect relationship between the cost allocation base and the indirect costs. The cost allocation bases that I can think of for a bakery would include: • Direct labor hours • Direct labor cost • Machine hours • Direct material cost.
4. Identify the indirect costs to be used with each base
a. The overhead costs that the company acquires are indirect costs to the baked goods. Such overhead costs will include the amount of time the ovens are being ran, and the mixers are being used. An indirect cost that many may not give much thought about is cooking spray. It’s difficult to determine just how much nonstick cooking spray is used per product, therefore it is an indirect cost. Most Fixed costs are Indirect costs, such as rent, electric bill, marketing,
5. Calculate the rate per unit for each base
i. • Direct labor hours = To use direct labor hours as part of the allocation base, management first needs to make an estimate of the total direct labor hours expected to be used during the year. Say the bakery takes 10 employees, 8 earning $12 an hour and 2 earning $18 an hour. Assume that they will all work 8 hours a day, and work 7 days to complete the cake project coming up. This means each employee will have a total of 56 hours for a total of 560 total direct labor hours. Multiply the hourly rate by eight hours for each work day. For every $12-per-hour employee, this is $96 per day. For every $18-per-hour employee, this is $144 per day. Multiply the number of workdays of the project by the day rate of the employee. For employees at $96 per day, the base for each employee is $672 for the project. The base for each $144 employee is $1,008. These totals together gives $1,680 for the cupcake project. ii. • Direct labor cost = If the bakery uses an average 96 direct labor hours per day at $12 an hour your direct labor costs are $1,200 per day. If annual overhead costs are $600,000 and you operate the plant 300 days a year, your average overhead costs are $2,000 a day. So the overhead rate is about $1.67 for every $1 spent in direct labor. iii. • Machine hours = For companies where incurring overhead cost is most closely tied to operating machinery (such as the ovens and mixers in a bakery), machine hours may be the best choice of allocation method. If indirect costs of operating the ovens and mixing machines is $10,000 based on running these machines for 1,000 hours, the cost allocation rate is $55,000 ÷ 1,000 hours = $55 per machine-hour. iv. • Direct material cost. = For this allocation base, managers prepare an…