This is “How Is Job Costing Used to Track Production Costs?”, chapter 2 from the book Accounting for Managers (v. 1.0). For details on it (including licensing), click here.
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Chapter 2 How Is Job Costing Used to Track Production Costs?
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Dan Stevens recently started Custom Furniture Company, a manufacturing company that specializes in building custom wood tables for individuals and organizations. Each table is unique and built to customer specifications for use in homes (coffee tables and dining room tables) and offices (boardroom and meeting room tables). The sales price of each table varies significantly, from $1,000 to more than $30,000. (Note that this is the same company as the example in the last part of Chapter 1 "What Is Managerial Accounting?". Although not required, you may find it helpful to refer to the Chapter 1 "What Is Managerial Accounting?" discussion of Custom Furniture Company.)
When Dan received the company’s income statement for May, he was surprised by the lack of profits. Because sales prices are based on a markup of estimated costs, Dan is questioning the accuracy of his estimates. He approaches Leslie, the full-time accountant for Custom Furniture Company, to get more information.
| Dan: | Leslie, last month’s income statement shows we are struggling to make a decent profit. I’m not sure why this is happening, especially since we price our furniture 70 percent above estimated production costs. |
| Leslie: | Basing prices on estimated costs is a good approach, but it only works if your estimates are accurate. Have you compared the actual cost of each table with your original estimates? |
| Dan: | No, but I like the idea. Where do I start? |
| Leslie: | We use a job cost accounting system that tracks costs for each table you produce. I can pull together the information for you. How far back do you want to go? |
| Dan: | Let’s start by looking at actual product costs for the three costliest tables produced in May. It would be helpful to break these costs out for direct materials, direct labor, and manufacturing overhead. I would also like to see the gross profit generated by each table. |
| Leslie: | No problem, I’ll have the information for you by the end of the day. |
We use Custom Furniture Company as an example throughout the chapter to explain how a job costing system works and to provide information that will address Dan’s concerns.