Conceptualizing Job Costing
Start to develop an understanding of job costing by thinking about the simple illustration. Jack Castle owns an electrical constricting company, Castle Electric. Jack gives a variety of products and services to the clientele. Jack has four employees, maintains a neat rented shop, a broad inventory of parts and apparatus, and a fleet of five service trucks. On a typical day, Jack will come at the shop early and line out the day's work to be done for his four electricians. Around 8:00 a.m., his electricians start to arrive, and he gives them their assignments, as well as the important parts and equipment they will need. They are then sent to the various job sites.
One of Jack's electricians name is Donnie Odom. On July 14, Donnie came at the shop at 8:00 a.m. He first dedicated thirty minutes getting his assignments and loading a service truck with required items to complete the day's work. His three tasks for the day comprised of:
x Job A: Cleaning and reconnecting electrical connections and replacing the flood light atop a billboard (materials needed include one lamp at $150).
x Job B: Replacing the breakers on the old electrical distribution panel at the office building (materials needed include 20 breakers at $20 each).
x Job C: Pulling wire for the new residence under construction (materials needed include 500 feet of wire at $0.14 per foot).
Donnie productively completed all three tasks on July 14. He spent 1 hour on billboard, 2 hours on electrical panel, and 3 hours on residential installation. The other 2 hours of his 8-hour day were invested on indirect job administration and travel. During the day, Donnie used a roll of electrical tape ($3) and the box of wire nuts (60 nuts at $0.05). Donnie is given $18 per hour. Donnie drove the truck 100 miles on July 14, and he used a number of tools, ladders, and other specialized equipment. Jack is given $25 per hour, and he does not generally work on any specific job. Instead, his time is spent doing spot inspections of work, managing inventory, getting permits, and tending to the various other tasks connected with these jobs.
The "job costing" question arises is: How much did it "price" to change the light on the billboard, etc.? Clearly, the job cost included the direct costs of the job; specially, Donnie's direct labour time
(1 hour) and the direct material (one lamp at $150). But, the job could not have done without the shop, trucks, equipment, indirect labour time, Jack's efforts, tape and wire nuts, and so forth. These latter items comprise the indirect costs, or overhead, for the job. How then, are we to allocate costs to a specific job?