Chapter 1

Introduction

Rationale of the Study

Job order costing is a system used by companies to track costs to

a specific product or service. The purpose of this system is to assign

and accumulate costs separately for each product or service. In a job-

order costing system, a cost object is an individual unit, batch, or a

lot of a distinct product or service. It records the flow of costs for

each product or service and is used to price unique products for

different jobs. On receipt of an order from the customer or an

indication from the sales department for manufacturing a particular

product, the production planning department prepares a suitable design

for the product or job. It also works out the requirements of

materials for the product or service. It prepares a list of operations

indicating the various operations to carry out and their sequence and

the shops, departments, plants or machines to be entrusted with each

of the operations. Job order costing systems can do more than track

the costs of each job. Companies also use these systems to track

revenue and the resulting profit for each job. It gives companies in

all industries the ability to evaluate costs accurately and price

services correctly (The Institute of Cost Accountants of India, 2016).

Job order costing system is extensively used by companies,

locally and globally. Examples of manufacturing businesses that use

job-order costing system include clothing factories, food companies,

and air craft manufacturing companies among others. For service

businesses that use job order costing system, examples include movie

producers, accounting firms, law firms, and hospitals among others

(www.accountingformanagement.org, 2019). The job order costing system

is advantageous to companies as it allows them to measure the profit

or loss for each job. It helps to ascertain better whether specific

jobs are profitable and desirable to pursue in the future. Also, it

aids in keeping track of individuals' and teams' performance in terms

of cost-control, efficiency and productivity (Ingram, 2019). However,

although job order costing is a very powerful concept in theory, it is

very complicated to implement in practice. Problems encountered in the

implementation of the job order costing system usually includes: (1)

massive paper trail, (2) difficulties in measuring the costs that are

associated with a particular job, (3) conflict within the

organization, (4) overheads are based on estimates, and (5) overheads

cannot be controlled. 

    

It is for the ability to recommend the effective job order

costing system that the researchers conduct this study. The

researchers aim to gather the efficiency of job order costing system

implementation of businesses based within Butuan City. These

businesses shall include a multinational company, the Toyota Motor

Corporation Butuan branch, and a local business, the LJ Cars Butuan

Corporation. 

Statement of the Problem

 This study aims to identify and assess the best practices and

application for job order costing system and make recommendations to

the local companies here in Butuan City; it seeks to satisfy the

following questions:

1. What is the current costing method that is used by the local

company?

2. What is the appropriate method to be used in this local company?

3. What are the best practices by the multinational and

international companies as to the application of job order

costing?

4. How can job order costing apply to this local company?

Significance of the Study

This research is highly significant for the part of the Manager

to the company as well as to the staff and personnel because it gives

them the following information about the best practices and the

appropriate methods. The results of this study will be beneficial to

the following:

Students. This will benefit those students that have inquiries

regarding the research topic. This may also serve as a basis for the

students’ Projects, assignments, and activities that requires the use

of technology and technology integrated teachings.

Teachers. This study will serve as a useful learning material

which they can use to further explain to students certain information

pertaining to job order costing.

 Managers of the Company. This study will aid the managers or

owners of the company who are encountering difficulties in managing

their systems of transactions to the customers. May this serve as a

guide to use this application in the handling of their system.

Staff and Employees. This study will serve as an eye opener to

the staff and employees such that they will implement off best

practices relating to job order costing.

Other business establishments. This study will serve as a useful

reference that provides useful and relevant information to other

business establishments which are using process costing as their

costing method.

Future Researchers. This study will be a useful reference for

researchers who are planning to pursue studies related to or similar

to that of this study.

Scope and Limitations

This study focuses on the recommendation of the best practices of

an effective job order costing system in multinational and local

companies such as Butuan city, Agusan del Norte.

The Toyota Motor Corporation Butuan branch is chosen, a

multinational company and LJ Cars Butuan Corporation, a local

business to conduct the research and will not go beyond the said

premises.

This study would also focus the appropriate and best practices in

the application of job order costing.

The researchers gathered the data from the said companies to

recommend the effective job order costing system.

Definitions and Terms

Job-Order Costing is a system in which it is the assigning and

accumulating jobs of individual unit of output and it has its own

distinct product according to the customers specifications.

Chapter 2

Review of Related Literature

A job-order cost system is used when heterogeneous products are

involved. A capacity measure should be chosen that best suits the

company’s planning and performance evaluation objectives. For example,

if management wants to establish a more rigid production goal to

increase productivity, it would use practical capacity rather than

normal capacity. Process costing is a primary approach to assigning

manufacturing cost to units produced. It is used by manufacturers

whose products are produced on a continuous basis, with units

receiving equal attention in each processing center. The four steps in

process costing are the computation of equivalent units, calculation

of the unit cost, figuring the cost of completed production, and the

valuation of the ending work-in-progress. If units are spoiled or

defective, the per-unit cost of good units will increase.

One example of a company that uses job order costing is IKEA. It

is a European multinational group that designs and produce ready-to-

assemble furniture, kitchen appliances, home accessories or home

services. IKEA is using job order costing since they both manufacture
and offer service where in manufacturing they create innovative

designs and realizing it with the collaboration of long-term suppliers

and designers in order to have alternative light weight raw materials

making the price lower. The raw materials then are processed by the

employees until it is finished and ready to transport. In addition,

IKEA’s are packaged flatly to have cheap fees charged and to keep its

goal to have overall lower price. In servicing is they receive a house

service and designers examines the wideness of the space. Then

material use depends on the customer’s preference and work team

realize and do its part and finishes them. IKEA’s business

model relies on aesthetically pleasing goods that are sold at great

prices. the provision chain is integrated from the beginning to

concentrate on cut measures and thus no single aspect drives the

incredible success IKEA has seen. The integrated process has made it

very difficult for competitors to compete on price or design, leaving

IKEA at the highest of its target market (Perry,2015).

Possible for Job Appraisal:

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.

Comparison of Re-work:

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.

Comparison of Machine Usage:

 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.

According to MSG Management Study Guide, 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.

Job Order Costing in Service Companies

Manufacturers and service organizations often use job order

costing to track direct labor costs.

Job order costing is a system companies use when they can trace

costs to a specific product or service. It allows managers to

accumulate costs by jobs instead of departments. A job could refer to

a service performed or a customer. Job order costing gives companies

in all industries the ability to evaluate costs accurately and price

services correctly.

At a manufacturing facility, direct materials—the raw materials

that workers use to create products—are likely to be expensive and

require highly specific tracking and inventory. But in a service

business, such as an accounting or legal firm, direct materials may

not be significant expenses. Most materials that the accountants or

lawyers and their support staff use will have insignificant cost that

an accountant would allocate to the job as overhead. This is not true

in all service firms, though. An auto repair shop is a service

business, since it is providing a service rather than producing a

product. While a significant cost for an auto repair shop is labor,

the costs of parts can also be significant. So, the accountant for an

auto repair shop would include direct materials in job costing.

A service firm uses a job cost sheet to accumulate all costs

related to a specific job. In a white-collar firm where labor may be

the only direct cost, employees would fill out a time sheet as the

costing document. A time sheet, or time ticket, is a paper form or

spreadsheet that employees use to record the amount of time they spent

working on a job. Members of a CPA firm would use a time sheet to

indicate start and stop times where they worked on projects for

clients. CPA firms classify employees into groups, such as partner,

auditor, senior accountant, and junior accountant. The firm's cost

accountant would calculate the costs associated with each employee

based on the employee's classification. The cost accountant would

apply overhead based on the allocation base and rate. Most service

organizations use direct labor as the allocation base.

As the years have passed by, our way in the economy have changed.

The first reason is globalization. The world has been shrunk by

information technology and open economies. The second reason is that

companies must take care of costs to meet the descending price rate of

the market. Competition in the mature lines of business especially

requires continuous productivity improvements. This leads to narrow

competencies and extensive outsourcing. (Kulmala, 2002).

Different companies can use job order costing for them to have a

organize way of putting up their products into something that can be

sold. Companies which are producing individual, unique products,

construction companies and consulting firms, and furniture

manufacturers which produce batches of products. These companies would

produce all the components of a single product in one batch in a new

batch. Companies such as these use job costing methods to accumulate

the cost of each batch. (Edwards, 2018)