Job costing (Reference book-cost accounting by Horngren and Datar)

Job costing- in this system, the cost object is a unit or multiple units of a distinct product or service call a job. Each job generally uses different amount of the resources. the product or services is often a single unit , such as specialized machine made at Hitachi, a construction project managed by LnT , a repair job done at Honda service center or an advertising campaign produced by Saatchi and Saatchi. Each special machine made by Hitachi is unique and distinct. Advertising campaign for one client at Saatchi and Saatchi is unique and distinct from advertising campaign for other clients. Job costing is also used to cost multiple units of the Agni missile for the ministry of defense. Because the products and services are distinct, job costing system accumulate costs separately for each products or service. Process costing- in this system, the cost object is masses of identical or similar units of products or service. For example, Citibank provides the same service to all its customer when process customer deposits. Intel provides the same product (say Pentium 4 chips) to each customer. Customers of reliance fresh all receive the same frozen orange juice product. in each period , process costing system divide the total costs of producing an identical or similar product pr service by the total number of units produced to obtain a per unit cost. This per unit cost is the average unit cost that applies to each of the identical or similar units produced in that period. Exhibit 1 presents job costing and process costing.
Job costing system Distinct units of a product or services Process costing system Masses of identical or similar units of a product of service

Cost object-anything for which a measurement of cost is desired- for example, a product a such as Imac computer, or a service, such as the cost of repairing an Imac computer. Direct cost of a cost object-costs related to a particular cost object that can be traced to that cost object in an economically feasible (cost effective) way- for example the cost of purchasing the main computer board or the cost of parts used to make an Imac computer. Costs can be traced because making more computers directly causes more computer board costs to be incurred.

Indirect cost of cost object-costs related to a particular cost object that can not be traced to that cost object in an economically feasible way-for example, the cost of supervisors who oversee multiple products, one of which is the IMac , or the rent paid for the repair facility that repairs many different apple products besides the iMac. Indirect costs are allocated to the cost object using a cost allocation method. Cost pool-a cost pool is grouping of individual indirect cost items. Costs pools can range from broad, such as all manufacturing plant costs, to narrow, such as the costs of operating metal cutting machines. Cost pools are often organized in conjunction with cost allocation base. Cost allocation base-how should a company allocate costs to operate metal cutting machine among different products? One way would be to allocate the costs based on the number of machine hours used to produce different products. The cost allocation base is a systematic way to link an indirect cost or group of indirect costs (for example operating costs of all metal machines) to a cost object (different products). For example , if overhead costs of operating metal cutting machines is Rs 50,00,0000 based on running these machines for 10000 hours , the cost allocation rate is Rs50,00,000/10000 hrs= Rs500 per machine hr , where machine hour is cost allocation base. If product uses 800 machine hrs , it will be allocated Rs 400000 , (Rs 500* 800).companies often uses the cost driver of indirect costs as the cost allocation base because of cause and effect relationship between change in the level of the cost driver and changes in indirect cost over long run. A cost allocation base can be either financial (such as direct labor costs) or nonfinancial (such as the number of machine hrs). When the cost object is a job, product, or customer, the cost allocation base is also called a cost application base. Actual costing- is a costing system that traces direct cost to a cost object by using actual direct cost rates times the actual quantities of the direct cost inputs. It allocates indirect cost based on the actual indirect costs rates times the actual quantities of the cost allocation base. General approach to job costing Commonly used approach by the companies in the manufacturing, merchandising and service sector. 1. 2. 3. 4. 5. Identify the job that is the chosen as cost object. Identify the direct costs of the job. Select cost allocation bases to use for allocating indirect costs to the job. Identify the indirect costs associated with each cost allocation base. Compute the rate per unit of each cost allocation base used to allocate indirect cost to the job 6. Compute the indirect costs allocated to the job.

7. Compute the total cost of the job by adding all indirect and indirect costs assigned to the job Balance Score card The balance score card translates an organization mission and strategy into set of performance measure that provides framework for implementing its strategy. The balance scorecard does not focus solely on achieving financial objectives. It also highlights the non financial objectives that an organization must achieve to meet and sustain its financial objectives. The scorecard measures an organizations performance from four perspectives: 1. 2. 3. 4. Financial Customer Internal business processes Learnings and growth

Why is this tool called a balanced score card? Because it balances the use of financial and nonfinancial performance measure to evaluate short term and long term performance in single report. The balance scorecard reduces managers emphasis on short-term financial performance, such as quarterly earnings. Thats because the key strategic nonfinancial and operational indicators, such as product quality and customer satisfaction, measure changes that a company is making for the long run. The financial benefits of these long run changes may not appear immediately in short term earnings, however given the companys strategy, strong improvement in nonfinancial measures usually indicates the creation of future economic value .for example, an increase in customer satisfaction, as measured by surveys and repeat purchases, signals a strong likelihood of higher sales and income in the future. By balancing the mix of financial and nonfinancial measures, the balanced scorecard broadens managements attention to short run and long run performances. Four perspectives of Balanced Scorecard 1. Financial perspectives- this perspectives evaluates the profitability of the strategy and it focuses on how much of operating income results from reducing costs and selling more units.

2. Customer perspectives- this perspectives identifies targeted customer and market segments and Measures Companys success in these segments such as market share, number of new customer and customer satisfaction ratings. 3. Internal business process perspectives- focuses on internal operations that create value for customer that , in turn , furthers the financial perspective by increasing shareholder value. For ex. benchmarking the process a. Innovation process-creating products services and processes that will meet the needs of customers i.e. constantly design and develop innovative new products to remain competitive in the market place. b. Operation process-1)continuous improving manufacturing quality 2)reducing delivery time to customer and c) meeting specified delivery dates c. Post sales service process- Providing service and support to the customer after sales of product or service. 4. Continuous Learning and growth perspectives-this perspective identifies the capabilities the organization must excel at to achieve superior internal process that create value for customers and shareholders.