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This paper focuses on Auerbach Enterprises’ implementation of job costing. The obvious aim for Auerbach’s operations is to make profit (Murphey and Laczniak, 2007). Profit can be achieved when the expenses associated with the business are less than the generated revenue. It will be impossible for the management of an organization to ascertain whether it makes profits without effectively identifying the costs incurred and revenue generated through business operations. While it is may be easier to identify the generated revenue, understanding the costs associated with production may be difficult. Although few activities (via sales) contribute to revenue generation, numerous activities contribute to the inputs necessary for production. These activities are usually responsible for the costs incurred during production. Owing to the imperativeness of cost management for profit optimization, it is important for the management of an organization to make incessant efforts for costing its operations (Murphey and Laczniak, 2007).
The job costing method allows the management of an organization to departmentalize the costs associated with the production process. The table below shows the company’s records.
Also, the air conditioners are produced in batch sizes of 20 units at a time. A production batch of 20 units requires the following number of hours in each department:
The material and labor costs for Auerbach’s two product lines (MaxiFlow and Alaska) are as follows:
Understanding the feasibility of using the job costing method for the both products would require a computation of the costs per batch, and costs per unit derived from the computation. A comparison of the cost outcomes from the application of company-wide and department overhead rates will assist in the understanding of the effects of job costing on the two different products.
To achieve this, it is first necessary to calculate the department overhead rates. The overhead rate for each department is computed by dividing the Overhead Costs by the Machine Hours.
Overhead Rates = (Overhead Costs/Machine Hours)
The table below presents the outcome of the utilizing the method for computing the overhead rates for the different departments. The company-wide overhead rate is also computed using the same method by dividing the total overhead costs by the total machine hours. The outcome of the computation is presented in the last row in the table below.
The rates derived in the table above are used to compute the overhead costs of the two products in relation to the material and labor costs incurred for the two products. The company-wide rates and department rates are both used for these computations and the costs can be compared. The two following tables summarize the computations.
Overhead Costs per Batch (OC/B) by Company Rates = $12096
Overhead Costs per Batch (OC/B) by Department Rate = 5024 + 5100 + 5868 + 4754 =20746
Overhead Costs per Batch (OC/B) by Company Rates = $72104
Overhead Costs per Batch (OC/B) by Department Rate = 5024 + 5100 + 5868 + 4754 =25334
The two tables below further compute the costs per unit for the two product types considering the company-wide and department rates. These are computed by simply dividing the total overheads by the number of units per batch (20 units).
From the results of the comparison, it can be seen that Alaska is more affected by the utilization of the job costing method. The derived job costing expenses per batch and per unit for Alaska are higher than those of MaxiFlow. This is because two if its departments have very high labor hours. However, the current costing (job costing) method used by the company is efficient.
Costing is a method used in accounting to identify the precise costs of business’ operations (Sapp, Crawford, and Rebishcke, 1990). The operations associated with the business organization may be cost using different accounting costing methods. In the current case, the management of Auerbach utilizes the job costing method to identify the different costs associated with the production of two different brands of its base product, car air-conditions. In the job costing method of accounting, job-specific labor and material costs are recorded, while pre-determined rates overheads are used to allot costs to tasks (Sapp, Crawford, and Rebishcke, 1990).
A benefit of using job costing is that it helps managers to compute the profit each product unit or batch generates. Understanding the profitability of each product unit or task will assist the management of Auerbach to identify the need to continue the inclusion of certain tasks in the future (Sapp, Crawford, and Rebishcke, 1990). Auerbach’s utilization of the job costing method is rational since its business involves the production of air-conditions customized for different car categories (Sapp, Crawford, and Rebishcke, 1990). The job costing method will also provide Auerbach’s management with a comprehensive understanding of the fabrication records of the four departments (The Radiator Parts Fabrication Department, The Radiator Assembly, Weld, and Testing Department, The Compressor Parts Fabrication Department, and The Compressor Assembly and Testing Department). A detailed understanding of the performance of each of the departments will help the management of Auerbach to identify the best strategy to employ to successfully work within its cost budget.
References
Murphey, P. E. and Laczniak, G. R. (2007). An ethical basis for relationship marketing: a virtue ethics perspective. European Journal of Marketing, 41(3), pp. 37–57. Web.
Sapp, R., Crawford, D., and Rebishcke, S. (1990). Activity Based Information for Financial Institutions. Journal of Bank Cost and Management Accounting, 3(2), pp. 18-30.
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