Page 737 - Accounting Principles (A Business Perspective)

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An accounting perspective:

Business insight

Engineers for automobile companies in the United States believe that Japanese manufacturers can
build cars for considerably less than their US counterparts. Many hospitals that thrived when
health care costs were reimbursed faced troubled financial times when they had to compete with
health maintenance organizations. These organizations required a better understanding of their
costs. It is simple. Companies with competitors have to know and control their costs to be
competitive.

Job costing
A job cost system (job costing) accumulates costs incurred according to the individual jobs. Companies
generally use job cost systems when they can identify separate products or when they produce goods to meet a
customer's particular needs.

Who uses job costing? Examples include home builders who design specific houses for each customer and
accumulate the costs separately for each job, and caterers who accumulate the costs of each banquet separately.
Consulting, law, and public accounting firms use job costing to measure the costs of serving each client. Motion
pictures, printing, and other industries where unique jobs are produced use job costing. Hospitals also use job
costing to determine the cost of each patient's care.
Assume Creative Printers is a company run by a group of students who use desktop publishing to produce
specialty books and instruction manuals. Creative Printers uses job costing. Creative Printers keeps track of the
time and materials (mostly paper) used on each job.
The company compares the cost of each job with the revenue received to be sure the jobs are profitable.

Sometimes the company learns that certain jobs are too costly considering the prices they can charge. For example,
Creative Printers recently learned that cookbooks were not profitable. On the other hand, printing instruction
manuals was quite profitable, so the company has focused more on the instruction manual market. To illustrate a
job costing system, this section describes the transactions for the month of July for Creative Printers.
On July 1, Creative Printers had these beginning inventories:
Materials inventory $20,000
Work in process inventory (Job No. 106: direct materials,
$4,200;direct labor, $5,000; and overhead, $4,000) 13,200
Finished goods inventory (Job No. 105) 5,500
Creative Printing had completed Job No. 105, a set of gardening books, but had not shipped them to the
customer as of June 30. They had Job No. 106, a set of instruction manuals for computer software, in process at the
beginning of July and completed it in July. They started Job No. 107, a travel guide for visitors to Southeast Asia, in
July but had not completed it.
The transactions and the journal entries to record these transactions follow. In Exhibit 145, we show the flow of

costs through accounts and the beginning balances just presented.

Accounting Principles: A Business Perspective 738 A Global Text