Depending on the nature of the business conducted, the organization either uses process costing or job order costing. The process costing is rather direct and is used in companies that have a direct line of products that they are offering to the customers. For instance, an oil company will use process costing for their business (Pollard, 2018). On the other hand, companies that manufacture several different products utilize job order costing. In particular, the system is widely used in the service and manufacturing industry.
For instance, an advertising company is a professional service industry that assigns costs to a specific product or unit using the job order costing system.For the advertising companies, each client has a different set of requirements for the end product. Therefore, the company requires having a job cost sheet to calculate the total cost for each advertisement service that they offer the clients (Pangemanan, & Ramintang, 2016). Under the sheet, there is the cost of direct material used, the direct labor used, and the material overhead cost. The total of the three sections under the sheet provides the cost of delivery for the service provided.
Additionally, the spare part repair companies are perfect examples for the application of job order costing in the professional industry. For instance, a company that fixes television will have a fixed rate for the diagnosis of electronics. Besides, the company will have a fixed price per hour that is paid to the workers once assigned a job. Additionally, it will apply an overhead equal to the direct labor cost, but it will not reflect on the customer’s receipt but rather on the labor total cost. Also, under the job cost sheet, the company will indicate the price for the spare parts bought plus a markup. Therefore, for each problem that is brought to the company for repair or restoration will have a different price.
To understand the contribution margin, it is vital first to analyze critical concepts such as fixed cost, the variable cost, and the relevant range. The fixed cost refers to that cost that does not change within a specific range of products. For instance, if the fixed price for the student selling fee is $80, it will remain the same despite the number of shirts sold. As long as the club produces the shirts within the relevant range, it will stay the same. Therefore, the appropriate field refers to the anticipated level of production for a specific product (Khotimah, 2017). Finally, the variable cost refers to the cost that changes with the unit of production. Raw materials are a perfect representation of variable cost since the usage depends on the product being manufactured.
The contribution cost refers to the amount by which the selling price of a product exceeds the total variable cost set. Therefore, the contribution cost is calculated by getting the difference between the sales for the product and the variable cost of the same product. For instance, if the purchase of a shirt is $15 and the variable cost is $10, the contribution cost will be $5. Cases, when the contribution margin is calculated per the basis of units, are referred to as unit contribution margin. The calculation of the unit contribution margin can either be represented in dollars or as a percentage.
The calculation of the unit contribution margin to percentage is also known as the contribution margin ratio. Therefore, for the calculation of the contribution margin ratio, the contribution margin per unit is divided by the sales price per unit. For instance, the contribution margin per unit for the shirts is $80, and the sales price per unit for shirts is $100; the contribution margin ratio is 0.80.
On the other hand, the break-even analysis contains the examination and calculation of the margin of safety for an entity based on the associated costs and revenues collected. To determine what level of sales is needed to cover the organization’s total fixed cost, it uses the break-even analysis to check the different price levels that relate to the various demands(Khotimah, 2017). To calculate the break-even, the company divides the total fixed cost by the unit contribution margin. Alternatively, it can be achieved by dividing the total fixed cost with the contribution margin ratio.
The term underapplied factory overhead refers to the actual factory overhead cost that was not allocated in the units of productions. While the over applied factory overhead refers to the amount in excess applied in production period that exceeds the actual overhead incurred during the time (Farkas, Kersting, & Stephens, 2016). Therefore, if I had a job order cost system, I would want my overhead to be over-applied rather than under applied since less will have been spent than the anticipated level of production.
The cost volume profit analysis is also known as the break-even analysis that aims at determining the break-even point for a business. Therefore, if the price of the product is increased, the contribution margin per unit will increase, and this will affect the cost volume profit analysis by bringing the break-even point lower (Abdullahi, Bello, Mukhtar, & Musa, 2017). Consequently, the break-even will be higher if the price of the product decreases since the contribution margin per unit decreases.
On the other hand, when the variable cost increases without an equal increase in revenue, the break-even point will increase as a way to cover the loss made. Therefore, it means the company will require selling more to cover the fixed costs. Finally, an increase or decrease in the fixed cost will affect the cost volume profit analysis by increasing or decreasing the break-even point, respectively.
Pollard, W. B. (2018). An Active Learning Approach to Teaching Job-Order Costing. Management Accounting Quarterly, 19(4), 10-10.
Pangemanan, S., & Ramintang, J. (2016). The Application of Activity-based Costing (ABC) and Job Order Costing (JOC) at Wisata Bahari Restaurant Manado. Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi, 4(1), 2865.
Khotimah, K. (2017). Experiential Marketing to Increase Net Marketing Contribution Margin (NMCM) through Customer Value. J. Mgt. Mkt. Review, 2(4), 36-42.
Farkas, M., Kersting, L., & Stephens, W. (2016). Modern Watch Company: An instructional resource for presenting and learning actual, normal, and standard costing systems, and variable and fixed overhead variance analysis. Journal of Accounting Education, 35, 56-68.
Abdullahi, S. R., Bello, S., Mukhtar, I. S., & Musa, M. H. (2017). Cost-Volume-Profit Analysis as a Management Tool for Decision Making In Small Business Enterprise within Bayero University, Kano. Iosr Journal Of Business And Management (Iosr-Jbm), 19(2), 40-45.
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