Example of companies using job order costing, process costing and activity based costing

Please identify a company that you believe would use job order costing and another company that you believe would use process costing.  Identify a third company that uses activity-based costing allocations.  Discuss why each might use the method you identified with them. Compare and discuss the similarities and differences you see in the companies.

 

 

I believe Firestone or jiffy Lube are the types of companies which might use job order coasting. In case you are not familiar with these companies, these are essentially workshop or service centers for your vehicle. You can take your car there for the oil change or tire change and other automotive needs.

Vedanta is basically an Indian mining company that has mine all over could be described as a company that uses process-based costing. Since this is a mining company that extracts ore for different metals and then process those ores to get the metal out of the ore, cost allocation for such a company is the perfect example for process-based costing.

Cognizant Technology Solutions is an IT services company, they do not have any product, they customize software for their clients, and I think they can use activity-based costing.

 

To begin with, the reason why  Jiffy Lube can use job order based costing because say I take my car to Jiffy Lube for oil change and I request synthetic oil. The quantity of oil costs $15 and the labor to change the oil costs $20 – they have other overhead expenses too. Such as the rent of the garage, utilities, cost for the person handling the billing.

Let us make some assumptions to make this easier to calculate –

Say the person who changes the oil – takes 30 mins to handle one request

So in a whole day, he would be able to handle 14 jobs ( 1 hr lunch, so effectively he works 7 hrs)

Rent of the garage is $80 per day, so $10 / hr

Electricity costs -$5 / HR

And the accountant’s labor cost say $2.5

The job cost sheet will look like for this 30 mins oil change job –

Direct Labor Material Cost Overhead Grand Total
Time Rate Total Qty Cost Total Total
30 mins $20 $10
1 $15 $15
$10
$35

 

Vedanta has many mines globally, let us talk about one specific one in India. It operates one Zinc mine. First, it had to bid for the mining rights. So first they paid money to obtain rights to extract the metal ore. They have labor cost and another overhead cost such as their machines and transport vehicles to operate the mine. And then they transport the ore to plant and extract/process the final material from the ore.

Each step of the process of obtaining final metal from the ore consists small jobs and each job has material cost, labor cost and overhead cost associated with them.

It is possible to create job cost sheet for each step of the process and then add them up to get the process cost.

 

Cognizant might use activity-based costing because for a project it uses consultants from different geographic locations. Some of the consultants have travel expenses, some do not. While billing to the customer, Cognizant cannot quantify how much money is spent on training resources or on the travel of each resource ( one might be coming from NYC to Miami FL and another might be coming from Jacksonville FL, so the expenses are different) and then billing rate for the consultants might be different. It is much easier for Cognizant to add up all overhead expenses and expenses for resources and then bill client. So once these consultants travel, the stay at a place, so we can see the overhead is really big in this situation to build a custom software solution. Hence a business model like Cognizant can use activity-based costing.

 

Vedanta the mining company and Jiffy Lube the oil changing company are vastly different in terms of their end product. Jiffy Lube works with readily available product, so their man input is the labor. But a company like Vedanta, where machines and the factory workers are equally important goes thru many steps to get the final product. But each step such as transporting the ore to the plant or extracting ore from the mine could be calculated using job-based costing.

On the other hand, Cognizant mostly does not have any product related cost, it has overhead which is huge, that includes travel, food, relocation, accommodation expenses, training expenses and on top of that the billing of the consultants, which is very different than prior 2 businesses.

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