To calculate the total cost, we must first establish the cost driver per labor cost.
Calculating the cost per driver= 7500, 000/250,000
= 30 times, direct labor cost
To calculate the total cost, we assume that the cost of labor is 25,000. Therefore, the cost of consultant labor cost is given by multiplying the cost per driver by the labor cost.
Labor cost is given by = 25,000 25,000
Support cost = 30*labor cost
Total costs 775, 000
According to Andersch, job costing is the process of assigning costs to a product of a company (251). When valuing a product, direct material and labor costs are traced to each particular job. However, a company cannot be able to allocate overheads directly to each product. Therefore, a cost driver must be established to assign manufacturing overheads to arrive at the value of a product. Vlachý noted that a job-costing system is mostly used in the manufacture of aircraft and motorcycles to allocate production overheads (211). This system is also frequently employed in the service industry such as accounting firms, hospitals, and repair shops to allocate costs. When calculating the cost of a product, we must first establish the direct costs associated with the product which is also referred to as prime costs.
The essence of establishing both past and present information of a product is to help accountants to estimate the future cost behavior of the product in financial statements. For instance, under the GAAP, product costs must be assigned to inventory. After the products are sold, the cost is transferred to the cost of goods sold. When a company reports using this practice, it can be able to match the cost of goods sold against the revenues reported in the income statement. Therefore, job costing enables manufacturing overheads to be assigned first to inventory and then to the cost of goods sold.
According to Zengin and Ada, job order costing is imperative to accountants because it allows them to make strategic decisions, especially concerning the pricing of products and services (5609). Job costing is a system used by the accountant to distribute overheads (manufacturing overheads) to a batch of products in order to determine the cost of producing one unit of that product. The job costing system is only used when a company is producing sufficient different products. In simple terms, the job costing system is used when the products being produced are identical or nearly identical. Different products have different variation of product manufacturing life cycle where each job costing system is created to record each item. The manufacturing overhead is assigned to each task based on a cost driver (Kachalay 71). This method is mostly applied to determine the value of a product by assigning overhead costs to establish the total production cost of a product (Park and Simpson 121). The best example is in the manufacture of Cabinetry that must keep track of production costs by item or job. In job costing, managers must ensure they consider the production costs associated with all products (Fisher and Krumwiede 48). The production overheads are assigned to each product based on the cost driver to identify the cost of a single product. Job costing is imperative because it enable managers to fix a price for each product. Product costing also enables a company to set a price that will allow the company to make enough profits.
Andersch, Adrienn. “Product Costing Program For Wood Component Manufacturers.” Forest Products Journal 63.7/8 (2013): 247-256.
Fisher, Joseph G., and Kip Krumwiede. “Product Costing Systems: Finding The Right Approach.” Journal Of Corporate Accounting & Finance (Wiley) 23.3 (2012): 43-51.
Kachalay, Valeriy. “Modern Techniques Of Product Costing At Industrial Enterprises.” Management Theory & Studies For Rural Business & Infrastructure Development 34.5 (2012): 66-73.
Park, Jaeil, and Timothy Simpson. “Toward An Activity-Based Costing System For Product Families And Product Platforms In The Early Stages Of Development.” International Journal Of Production Research 46.1 (2008): 99-130.
Vlachý, Jan. “Using Life Cycle Costing For Product Management.” Management: Journal Of Contemporary Management Issues 19.2 (2014): 205-218.
Zengin, Yasemin, and Erhan Ada. “Cost Management Through Product Design: Target Costing Approach.” International Journal Of Production Research 48.19 (2010): 5593-5611.