Read all of Chapter 2. In this chapter, you discover that Custom Furniture Company is in a predicament. The company is not doing as well as its owner, Dan, thought it would. Dan prices his unique tables at 70 percent above what he thinks his production costs are, but his income statements do not reflect that markup. Dan may not be estimating his costs correctly and is, as a result, underselling his products.
Job costing systems record revenues and costs for unique products, like Dan’s tables; each table can be easily distinguished from other tables.
An alternate costing method that some companies chose is process costing. Process costing systems record revenues and costs for batches of identical units of product. When deciding whether to use a job costing or process costing system, you must understand a company’s products and production processes.
Job costing systems can do more than simply track the costs of each job. Companies also use these systems to track revenue and the resulting profit for each job. Also a job costing system can be used to identify areas of concern by comparing the cost estimate prepared before starting the job with information on the completed job cost sheet. This type of analysis often leads to changes in the production process and revised estimates for future jobs.
By the end of this unit, you will know why Custom Furniture Company is experiencing less profit than Dan had planned for. Job cost analysis confirmed that he was underestimating his costs and helped Dan focus on what management decisions he needed to make to remedy the issue.