35 5.5 Job Costing in Service Organizations

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    Dec 28, 2020
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 Learning Objectives 

  • Apply job costing methods to service organizations.

Question: Although this chapter has focused on job costing in a manufacturing setting, many service organizations use job costing as well. Electricians, accountants, and auto mechanics are examples of service providers that use job costing. Electricians track costs by project (e.g., a new building or a kitchen remodel), accountants track costs by client (e.g., an individual or a corporation), and auto mechanics track costs by job (e.g., replacing a drive belt on a company truck). How does job costing work in a service company setting?

Table 5.2 – Accounts Used in Service Organizations and Manufacturing Organizations
Manufacturing Organization Account Name Manufacturing Organization Account Name Financial Statement
Raw materials inventory Parts inventory or supplies Balance sheet (asset)
Work-in-process inventory Work in process* Balance sheet (asset)
Finished goods (Not applicable) Balance sheet (asset)
Cost of goods sold Cost of services (or other expense accounts) Income statement (expense)
Manufacturing overhead Overhead (or service overhead) None (clearing account)

*Some service companies do not use a work-in-process account but instead simply charge costs directly to expense accounts.

Service organizations use a job cost sheet like the one discussed earlier to track direct materials, direct labor, and overhead.

Direct Materials

Question: How do service organizations track direct materials using job costing?

Direct Labor

Question: How do service organizations track direct labor using job costing?


Question: Like manufacturing companies, service organizations often use a predetermined overhead rate to apply overhead. What allocation bases are most commonly used by service organizations to apply overhead costs to jobs?

Business in action 5.2 – Job Costing at Movie Studios 

Studios that produce costly movies, such as 20th Century Fox, Universal Studios, and Warner Brothers, incur a variety of costs that are tracked using a job costing system. For example, the production of a Harry Potter movie requires direct labor in the form of actors, directors, editors, and the film crew. The direct materials category includes costumes, extensive sets, and props. Overhead costs include items such as depreciation of film production equipment, utilities in the editing studio, and executive salaries for those overseeing the production of several films concurrently.

Determining the production costs of movies and related profitability is important for this industry since actors, directors, and others involved in the film are often compensated based on a percentage of profits. Disagreements sometimes arise between studios and actors regarding the accuracy of costs for movies, particularly in the area of overhead. Some studios have been accused of allocating too much overhead to individual films to drive down the reported profitability of each film, thereby reducing the amount owed to those receiving a portion of the profits.

 Key Takeaway 

Job costing systems in service organizations are similar to those used by manufacturing companies. However, service organizations use fewer materials than manufacturing organizations, the account names they use are slightly different, and they often track costs by customer rather than by product.

Review problem 5.4

Describe the similarities and differences in how service companies and manufacturing companies account for direct materials, direct labor, and overhead.


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