Welcome to our module on job order costing. Now, I've said it before, and I'm going to say it a lot of times in this course. The cost of any product is the cost of its material, direct material, plus the cost of the direct labor, plus the overhead cost.
And we explained these in the previous module, and what we said then was, you can think of, you know, if we're making a burger. You can think of the direct material of the burger as the bun, the meat, the cheese, the main ingredients, right? Those materials that are directly traceable to the burger. Not the cleaning supplies that are used to clean the kitchen.
Even though that's material we use when we make a burger, that wouldn't be a direct material of the burger. You can think of the direct labor as the cost of the cook's wages while they are making the burger. And finally, you can think of overhead as the indirect factory, or in this case, kitchen costs.
So the gas to heat the grill, the fact that there's lights on in the kitchen and we pay a utility bill to keep the lights on. And maybe we pay rent or we own and pay property taxes on the building where the kitchen is. So those are all indirect factory costs. And our list could go on and on.
We could have indirect materials like the cleaning supplies related to. Cleaning the kitchen, we can have indirect labor, like the time when the chef is not cooking anything. They're just looking at their phone, checking Twitter.
We still have to pay those bills. Those are indirect factory costs. And what we said was, as a consequence of that, material is very easy to deal with. You just use the actuals.
You just use the actual amount you spent on the ground beef that went into the burger. And that's the cost of the product, right? You can figure it out.
quite quickly. For labor, again, fairly easy. You just do the math.
I pay my chef $15 an hour. It took them 10 minutes to bake the burger. I can figure out the actual cost of the chef's wages in the product.
What we said, though, was overhead was special. Overhead, we couldn't use the actual amount because I actually don't know the precise amount of light that went into that burger, the light that was necessary to make that one burger. In fact, I won't get my utilities bills for a month, and I've made the burger three weeks ago, you know, so I won't even know my overhead costs in the moment when I make the burger. And so because of that, we have to estimate overhead in the way you'll read in a management accounting textbook. And in this course, I'm going to constantly use this term, I won't use the word estimate to describe what we're doing.
we say we apply overhead. And you're going to hear all about applied overhead. So actual material, actual labor, and applied overhead. And one step further, a big piece of this module will be all about how we apply overhead.
And we apply overhead using something called the predetermined overhead rate. And what the predetermined overhead rate says is, okay, before predetermined, so before the month or before the year, you will estimate your total overhead for the month. So you say, okay, what's my utilities bill going to be?
What's my rent going to cost me? What are my supplies that I use in cleaning the kitchen going to cost and so on. You make a big long list and you make a budget.
You plan and estimate your total overhead for that period. And then you estimate your overhead driver. What drives your overhead? So it may be the more labor hours you have, the more overhead you're expected to have. Or the more machine hours you have, the more overhead you're expecting to have.
You come up with something that you think is going to correlate closely with overhead costs, and you estimate that. This is kind of a tricky concept, and I go over it in some detail in Module 2 of this course, and we'll also go through several examples where we compute this. If you're coming to this from a class, I'm certain you will have seen this calculation in your textbook.
But anyway, you estimate your overhead, you estimate something that's going to drive overhead, and that ratio becomes your... predetermined overhead rate. And that's how we apply overhead in the moment. So again, in the moment, I know how much beef and bun cost went into my burger. I know how much labor cost went into my burger.
And I use this ratio to guess, to estimate, to apply overhead costs in that moment to the burger to say, does that much overhead went into the burger? And now I can determine how much my burger cost and I can determine how much money I made when I sold the burger for five bucks. How profitable was that sale? Okay, this is all kind of review from a previous video.
But we're going to really drive that predetermined overhead rate concept home, this module. One other thing I want to discuss in this sort of intro video is we're going to be covering this module job order costing. Maybe I'll write the word costing here. And next module, we're going to look at process costing.
And I just wanted to contrast the two. And if I could, in as simple words as possible, we're going to look at, and again, they both use predetermined overhead rates to apply overhead, just as we discussed. They both have the same problem of material labor being known and overhead needing to be estimated. Companies that use job order costing are companies that have custom. In other words, not one size fits all, but every customer is a little bit different.
So when I go make my product for my customer, customer A gets a different product from customer B. Process costing is for companies that have one size fits all type of products. And so when their customer buys the product, They don't make it specifically for that customer. And so they both deal with this concept of material, labor, and overhead product cost a little bit differently. This module, we're going to focus in on these custom folks.
So we're going to be looking at job order costing. Next module, we will cover process costing. So let me give you a few examples. Job order costing is custom.
So if you went to an architectural firm and you had them drop plans for your, you know, your dream home, this is a custom job. Every customer is going to be a little bit different. An architectural firm would fall under job order costing.
An accounting firm, just the same. A law firm, just the same. Often these job order costing firms have some custom element and they have some service element. to the work that they do. You know, if I had a home renovation, that would be a job order costing system that company would have to use.
Process costing, on the other hand, is one size fits all. So when I got my iPhone from Apple, they didn't make this iPhone for me. You've seen my wallpaper now.
They made the iPhone. I should show you the wallpaper after. It's funny. They made the iPhone. one size fits all and you know you get what you get and you might say well wait i got 128 gigabytes and my friend got 256 doesn't mean that's custom no i mean when they when they make it in the factory they don't have you in mind uh i have these like flossing things so you like oh my green screen look at this it's it's invisible because it's green in the green screen that's hilarious i wasn't expecting this uh These flossing things, though, it's absolutely process costing.
When this company makes these flossers, this won't show up on the green screen. This won't get messed up. My shoe. Oh, I'm gone out of focus now. Come on.
Grab focus, please. Oh, no. Well, you're seeing an out of focus shoe. Oh, my goodness. I've seen them do this on YouTube channels.
Hey, I'm back in focus. The shoe, of course, is process costing. The reason it's process costing is because when...
ASICs or whatever company that was made the shoe. They didn't have me in mind. It wasn't customized for me.
I just bought whatever they had off the shelf. So process costing, because they make thousands, hundreds of thousands of the same item, they can be a bit efficient about it. They can say, oh, I have 100,000 items.
I divide my total cost by my total items and I get a cost per item. Job order costing cannot be so efficient. You've got to say customer number one, like pair of shoes number one.
This is how much that cost me. I was looking around my room for things that could have been job order costing, and I only found one thing. If I bought beautiful art, my daughter drew this for me on some Valentine's Day or something. She didn't charge me for it, but if you were to cost art, well, it would be job order costing.
Every art would cost a little bit different based on the material, labor, the time it took. They'd all cost us something a little bit different. It's custom art.
So... That was the one thing I spotted in here. So this chapter, we're going to look at companies that have job order costing systems.
I'm going to show you something here. I'll show you my wallpaper because I thought it was cute. But that's it for the content of the video. So we're focused on job order costing.
Next module, all about process costing. So zooming in here, my kid, my wife took this picture of her. She was trying to sneak up on me in the house. And she thought. She put on this ski mask because she thought that made her sneakier somehow.
So that's my wallpaper on my phone. It makes me laugh every time I see it. Maybe it's just because it's my own kid.
It makes me laugh, but I still think it's amusing. All right, guys. Thanks for watching.
And we'll get into some problems and some real examples in the upcoming videos. That's all for this video. See you in the next one. Bye for now.