Job Costing Technique for Better Decision-Making

Dsicuss about the Guide to Understanding and Create Financial Report.

It is important to analyse the cost and profit data for any business in order to increase its efficiency. In the given case we see that Sue has implemented job order costing in order to help her in decision making process (Fridson & Alvarez, 2012). Job order costing is the technique whereby, all costs related to a job are allocated to that particular job. Sue has a business of making sauces for which she purchases the ingredients in batches. With the help of information provided to us on these ingredients and sales, we have the following available:

Product	Cost Per KG	Selling Price Per KG Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Margin Per KG
Bolognese With Bacon	1.94	12	10.06
Bolognese with Red Wine	2.13	12	9.87
Bolognese with Mushrooms	1.95	12	10.05
Roasted Garlic	1.90	12	10.10

From the above table we can see that the roasted garlic is least costly in production and earns the maximum margin of $ 10.10 per kg. Also that Bolognese with red wine is most costly in production and the margin earned is least with $ 9.87 per kg. Therefore, based on all the data available Sue can manage the production along with the sales price of the product. She can reduce and increase the production of any flavour as per her cost and margin data. Also she can charge different prices for different flavours based on the margin requirement (Girard, 2014). Further she can also collect the sales data and decide which flavour is more in demand and according make purchases and set the prices of the product.

There are a lot of costing techniques which can be implemented by a business owner in order to evaluate the data and make important decisions. Job costing is one of the most widely used costing techniques (Piper, 2015).  Job costing is the costing method under which all the costs related to a job are allocated to that particular job, so that profitability can be correctly determined. This is one of the major advantages of job costing. It helps the managers calculate profitability from each job, and helps them accept and reject the job accordingly. This method helps the managers have all the details of a particular job (Ittelson, 2009).  This technique also assist in recording data, which is further used to analyse cost control methods, efficiency along with productivity. Job costing not only helps record the profitability but it also helps in valuation of inventories for the financial statements. It helps in decision making on prospective jobs. This costing technique helps to compare the estimated costs and actual costs which help in planning the resources. It is also a technique which helps to formulate short term and long term policies for the companies (Lerner, 2009).      But in order to implement the job costing method effectively it is important that the mangers evaluate the cost data properly. Allocation of cost to their respective heads is necessary.

Case Study: Supplier Selection for Headlamps

Therefore we see that Sue’s business of making sauces can surely implement the job costing methods as it would assist them in more than one way. Sue should continue with job costing methods for better productivity and cost control measures.

Exhibit 1- Calculation of cost per KG of Final Product
Bolognese With Bacon
Ingredients	Ingredients for 10 KG Batch	Cost per gram	Total Cost for 10 KG Batch
Tomato Paste	6,780	0.000884956	6.00
Ground meat	1,130	0.008849558	10.00
Onions	170	0.011061947	1.88
Bacon	283	0.005530973	1.57
Total Cost for 10 KG Batch	19.45
Cost per KG	1.94
Bolognese With Red Wine
Ingredients	Ingredients for 10 KG Batch	Cost per gram	Total Cost for 10 KG Batch
Tomato Paste	6,780	0.000884956	6.00
Ground meat	1,130	0.008849558	10.00
Onions	170	0.011061947	1.88
Red Wine	509	0.006784661	3.45
Total Cost for 10 KG Batch	21.33
Cost per KG	2.13
Bolognese With Mushrooms
Ingredients	Ingredients for 10 KG Batch	Cost per gram	Total Cost for 10 KG Batch
Tomato Paste	6,780	0.000884956	6.00
Ground meat	1,130	0.008849558	10.00
Onions	170	0.011061947	1.88
Mushrooms	848	0.001935841	1.64
Total Cost for 10 KG Batch	19.52
Cost per KG	1.95
Roasted Garlic
Ingredients	Ingredients for 10 KG Batch	Cost per gram	Total Cost for 10 KG Batch
Tomato Paste	6,780	0.000884956	6.00
Ground meat	1,130	0.008849558	10.00
Onions	170	0.011061947	1.88
Roasted Garlic	565	0.001966568	1.11
Total Cost for 10 KG Batch	18.99
Cost per KG	1.90
Calculation of Margin Earned
Product	Cost Per KG	Selling Price Per KG	Margin Per KG
Bolognese With Bacon	1.94	12	10.06
Bolognese With Red Wine	2.13	12	9.87
Bolognese With Mushrooms	1.95	12	10.05
Roasted Garlic	1.90	12	10.10

Exhibit 2- Differential cost and profit – Bolognese With Bacon
Particulars	Cost of Bolognese With Bacon	Cost of Product	Differential Cost	Profit on Bolognese With Bacon	Profit on Product	Differential Profit
Bolognese with Red Wine	1.94	2.13	-0.19	10.06	9.87	0.19
Bolognese with Mushrooms	1.94	1.95	-0.01	10.06	10.05	0.01
Roasted Garlic	1.94	1.90	0.05	10.06	10.10	-0.05
Differential cost and profit – Bolognese With Red Wine
Particulars	Cost of Bolognese With Red Wine	Cost of Product	Differential Cost	Profit on Bolognese With Red Wine	Profit on Product	Differential Profit
Bolognese With Bacon	2.13	1.94	0.19	9.87	10.06	-0.19
Bolognese with Mushrooms	2.13	1.95	0.18	9.87	10.05	-0.18
Roasted Garlic	2.13	1.90	0.23	9.87	10.10	-0.23
Differential cost and profit – Bolognese With Mushrooms
Particulars	Cost of Bolognese With Mushrooms	Cost of Product	Differential Cost	Profit on Bolognese With Mushrooms	Profit on Product	Differential Profit
Bolognese With Bacon	1.95	1.94	0.01	10.05	10.06	-0.01
Bolognese with Red Wine	1.95	2.13	-0.18	10.05	9.87	0.18
Roasted Garlic	1.95	1.90	0.05	10.05	10.10	-0.05
Differential cost and profit – Roasted Garlic
Particulars	Cost of Roasted Garlic	Cost of Product	Differential Cost	Profit on Roasted Garlic	Profit on Product	Differential Profit
Bolognese With Bacon	1.90	1.94	-0.05	10.10	10.06	0.05
Bolognese with Red Wine	1.90	2.13	-0.23	10.10	9.87	0.23
Bolognese with Mushrooms	1.90	1.95	-0.05	10.10	10.05	0.05

With respect to the current situation of Zenn Australia, we need to make a decision on supplier selection for providing headlamps to the Zenn Canada.  While making the decision we need to keep in mind both the qualitative and quantitative points. (McLaney & Adril, 2016)

First supplier is Bakers Auto supply. We see that bakers auto supply have been in the business for 20 years in manufacturing of various automotive parts. Also there products are of very quality. They have provided a quote of $ 24.50 per unit of headlamp. Payment for the purchase is to be immediately made at the time of delivery. Also the warranty period provided by them is of 1 year from the date of sale to customer. The delivery will be made within 30 days of placing the order.

Second supplier is Lamp Inc. they are a newly established business with an experience of 2 years in the industry. They have quoted a price of $ 14.99 per unit for each unit. They have a flexible payment policy which requires payment in three instalments.  The warranty policy of Lamps Inc states that they would replace the products if found defective at the time of testing oh the product, this shall have to be done within 3 months of the date of purchase. Also they ensure that the delivery will be made within 15 days of placing the order.

Therefore we see that both the suppliers have few benefits over the other. Let us analyse them:

Particulars	Supplier 1	Supplier 2
Experience in the industry	20 years	2 years
Price Per unit	24.5	14.99
Payment Policy	at the time of delivery	3 instalments
Warranty Policy	1 year	3 months
Delivery Time	30 days	15 days

Calculation of Cost under both alternatives
Month	Sales – Units	Lamps Required	Cost under Supplier 1	Cost under Supplier 2
Jan	7,800	15600	3,82,200	2,33,844
Feb	6,500	13000	3,18,500	1,94,870
Mar	4,500	9000	2,20,500	1,34,910
Apr	4,700	9400	2,30,300	1,40,906
May	5,000	10000	2,45,000	1,49,900
June	7,500	15000	3,67,500	2,24,850
July	8,200	16400	4,01,800	2,45,836
Total Cost	21,65,800	13,25,116

From all the information available we can see that terms and conditions and pricing of supplier 2 is more favourable to us than supplier 1. In terms of quantitative advantage Lamps Inc has an advantage over Bakers Auto Supply (Taillard, 2013). If we place the order with Lamps Inc we can save $ 840,684. Also since the payment policy of Lamp Inc is flexible, we can save interest costs on the same. Now let us take into consideration the qualitative features of both the suppliers. Bakers Auto Supply has goodwill for their experience for 20 years and one can easily rely on the quality of their products. Whereas Lamp Inc has been in business for only 2 years. The supply period for Bakers auto part is for30 days whereas that of lamp is for 15 days. Therefore the company would prefer lower delivery time. (Siciliano, 2015)

Therefore to conclude we can say that Lamp Inc has both qualitative and quantitative advantage over Bakers Auto Parts. Hence the company should consider placing the order with Lamp In for the headlamps.

References

Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner’s Guide. New York: John Wiley & Sons.

Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.

Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes, N.J.: Career Press

Lerner, J. J. (2009). Schaum’s outline of principles of accounting. New York: Schaum.

McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.

Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.

Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.

Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.