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20.8 Explain How a Job Order Cost System Applies to a Nonmanufacturing Environment

Job Order Costing Beyond Manufacturing​

Job order costing is not limited to manufacturing. It can be applied to any business where work is done on a job-by-job basis, including service companies, construction, and professional services.

Service Companies​

Service companies can use job order costing to track costs by client, project, or engagement.

Key Differences:

  • No finished goods inventory (services are consumed as provided)
  • May have work in process (uncompleted services)
  • Direct materials may be minimal
  • Direct labor is often the major cost
  • Overhead still needs allocation

Example: Consulting Firm

Job #201: Financial Analysis Project for Client ABC

Direct Materials:

  • Travel expenses: €500
  • Supplies: €100
  • Total: €600

Direct Labor:

  • Senior consultant: 40 hours × €100/hour = €4,000
  • Junior consultant: 30 hours × €60/hour = €1,800
  • Total: €5,800

Applied Overhead (30% of direct labor):

  • €5,800 × 30% = €1,740

Total Job Cost:

  • Direct materials: €600
  • Direct labor: €5,800
  • Applied overhead: €1,740
  • Total: €8,140

Billing:

  • Billing rate: €150/hour (senior), €80/hour (junior)
  • Billable amount: (40 × €150) + (30 × €80) = €8,400
  • Job cost: €8,140
  • Profit: €260

Construction Companies​

Construction companies use job order costing extensively.

Example: Construction Project

Job #301: Office Renovation

Direct Materials:

  • Lumber: €5,000
  • Electrical supplies: €2,000
  • Plumbing supplies: €1,500
  • Paint and supplies: €800
  • Total: €9,300

Direct Labor:

  • Carpenters: 80 hours × €35/hour = €2,800
  • Electricians: 40 hours × €40/hour = €1,600
  • Plumbers: 30 hours × €38/hour = €1,140
  • Total: €5,540

Applied Overhead (40% of direct labor):

  • €5,540 × 40% = €2,216

Total Job Cost:

  • Direct materials: €9,300
  • Direct labor: €5,540
  • Applied overhead: €2,216
  • Total: €17,056

Professional Services​

Example: Legal Firm

Job #401: Corporate Legal Matter

Direct Materials:

  • Court fees: €500
  • Filing fees: €200
  • Research materials: €300
  • Total: €1,000

Direct Labor:

  • Partner: 10 hours × €200/hour = €2,000
  • Associate: 25 hours × €120/hour = €3,000
  • Paralegal: 15 hours × €50/hour = €750
  • Total: €5,750

Applied Overhead (25% of direct labor):

  • €5,750 × 25% = €1,437.50

Total Job Cost:

  • Direct materials: €1,000
  • Direct labor: €5,750
  • Applied overhead: €1,437.50
  • Total: €8,187.50

Accounting for Service Companies​

Key Accounts:

  • Work in Process: Uncompleted services
  • Cost of Services: Instead of Cost of Goods Sold
  • Service Revenue: Instead of Sales Revenue

Flow:

  1. Incur costs → Work in Process
  2. Complete service → (may skip Finished Goods)
  3. Bill client → Service Revenue
  4. Recognize cost → Cost of Services

Luxembourg Compliance Note​

For Luxembourg service companies:

  • Job order costing helps track client profitability
  • Use appropriate PCN accounts
  • Service companies may use different account structures
  • VAT handling depends on service type
  • Cost tracking supports pricing decisions
  • Consider Luxembourg service industry specifics

Think It Through​

How does job order costing apply to a service company? What are the key differences from manufacturing? Why is it still useful?