Job Order Cost System for Service Companies

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  • 0:03 From Manufacturing to Service
  • 1:01 Job Order Costing…
  • 1:40 Manufacturing vs.…
  • 2:52 Tracking Costs: An Example
  • 4:35 Lesson Summary
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Lesson Transcript
Instructor: Christian George

Christian has a PhD in Business Management and an MA in Accounting & Financial Management

This lesson discusses the assigning of costs through the job order costing system for service companies. It also illustrates the journal entries required to track these costs.

From Manufacturing to Service

Joey just moved to town. He recently left a company that manufactured automotive parts, where he worked in their accounting department, but with the change in scenery Joey decided to seek somewhere new to work where he wasn't familiar with the company or products.

He was excited…and a little nervous.

Finally, the day came for an interview with a local advertising firm. It piqued his interest to see how different this job would be compared to his last one. The interviewer was impressed with his background. Finally, the big question that Joey was worried to hear.

'So, you used to work at a manufacturing company and now you want to work for us. We're a service company. Do you think that your skills and knowledge will be a good fit here?'

Fast forward two weeks. Joey was offered the job and is set to begin the day. Right off, he is given a copy of the financial statements and other financial books and can see that there are some clear differences in how they do things here at this advertising company.

Oh well, he thinks, here goes nothing.

Job Order Costing System Review

Because Joey's new employer is an advertising firm, they are classified as a service company. A service is work performed for a customer. Examples of service companies include attorneys or advertising firms. They do not manufacture and sell products but rather sell services that they perform for their customers. Service companies can use various types of costing systems to determine their costs and how to charge customers. The most used costing system in service companies is the job order costing system. This system assigns costs to a specific unit or product. In this case, it assigns costs to a specific service.

Manufacturing vs. Service Accounts

Joey is not very familiar with this costing system since his old employer used process costing, which was more useful to them because they made mass quantities of their products instead of specific units or products. Luckily, he quickly learns that the job order costing method is not very different from what he is used to, but there are some new terms for the accounts' names that he has to learn. These terms are very similar to those used in a manufacturing company but are changed slightly to reflect the fact that the firm is a service company.

A manufacturing company uses the term 'raw materials inventory,' but since service companies don't use raw materials, they use the term 'parts inventory,' or just simply 'supplies.' Similarly, a manufacturing company considers its work 'in progress inventory' compared to a service company's 'service contracts in process.' There is no substitute for finished goods, but 'cost of good sold' turns into 'cost of completed service contracts.' And finally, rather than 'manufacturing overhead,' a service company has 'service overhead costs' to consider. The service company account names reflect the service contract that the company enters into with customers - there is no product being sold.

Tracking Costs: An Example

Let's look at an example. We're Hot, Inc. is the advertising company at which Joey now works. They recently signed a service contract with a local company to create, produce, and publish an advertisement for television. This advertisement will focus on the local company's newest product.

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