Chapter 4 – Job Costing
Exhibit TN-1
Existing Overhead Cost Allocation System
Cost Center
Component Component Component
Group Part Group Part Group Part
4-7
Central Support
Services
(OAW)
Plant Support Services
(Works Gen’l)
Shop 415 Overhead
(Bays 4 & 5)
Procurement – Related
Overhead
Direct Costs – Engr.,
Graphics, Setup, Matl.
Hand.
Cost PoolCost PoolCost PoolCost Pool
Chapter 4 – Job Costing
Teaching Strategies for Readings
4-1: How I Reengineered a Small Business
This article describes both the old and new job costing systems at James Street Fashions (also
called Latt-Greene), a small textile knitting and converting operation in Vernon, California. The author is
the controller of Latt-Greene. He instituted a spreadsheet-based job costing system that helped to reverse
a $5 million loss on $65 million in sales revenue to a $3 million profit on just $32 million in sales
revenue. He also eliminated unnecessary overtime and increased the overall quality of the company’s
product line.
Discussion Questions:
1. Briefly describe the company, its products and customers.
Latt-Greene is a small textile knitting and converting operation in Vernon, California. It knits textiles
2. What problems did the author discover when he conducted his initial interviews with the
company in early 1990.
3. Describe the company’s old financial costing system, and identify its weaknesses as well as
business operating and profit consequences cause by its poor costing system.
The company did not have any costing system. It used a manual system that include only general
ledger, cash receipts journal, customer ledgers, and a cash disbursement journal. As yarn was knitted into
unfinished textiles (called greige goods), sheets were manually prepared showing what prices were
assigned to what lot and what the lot weighted. But no attempt was made to cost the greige goods. When
the finished goods were delivered to customers, they were billed as per the purchase order, but again no
(4) Many orders had a very low gross margin or incurred a gross loss.
(5) Company sales increased tremendously but incurred a $5 million loss.
4. What are major impacts of the company’s new computerized costing system on its business
operations, product prices and quality, and company’s profit?
Major impacts:
(1) Better-cost data was developed.
Chapter 4 – Job Costing
(2) Pricing policy changed to reflect on new better-cost data. In some cases, major customers
were lost because the company raised prices. But most customers were retained. Because
the company improved its service to them.
(3) Delivery schedules were met on a more consistent basis.
(4) Product consistency and quality improved.
(5) The new costing system helped the company to reverse a $5 million loss on $65 million
in sales revenue to a $3 million profit on just $32 million in sales revenue.
5. What are general principles learned by the author for changing or reengineering a company’s
costing system?
Some general principles for changing or reengineering the company’s costing system:
(1) Be open with all employees regarding the process.
4-9
Education.
4.2 Distinguishing Between Direct and Indirect Costs Is Crucial For Internet Companies
This article points out the importance of distinguishing direct and indirect costs for internet companies.
The cost objects are different for internet companies, a focus on customers instead of products.
However, the key issues of pricing, cost allocation, and cost management are still applicable.
Discussion Questions:
1. What characteristic must a company have to be referred to as an internet company?
2. What is the key element of competition for an internet company?
3. What is the key cost allocation issue for internet companies?
The allocation of the costs of service to the customer.
4. What is the key cost object for an internet company?
The customer.
4-10
Chapter 4 – Job Costing
4-3: Key Project Management Concepts for the Accountants
This article provides an introduction to key project management concepts as this field has become
increasingly important for accountants today. Most accountants have had little exposure to the core
concepts of project management. This article serves as a resource with definitions, the PM life cycle and
an accounting example.
Discussion Questions:
1. According to PricewaterhouseCoopers, why is project management increasingly important?
“In the tight-fisted business environment of 2003 and with increased expectations for transparency and
2. What fields have been traditionally associated with project management concepts?
3. Why are project objectives important? What characteristics should these objectives entail?
Project objectives are set to provide direction for project activities and to enable measuring actual results
against prior expectations. They direct resource usage (manpower, materials, etc.) and affect schedule
integrity and the quality of work. Project objectives should be: