OBJECTIVE 4 — Diagram the flow of costs for a service business that uses a job order cost accounting system.
Explain that cost accounting can be applied to any organization that needs to determine the cost of its product. For a service business, the product is the service provided. Cost accounting can be used by an advertising agency to determine the cost to produce an ad for a customer, by an accountant to determine the cost of preparing a tax return, or by a plumber to determine the cost to clean a drain.
Refer to Exhibit 11 on page 872 of the text(Accounting/warren 24e). While reviewing that diagram, stress the following points:
1. The costs incurred by a service organization are labor and overhead. Any supplies used are treated as an overhead expense.
2. A cost of services account is used to record the cost of completed jobs.
GROUP LEARNING ACTIVITY — Job Order Costing in a Service Business