Bradley and Associates

Case 2: Bradley & Associates

Accounting 5023

Bradley & Associates, an engineering firm, produces specialized concrete structures. It uses the process costing system to estimate expenses that it passes on to its customers. The process costing system averages all production costs of a production batch and uses this average to determine final customer cost. This systems works well for production of identical items such as cleaning supplies, beverages, and lumber but can be problematic for customized products or services such as hospital services, consultants, computer repair, and construction contractors. While the process costing system is easy to use and requires less time for tracking expenses, it often results in less accuracy for financial reporting, inventory tracking, and final product costs. The job order costing system applies direct labor, direct materials, and overhead costs as they are related to specific jobs. This method of cost estimation improves inventory accounts, reporting precision, and evaluation of profitability on each customer account.

Once Bradley & Associates switched to the job order costing system, many benefits were evident. Internal reporting became more accurate with improved tracking of expenses. Reports prepared for managers reflected more accurate expenses allowing them to determine profitability of each customer account. By tracking expenses throughout each step of the production process, inventory accounts were more current and allowed for efficient amounts of inventory on hand. Production managers were able to order additional inventory quantities at the right time preventing excess inventory and work stoppages from lack of necessary materials. Job order costing also allowed Bradley & Associates to more accurately determine a profitable final cost for future customers and evaluate profitability of current accounts. Relating specific expenses to a specific customer account provides the ability to...