Two Period Dividend Discount Model
The next step towards understanding the dividend discount model is to extend the conclusions derived from the single step dividend model. This brings us to the two period dividend discount model. In this model we will use the same logic. However, we will extend the assumption regarding the holding period. Instead of selling his stock […]
Calculating Free Cash Flow to Firm: Method 3: EBIT
In the previous articles, we learned about how to calculate the cash flow from operations if the cash flow statement or the income statement were given in the question paper. In many cases, these financial statements may not be given in full in the question paper. Instead, some excerpts from these statements may be provided […]
The ABC of Peer To Peer Credit
The financial world has not witnessed much innovation since the 2008 meltdown. This is because any innovation in this sector is scrutinized for possible systemic risks. However, during this period peer to peer lending has evolved. The industry is still in a pretty infant stage. However, in 2015, peer to peer credit accounted for over […]
Spanish Property Bubble of 2008
Spain’s economy has been in an unprecedented decline since 2008. The average Spaniard found himself unemployed and had a huge mortgage bill to pay. An entire country has been bankrupted by the seemingly insatiable lust to acquire increasing quantities of real estate which drove the prices higher. This article will trace the beginning of this […]
Allocating Overheads in Job Order Costing
Tracking direct labor and materials that have been used in a job can be done with a fair degree of precision. That is not the real problem when it comes to costing. The real problem is with allocation of overheads. Usually, they have very little correlation to any specific activity. They are the result of […]
Law firms all across the world practice job costing. Most law firms charge an hourly rate to their clients. This rate is derived on the basis of the same factors direct material, direct labour as well as overheads. In case of law firms, the direct material used is negligible. The majority of the hourly rate signifies the expenses that have to be paid as salaries to the employee lawyers. The overheads required for maintaining the office and shared facilities is split amongst clients based on an estimated overhead.
Movie studios like Walt Disney also follow job costing. Every movie that they produce is a specific job. They allocate costs based on the material and labour that has spent while creating the movie. The tough part is to apportion the cost of equipment, studios and other such shared facilities amongst the various jobs that are being performed i.e. the movies that are being produced.
The cost of Medicare has been a major concern all over the world, of late. This has prompted many hospitals to have a closer look at their costs. Most medical service providers are using job costing to do so. A rational allocation of costs is the only way that costs can be brought down for certain ailments. Proper apportioning of costs ensures that people who common in for medication for common flu do not have to pay for the overheads incurred as a result of having equipment for major diseases like cardiac arrests, strokes, kidney failure etc.
The big 4 accounting firms have always used job costing to bill their clients. Their model is very similar to that of the law firms. With accountants too, the cost of material is negligible. Labour costs can be ascertained fairly easily. The real difficulty is to apportion the overheads amongst varios clients.
Companies that build custom software for clients also use job order costing systems. Most accept a fixed rate project, while some clients insist on time and material. However, the majority of expenditure in a software firm is overheads. These need to be apportioned fairly amongst the different clients.
Service firms have led to the development of job costing procedures. Earlier materials were the major component of costs and could be easily tracked. However, keeping a track of the amount of labour spent on different jobs and their productivity has been the result of the efforts of service firms. Some of their methods and procedures have been adopted by the manufacturing sector too. This has led to increased productivity.
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