Alaska Launch’s satellite declares specific costs associated with each job, usually accounting for tailored customer service.
In job costing, there is no average cost that is spread out across expense variables. Instead, costs are assigned to each unique job incurred and treated as a distinct cost object.
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Direct Materials
During satellite production, each quantity of raw materials and cost are recorded on the job cost sheet, highlighting the importance of tracking each job and “attaching” it to its specific cost. For example, $300,000 worth of titanium materials are directly attributed to each cost.
Direct Labor
Each satellite assembly is linked to labor hours spent on each job and recorded on labor sheets noting the number of hours worked on a particular satellite. For example, at a $50 charge per hour, a worker performing 1,200 hours would earn $60,000, tracing its roots back to each job.
Factory Overhead
Overhead is driven by depreciation, utilities, and supervisory salaries — variables that cannot be traced directly to each job because it is challenging to do so. Ergo, the allocation base comes in and allows us to derive the overhead to each job. For example, if an overhead rate is $10 per direct labor, having 1,200 labor hours would face $12,000 overhead applied to a particular job.
How Quintessential It Is of Pricing Satellites
Accurate Pricing
Under the contract, the price is inflated to 125% of cost. Having no job costing system in place would undermine the costing processes, ending up in overpricing or underpricing, given each job. For example, charging a more sophisticated satellite with the same price as a basic one would lead to losses of money and competitiveness in the market.
Profitability
Tracking costs is a pain point of any management which attempts to determine where main efficiencies or bottlenecks are and pass changes accordingly. If management investigates why the labor hours on one satellite exceed the norm, it will illuminate the core cost driver and an impeding factor and control further performance.
Transparency in Pricing
The company can communicate the cost breakdown and justify the set prices.
Total Manufacturing Cost = Direct materials + Direct Labor + Overhead
Total Manufacturing Cost = $13,442,769 + $21,889,554 + $8,223,454 = $43,555,777.
Selling Price = $43,555,777 * 125% = $54,444,722
Why you should care
Without job costing, the company may risk overcharging or undercharging the clients, which is alarming and may cause a retreat from profitability and competitiveness.
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