Cost Estimates: Is that a good costing method?

Corbin Medical Group, Inc. is a manufacturer of small medical supplies, (e.g., medicine containers, plastic wash basins, etc.). The company only makes the supplies when customers (e.g., hospital, doctors offices, clinics) order and provide specifics such as name, color, logos, sizes, etc. For the past 2 years you have held an accounting manager position with the company and really enjoy the job. Just about every job is different, not only in form and fashion, but also in the way you must account for the customers job.

Since you started with the company, you instituted some new procedures. Corbin now uses a detailed job order cost sheet to aid in the accumulation of total cost figures that are sent to customers. You are responsible for analyzing every order and preparing a cost sheet that includes details about the customers order including the materials and material cost, the labor cost, and overhead costs (based on a predetermined overhead rate).

A few days ago, you received an email from one of your newest account associates. In the memo, the account associate, Frances Batson, noted that she was marketing Corbin to a prospective customer, a purchasing manager for a small medical clinic. She noted, also, that she had discussed and shared a copy of the documents Corbins customer received once a job is completed.

Cherol had one question, however, to ask. She wants to know more about HOW and WHY overhead costs is estimated. Moreover, Cherol said that she would like to know what cost(s) are included in overhead. She notes that she has her prospective customer 80% sold on using Corbin but feels that knowing more about overhead would be all that she would need to win the potential customers business.

Reading this memo from Frances Batson causes you to think that possibly other accounting associates might wanted to know the same information. That is, why is the overhead cost estimated rather than reported as actual dollar amounts when completing a job order cost form. Perhaps knowing more about overhead costs in general might be information you need to be sure your account associate has.

Write a memo to Frances Batson that will address her concerns and help her better market Corbin Medical Group, Inc. to potential customers.