Meaning of Job Costing and its Features:
Many industries use job costing as a means to determine the cost of their products and services. This method of costing is most suitable whenever a company produces products or provides services as per customers’ specifications.
In this blog post, we are discussing the meaning and features of job costing as well as its suitability.
What is Job Costing?
Job costing refers to a costing approach in which costs are calculated in terms of specific jobs or orders that are not comparable with one another.
It is also referred to as job order costing.
Here, the cost elements are accumulated separately for each job or work order completed by an organization.
Each job has its own characteristics and hence, needs to be handled differently.
A job can be a product, unit, batch, sales order, project, contract, service, specific program, or any other cost object that can be clearly distinguished in terms of materials and other services employed.
Consider a machine tool manufacturer or a car repair company, for example. Each machine order or repair work requires a distinct amount of materials, labor, and overheads. As a result, each order should be treated separately. And all the relevant costs for each order or job must be accumulated in order to compute the entire cost of the job.
What are the features of job costing?
Job costing is a system of specific order costing. The following are the main features of this method of costing:
Features of Job Costing
- Each job is unique, specific and dissimilar.
- Each job is undertaken according to the special requirements of the customer and not for stock.
- This method treats each job as a separate unit of cost. Hence, costs are accumulated and analyzed job-wise.
- Usually, each job is of short duration.
- Each job is capable of identification at all stages of production. This means that the costs of materials, labor and overheads are capable of being clearly identified for the specific job.
- Each job is given a unique job order number.
- There is no consistency in the flow of production from department to department.
- The direct costs of materials, labor and expenses are booked directly against the job order number.
- Overheads are charged to the job on the basis of some predetermined rates.
- Job costing allows a company to determine the cost of a job so that it can serve as a basis for giving the quotation for the job.
- Since each job is different from the other, it may be difficult for the company to have standardization of controls. Thus, more detailed supervision and control are necessary.
- At the end of the accounting period, work-in-progress may or may not exist.
How is the cost of a job calculated?
Under this method, costs are collected and recorded for each job or a batch of similar jobs.
Every order is separate and therefore, it is not essential that the same production operations are carried out or the same materials are utilized in respect of each.
Hence, each job is given a separate production order number.
Thereafter, the cost of each job is calculated separately by generating its Job Cost Sheet.
The total cost of the job is ascertained by adding up the materials utilized for the job, the direct labor employed for the job, and any production overheads or other overheads charged to the job.
Direct costs are added up directly while indirect costs are allocated on a suitable basis.
Let us take an example.
Suppose an automobile repair company receives a job order for repair work for a particular customer. It will first add the direct materials cost traceable to the job order, say its Rs. 2,500.
Next, it will need to compute the labor costs.
If it employs two workers for 6 hours each to complete the repairing work and each worker is paid Rs. 100 per hour, the labor cost will come to 6 x 2 x 100, i.e., Rs. 1,200.
Now, the company would need to compute its overhead rate to allocate the overheads to the job. If during the last month, it paid Rs. 50,000 in overheads between rent, utilities, machinery, etc., it can divide this by an activity driver, say the total number of direct labor hours over the same period, to get an overhead rate.
So, if the company had 340 total direct labor hours, the overhead rate would be Rs. 147.059 per labor hour (Rs. 50,000/340 = Rs. 147.059). Then, it will allocate the overheads to this job by multiplying the overhead rate by the hours spent on the job: Rs. 147.059 x 12 = Rs. 1764.706.
Now, the company will simply add up all these costs to get the total job cost, i.e., Rs. 5,464.706 (Rs. 2,500 + Rs. 1,200 + Rs. 1764.706).
Job costing is used in ….
Job costing or the job order method of cost accounting is used in industries that create items or provide services in response to particular orders.
Printing presses, vehicle garages, repair shops, shipbuilding, housebuilding, engine and machine manufacturing, and so on are some examples of industries where this approach of costing is commonly used.
In other words, this method of costing is applied in job order industries where production is done according to the needs of the customer. Production in such industries does not occur on a continuous basis; rather, it occurs only when a customer order is received, and only according to the requirements of the customer. As a result, each job may be differentiated from the other.
The following table may be helpful in understanding:
|Examples of industries||Nature of job|
|Printing Press||Each item to be printed is a separate job, whether it is a pamphlet, a book, or an advertising brochure.|
|Garage||Each car that needs to be serviced or tuned up becomes a separate job.|
|Furniture Manufacturer||Each furniture order is processed as a separate job. For example, multiple units of a particular model of a chair may be manufactured in a single batch.|
|Service Organisation stations||A firm of Chartered Accountants is an example of a service organization. Each work order assigned by the client is handled as a separate job, and the fee is charged accordingly.|
|Construction Companies||Each building is a separate job because each one has a different design and area.|
Job costing can prove to be very useful for businesses that produce unique products or take distinctive orders from their customers. It considers each job or product as a separate cost unit. Thus, one can ascertain the total cost incurred on the job as well as the profit potential.
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