Job costing is also known as job order costing. Job costing is suitable in circumstances where goods and services are produced after receipt of the order from customers/clients as per their specifications. It is a system of monitoring the manufacturing expenses assigned to a particular product or service. Therefore, let’s understand the concept of job costing, features of job costing and other relevant information in detail.
Did you know? A company is most likely to use the job costing method if it manufactures products with unique characteristics.
What is Job costing?
Job costing is a method specifically designed to assist you in tracking various costs and revenue associated with a particular project or job and eventually calculating the profitability from such project or job.
In job costing, the costs associated with a particular job can be categorized into direct and indirect costs. The costs that are allocated to each job having regard to the materials and labour directly utilized in that job are known as direct costs. However, there are some costs that cannot be directly allocated to particular work. These are known as indirect costs. Job Costing is generally broken into three elements: material, labour, and overheads. Manufacturing firms use the Job costing technique to control the use of raw materials, labour hours, and other overheads by allocating the cost of each customer order separately.
Features of Job Costing
Job costing helps in determining the cost of labour, overheads, and the materials involved in each job. It helps to understand the profit or loss of each distinct job to ensure that the cost for a specific product makes for a feasible price suited to the customer while allowing the company to earn a profit.
- Management can use Job costing to track profitable and unprofitable jobs.
- It provides a base for determining the cost of similar jobs to be undertaken in the future.
- Helps in the determination of variances, by comparing actual cost with the estimated cost. This in turn helps in managing and controlling the cost.
Also read: What is the List of Accounting Standard
How is Job costing done?
Job costing procedure can be divided into 6 stages:
- Stage 1: In this stage, Organisations need to estimate the total cost that will be affected by accepting a particular job.
- Stage 2: In this stage, the organisation needs to identify the direct cost element included in the total estimated cost for the job. It’s an easy task to determine the amount of direct cost that will be incurred in the job. This includes the cost of material and labour to be incurred for the job.
- Stage 3: In the third stage, organisations determine the amount of overheads to be incurred for the job. Estimation of overheads is a complex task as it is based on the circumstances and circumstances at the time estimates are made and at the time of actual product might be different.
- Stage 4: In this stage, organisations bid for the job and give their quotation. The quotation is a collation of direct costs, indirect(overheads) costs and a decent amount of profit.
- Stage 5: During the performance of the job, job cost sheets are prepared. By preparing cost sheets, Organizations track whether actual material and labour is used as per the quotation. If the actuals differ from the quotation, then there is some anomaly. Organizations try to find the cause of such anomalies.
- Stage 6: After the completion of the job, organisations compare the actual overheads with that of the estimated overheads. Then they give effect to the variances between actual and estimated overheads to arrive at the final cost of performing the job
Also read: Learn About Bookkeeping: Definition, Types & Importance
Job costing: Applicability, Process, Documentation requirements
Let us discuss various concepts revolving around Job costing in detail:
1. Organisations and Activities where Job Costing is considered suitable
Job Costing is suitable for those organizations that produce products and services according to the specifications of the customer. Customers require products and services customized to their specific requirements. Job Costing is suitable for activities like Shipbuilding, Engineering works, Plumbing works, Printing press, Repair shops, Vehicle garages, Electrical fittings work. This is just an illustrative list. Many other activities use job costing in their process.
Certain Companies where Job costing systems can be used are:
- Construction Companies: Construction projects require a range of inputs, from labour to various types of materials, equipment, and tools which makes the costs vary. Job costing can be very useful for construction project managers to keep track of their total job expenses.
- Manufacturing Companies: Manufacturing companies incorporate job order costing as a means of controlling the usage of raw materials, equipment, and labour hours.
- White-collar businesses: Companies in the white-collar sector of business utilize job costing to manage individual client accounts.
- Medical Services: Medical services sectors, including hospitals, small doctor’s chambers, and medical billing companies use job costing by considering each patient or a bill as a particular Job.
- Companies in the retail sector: Retail sector companies which include clothing producers and retail outlets, use a job costing system to track sales of clothing by size, individual articles, and broader styles. This assists retail sector companies and other businesses to track expenses to create a variety of job order cost models.
- Entertainment Industry: Businesses engaged in the entertainment industry including Film studios can employ a Job Costing system to keep track of the cost associated with each Job order. Film studios prepare separate cost sheets for each film. Here different elements of costs include salaries and daily wages. Certain props and other types of equipment form part of the direct cost.
2. The process usually followed by a project based on Job Costing
Following is the process which a project based on Job Costing usually follows:
- Receiving Enquiry: Before a client places an order, they enquire about the offerings of the company. They generally enquire about the quality, delivery time and other information.
- Estimation of Price: After the company receives an inquiry, the accountant determines the estimated cost of the project. While estimating the cost, the accountant keeps in mind the specifications of the client other relevant cost factors. The accountant can also calculate the cost estimate based on similar projects they did in the past. Once the accountant prepares the estimate, it is reviewed by the management and after approval of the management, it is sent to the client.
- Order Placement: If the client is satisfied with the estimate proposed by the company, they place the order. Sometimes before an order is placed, certain rounds of negotiation also take place.
- Production of Order: The production department then starts production of the order based on the specifications of the client. The cost accountant prepares the cost sheet based on the information obtained from the floor employees.
- Inspection of order: After the order is completed, the inspection department inspects whether the order has been produced in accordance with the specifications provided by the client. They also check whether the actual cost is in line with the estimates.
- Delivery of the Order: After the inspection is completed, the company packs the product and delivers the same to the client.
3. Documentation Requirements of the Job costing system
The following documents are required by the cost accountant to come up with an accurate Job costing system:
Manufacturing Order: This document provides information on the volume of the product that needs to be manufactured.
Cost Sheet: It is a very important document of the job costing process. It helps to record all costs at all the levels of the production.
Other Documents: Various other documents help the cost accountant with this costing system. These may include: Time tickets, tools and spares orders, Inspection orders, and more.
4. Cost Allocation for different activities under the Job Costing system
|
Activity |
Procedure |
Allocations |
|
Material |
|
|
|
Labour |
Employees’ time is charged to a specific job in which they are engaged. Which is then assigned to the jobs based on the labour cost of the employees. |
|
|
Overhead |
These costs are added to the overhead cost pool and then allocated to different jobs |
Indirect costs: – These are accumulated into one or more overhead cost pools from where they are assigned to open jobs based upon the measure of cost usage. |
Total Job Cost = Direct material cost plus direct labour cost + allocated overhead cost
Also read: What is Double Entry System of Accounting
Example: How ‘cost sheet’ is prepared under Job Costing
The following information was recorded in the books of XYZ Pvt. Ltd. for the period ended 31-12-2021.
|
Cost |
Completed Job (₹) |
W.I.P (₹) |
|
Raw materials supplied from stores |
84,000.00 |
32,000.00 |
|
Wages |
2,00,000.00 |
60,000.00 |
|
Chargeable expenses |
20,000.00 |
4,000.00 |
|
Materials returned to store |
4,000.00 |
– |
- Factory overheads are 70% of wages, office overheads are 30% of factory cost, and selling and distribution overheads are 10% of the cost of production.
- The completed job materialised for Rs. 7,00,000 /-
Consolidated Job Account as on 31.12.2021
|
Dr. |
Amount (₹) |
Cr. |
Amount (₹) |
|
To Raw materials Consumed 84,000.00 Less: Returned to Store. 4,000.00 |
80,000.00 |
By sales (amount materialized on job completed) |
7,00,000 |
|
To wages |
2,00,000.00 |
||
|
To chargeable expenses |
20,000.00 |
||
|
To factory overheads (70% of wages i.e. 2,00,000 * 70 / 100) |
1,40,000.00 |
||
|
Factory cost |
4,40,000.00 |
||
|
To Administrative overheads (30% of factory cost i.e. 4,40,000 * 30 / 100) |
1,32,000.00 |
||
|
Cost of production |
5,72.000.00 |
||
|
To selling and distribution overheads (10% of cost of production i.e. 5,72,000 *10 / 100) |
57,200.00 |
||
|
Total cost/cost of sales |
6,29,200.00 |
||
|
To transfer to profit and loss account |
70800.00 |
||
|
Total |
7,00,000.00 |
Total |
7,00,000.00 |
The above cost sheet is just an illustrative one. The elements of the cost may differ from company to company.
Explanation of the above cost sheet:
- Companies prepare a cost sheet to track different costs associated with a particular Job and also to determine the profit or loss concerning such Job.
- All the costs directly traced to the Job are allocated to such job directly and form part of the factory cost.
- Overheads such as Administrative, selling and distribution, and factory are not directly associated with the job. Therefore these are allocated to the Job on a certain reasonable basis. Like in this example: Factory overhead is allocated to the job @ 70% of the value of wages, Administrative overhead is allocated to the Job @ 30% of Factory cost, and selling and distribution overhead is allocated to the Job @ 10% of the cost of production. I.e. indirect costs need to be allocated to a particular job at some predetermined rate.
- Hence, the above cost sheet properly highlights every cost associated with the Job undertaken by XYZ Pvt. Ltd.
Job Costing system in collaboration with Information technology
Job Costing in itself is a system that provides the management with such information that will help them to trace the cost of a particular Job from the beginning till the end. Management can use this information to decide the future course of action with respect to similar types of Jobs.
Information technology helps managers by providing up-to-date, quick, and precise Job costing information and making it easier and quicker for them to control and manage the cost and to make necessary decisions if needed.
When Job costing processes are carried out using technological tools, it helps businesses to carry out their work efficiently and effectively. Certain online platforms provide you the facility to cope with the Job Costing requirements. Here you can maintain your staff salary details, labour wages details, Overhead cost details, and other cost-related details without any complications. One such efficient platform is Legal Tree.
Also read: What is Trial Balance – Meaning, Features and Purpose
Conclusion
Job Costing is one of the important aspects of businesses that use such a system and Job costing combined with a technological platform can ease the burden of companies concerning cost management. In this technologically advanced world, all companies are relying heavily on some types of technology platforms to manage their businesses. Big businesses can afford to buy or hire some costly software to manage their task. But what about small businesses? Yes, you have your own easy-to-use Legal Tree app.
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