Job Costing Meaning, prerequisites, Job costing procedures, Features, objectives, applications, advantages and disadvantages of Job costing

17th July 2021 1 By indiafreenotes

Job costing is accounting which tracks the costs and revenues by “job” and enables standardized reporting of profitability by job. For an accounting system to support job costing, it must allow job numbers to be assigned to individual items of expenses and revenues. A job can be defined to be a specific project done for one customer, or a single unit of product manufactured, or a batch of units of the same type that are produced together.

To apply job costing in a manufacturing setting involves tracking which “job” uses various types of direct expenses such as direct labour and direct materials, and then allocating overhead costs (indirect labour, warranty costs, quality control and other overhead costs) to the jobs. A job profitability report is like an overall profit & loss statement for the firm, but is specific to each job number.

Job costing may assess all costs involved in a construction “job” or in the manufacturing of goods done in discrete batches. These costs are recorded in ledger accounts throughout the life of the job or batch and are then summarized in the final trial balance before the preparing of the job cost or batch manufacturing statement.

Job costing is a costing method used to determine the cost of specific jobs, which are performed according to the customer’s specifications. It is a basic costing method which is applicable where work consists of separate projects or contract jobs.


Job Costing Allocation of Materials

In a job costing environment, materials to be used on a product or project first enter the facility and are stored in the warehouse, after which they are picked from stock and issued to a specific job. If spoilage or scrap is created, then normal amounts are charged to an overhead cost pool for later allocation, while abnormal amounts are charged directly to the cost of goods sold. Once work is completed on a job, the cost of the entire job is shifted from work-in-process inventory to finished goods inventory. Then, once the goods are sold, the cost of the asset is removed from the inventory account and shifted into the cost of goods sold, while the company also records a sale transaction.

Job Costing Allocation of Labour

In a job costing environment, labour may be charged directly to individual jobs if the labour is directly traceable to those jobs. All other manufacturing-related labour is recorded in an overhead cost pool and is then allocated to the various open jobs. The first type of labour is called direct labour, and the second type is known as indirect labour. When a job is completed, it is then shifted into a finished goods inventory account. Then, once the goods are sold, the cost of the asset is removed from the inventory account and shifted into the cost of goods sold, while the company also records a sale transaction.

Job Costing Allocation of Overhead

In a job costing environment, non-direct costs are accumulated into one or more overhead cost pools, from which you allocate costs to open jobs based upon some measure of cost usage. The key issues when applying overhead are to consistently charge the same types of costs to overhead in all reporting periods and to consistently apply these costs to jobs. Otherwise, it can be extremely difficult for the cost accountant to explain why overhead cost allocations vary from one month to the next.

The accumulation of actual costs into overhead pools and their allocation to jobs can be a time-consuming process that interferes with closing the books on a reporting period. To speed up the process, an alternative is to allocate standard costs that are based on historical costs. These standard costs will never be exactly the same as actual costs, but can be easily calculated and allocated.

The overhead allocation process for standard costs is to use historical cost information to arrive at a standard rate per unit of activity, and then allocate this standard amount to jobs based on their units of activity. You then subtract the total amount allocated from the overhead cost pool (which contains actual overhead costs), and dispose of any remaining amount in the overhead cost pool. You can use any of the following methods to dispose of the remaining amount:

  • Charge to cost of goods sold. Charge the entire variance to the cost of goods sold. This is the simplest method.
  • Allocate the variance. Allocate the variance to the accounts for finished goods, work-in-process, and cost of goods sold, based on the ending balances in these accounts. This approach is slightly more time-consuming, but is the most theoretically correct method under generally accepted accounting principles.
  • Charge to jobs. Allocate the variance to those jobs that were open during the reporting period. This approach is the most time-consuming. It essentially reverts a company back to an actual costing system, since the results of this method will approximate those created under an actual cost allocation system.

Prerequisites of Job costing

  • Proper classification, apportionment and absorption methods for the overheads.
  • An effective production control system.
  • Labour time booking procedure through job tickets or piece work tickets, idle time reports, etc.
  • Material control system involving work orders, material requisitions, specification of materials, scrap reports, etc.

Procedures of Job costing

Receiving an Enquiry:

Before placing an order with the manufacturer, usually the customer will enquire about the price, quality to be maintained, the duration within which the order is to be executed and other specifications of the job.

Estimation of the Price of the Job:

The cost accountant estimates the cost of job after considering the various elements of cost and keeping in mind the specification of customer. This is based on the cost of execution of similar job in the previous year and considering the possible changes in the various elements of the cost. The estimated cost of the job is then informed to the prospective customer.

Receiving of Order:

The customer will then place the order if he is satisfied with the quotation price and other terms of executing the job. The production control department receives the order and it will give a number for every order thus received which is known as job order number. The job is known by this number until it is completed.

Preparation of Production Order:

A production order is prepared by the production control department is sent to the concerned persons such as the employees to enable them to carry out the job, to the store-keeper to facilitate him to stock all the required materials, to cost accountant to enable him to prepare job cost sheet in order to ascertain the profit on every job completed.

The production order consists of the following particulars:

(i) Date on which the order is prepared

(ii) Job order number

(iii) Description of the goods to be produced

(iv) Number of goods to be produced

(v) Date of starting the work

(vi) Date of completing the work

(vii) Listing of materials to be used

(viii) Sequence of production process

(ix) Signature of production manager etc.

Preparation of Design:

When the job to be executed requires special treatment, a design to meet the customer’s specifications is prepared by the production planning department. This is done by the engineering department with consultation with the production planning department.

Execution of Job and its Inspection:

The job will be started as per the schedule of production. Necessary materials, employees, tools, etc. are used to complete the production. The production process is supervised by the production manager or supervisor from time to time to ensure that the job executed is in accordance with customer’s specification and that it is completed as per the production schedule.

Dispatch of Goods:

The finished product are then packed and delivered to the customer as per the delivery schedule. Payment is settled as per the agreed mode of payment.

Features of Job costing

  • The industries need not incur selling and distribution expenses as the customers themselves come to place orders and collect the goods after production.
  • Under this method, production is intermittent and not continuous.
  • Under this method, the cost of each job and the profit or loss made on each job undertaken is found out separately.
  • By comparing the actual cost of each job against the price charged for each job, the profit or loss made on each job is ascertained.
  • As each job is different from other jobs, each job needs separate treatment under job costing.
  • Under job costing, the cost of each job is ascertained after the completion of the job.
  • A separate account is opened for each job to which all expenses incurred on that job, from the date of commencement till the date of completion are debited. This will enable the concern to know the cost of each job.
  • Job costing is adopted in concern where the work done is analysed into different jobs, each job being considered a separate unit of cost.
  • Those concerns which follow job costing method produce goods not for stock but against specific orders from customers.
  • Job costing is adopted by manufacturing concerns as well as non-manufacturing concerns.

Objectives of Job costing

  • Another objective of job costing is to provide a basis for estimating or determining the cost of similar jobs undertaken in future.
  • Control of costs, by comparing actual costs with estimated costs, is also one of the objectives of job costing.
  • The main objective of job costing is to ascertain the cost as well as the profit or loss on each job.
  • Job costing is also intended to indicate, through the comparison of actual cost of a job with its estimated cost, whether the estimation is incorrect or the actual cost is excessive.
  • Another objective of job costing is to find out those jobs which are more profitable and those which are not profitable or less profitable.

Applications of Job costing

the application of job costing method is followed in industries such as printing press, automobile garage, repair workshops, shipbuilding, foundry, and other similar manufacturing units, which manufactures according to customer’s specific requirements. A business that applies costing method usually has the following characteristics:

  • Products are manufactured in distinguishable lots
  • Production is carried out based on the customer’s specification
  • It is practical to maintain a separate record of each lot from the time production is begun until it is completed.
  • Products produced are of not uniform nature

Advantages of Job costing

  • The cost data relating to completed jobs is helpful to the management to know the trend of material, labour and overhead costs and to control the future job costs.
  • Under this method of costing, spoilage and defective jobs can be easily identified and responsibility for the same can be fixed on specific departments or individuals.
  • It is best suited for cost plus contract.
  • Cost sheet: In job costing, a cost sheet is often used to record costs incurred in stages of production. The cost sheet and job order work may also be combined, when costs are recorded on the production order document.
  • It is helpful to ascertain the cost as well as the profit or loss on each job separately.
  • The data of the job costing are quite helpful in the preparation of future budgets.
  • Manufacturing or production order: This document authorizes the manufacturing or production department to produce a specified quantity of a product which constitutes the job.
  • It provides detailed analysis of the elements of cost which is quite useful for the preparation of cost estimates and quotations.
  • It helps the management to know about the profitability of the jobs.

Disadvantages of Job costing

  • No corrective action is possible, in case the actual profit is lower than estimated in job costing.
  • The price of a job is fixed only on the basis of market condition not on the basis of past records.
  • There is no possibility of control of costs since the controlling steps are taken only after incurring the expenses in job costing.
  • More clerical work is required for maintaining detailed information in job costing.
  • Comparison of job costs becomes meaningless during the period of inflation.
  • The accurate cost information is not obtained since large number of small jobs is executed at a time in job costing.
  • Job costing is expensive.
  • There is no standardization of job in job costing. Hence, there is a need of close supervision.