by Job Costing
This is the ascertaining of costs that are incurred in the undertaking of a specific job. Often used to accumulate costs in small level projects such as manufacturing of small product batches, construction of custom items, constructions and developing software programs, just to name a few, this method has been deemed effective in determining unrelated costs and the costs paid for, and is used to bill unrelated or unpaid costs to the customer.
Job costing mainly involves costs such as:
- Material
- Labor
- Overheads
Costing is important in:
- Determination of profit margins hence selling prices
- The determination of the exact cost of an item
- Detect wastage and reduce the cost of manufacture where necessary
- Suggest changes in design when the cost is lower or too high
Contract Costing
Contract costing is referred to as a costing system applied where work is undertaken according to special requirements of customers in a location specified by the customer. Contracts are undertaken by both private and public companies. Similar to job costing, costs and revenues are recorded separately and each contract is identified by a unique contract number. As a result, it becomes convenient for companies to calculate profit from each contract. Generally, companies find suitable suppliers for a contract through competitive bidding.
The period of completion for a contract spans over a long time, or usually for more than one year; the work is completed in stages. The construction work occurs in a place according to the choice of the customer, called as a ‘site’. In contract costing, most of the costs are direct in nature in the form of direct materials, direct labor and subcontract charges. Contract costing is widely used by construction companies and in the engineering industry.
- Similarities between Job Costing and Contract Costing
Both are ways of ascertaining costs incurred in the undertaking of jobs
Differences |
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Job Costing |
Contract Costing |
| Job work is carried in the premises. | Contract work is carried at site. |
| An order, a unit, lot or batch of product may be taken as cost unit. | Each contract is a cost unit. |
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Cost is first allocated to cost centres and then charged to individual jobs. It is a system of costing in which the elements of cost are accumulated separately for each job or work undertaken by an organization. |
Most of the expenses are of direct nature and are directly charged to respective contract accounts. Only general overheads and head office expenses are apportioned to individual contracts. |
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The prices of the jobs are fixed basing on the nature of costs and policy of the firm. |
The pricing is generally through bidding and external forces have major influence in fixing the offer price. |
| The duration of the job work is smaller. | Generally, the contract works will take more time to complete. |
| The value of the job work would be lesser. | The contract works are bigger in nature and the value of the contract would also be higher. |
