Job costing is usually a method of costing applied in industries, where the cost of the production is usually measured by the number of completed jobs. This is usually taken as a factor to measure the feasibility of jobs. These costs are recorded on a ledger throughout the whole job process and are added to the final balance statement when preparing for job costs and the batch statement.
Job costing method or system can be virtually used in any industry and is used to check whether if the cost of production exceeds the overheads and the price of the materials, so as to provide profit for the whole process.
What is Job Costing?
Job costing is a technique of costing where the amount of work done is in the form of the number of jobs completed.
The production is taken with respect to the customer’s orders and not as bulk for stocking purposes.
Moreover, the cost is not taken singularly but as a bulk of objects.
Printing 5000 books, assembling 500 cars, delivering 4000 pamphlets and so on.
The elements within job costing procedure consist of direct costs, employment costs and material costs which comprises of prime costs and also overhead charges used for the departmental costs and shipping and handling costs which also includes costs taken for stocking and storage.
Documents Used in a Job Costing System:
1. Production order:
Production order or cost order is a type of work order, authorising and sanctioning the manufacturers to produce, the order given to the customer. This process initiates the manufacturing process
2. Cost sheet:
For recording purposes, another type of document is present called the cost sheet. The cost sheet and the works order both can be combined at the last stage while establishing the final production value.
3. Other documents:
The other documents are processed and submitted in between the manufacturing processes such as materials order, tool tickets, storage and stocking documents, warehousing, and inspection tickets.
Job Cost Accounting Procedure:
The cost of the direct materials are taken calculated by the help of the materials requisition form. This is tallied by the accounts department. The employee wages are also calculated by taking the tickets issued by the payroll department. Moreover, if any overhead charges, these are also taken under consideration.
Manufacturing overheads are applied, at their respective departments during manufacturing. Then these are calculated together which constitutes the four main expenses of manufacturing. That is, direct expenses, direct labour, material expenses and manufacturing overheads within each department.
The job cost accounting procedures as a summary are given below:
1. Receiving an enquiry:
Before placing the order, the customer usually studies about the manufacturer, what their rates are, what is the quality of the materials that they use, the time is usually taken by them to complete the order and so on.
2. Estimation of the price of the job:
The cost of the job is done by the accountant keeping in mind the needs and taste of the customer. This includes the customer’s preferences and choices. Another factor is that they also keep in track of the change in the cost of the materials, especially in recent years and specify the difference in cost. This job cost is then sent to the future customer.
3. Receiving of order:
The customer will place the order if he is content with the job costs.
4. Production order:
If the job is accepted, then a production order is given by the manufacturer within its subsidiaries. It is a form of authorised order which officially starts the production of the job. It is a set of instructions directed towards the foreman directing when and how the job should be done and how much should be completed in a day. Enough copies are made and passed throughout the departments so that each department can parallely keep in track of the jobs done.
5. Recording of costs:
The costs are recorded and collected for each kind of job. For each department a certain job card is used, where the costs from different aspects of the jobs are taken into consideration.
1. Material requisition:
Any document issued by the company stating the manufactures to transport the materials from the storage unit to the production house, so as to start manufacturing.
2. Bill of materials:
A list detailing the materials, prices, components, sub-components for manufacturing the end product.
3. Materials issue analysis sheet:
A form of document which consists of materials, their related details and when it was issued for the manufacturers.
1. Operation schedule:
It is a form of the timetable which is related to the allocation and reissuing of resources in an organization.
2. Job card:
A form of card used to detail about the details of the job needed to be done in a production facility. It instructs the foreman what to do as a set of instructions. Helpful for both the parties involved in the business.
3. Wages analysis sheet:
It is a derivative of the income statement. It consists of the payroll statements and the wages for both the manufacturing and non-manufacturing employees depending on whether if it is a fixed salary or an hourly wage.
These include hidden costs such as transportation, stocking, storage, food, infrastructure etc.
6. Completion of job:
On the completion of the job, a report stating the completion of the job is given to the accounts department where the final cost calculation takes place. The final cost statement is then compared with the estimated cost, to ensure whether it was a profit or loss.
7. Calculating the profit or loss:
These costs are calculated when the final expenditure is compared with the estimated expenditure.
Objectives of Job Costing:
1. To maintain the development of each job, by providing a separate account for each and every process of the job, so as to estimate the costs taken, when transitioning from one process to the another.
2. Helps the management in estimating the price of a certain work based on the price of the previous jobs.
3. To identify profitable and non-profitable jobs and help and prevent profitless jobs taking place.
4. To differentiate departments from one another on the basis of the cost taken and the amount of materials required.
5. Provide detailed information of what is happening in each department to the customer and move forward with the plan with respect to the idea of the customer. Any sudden changes in the plan can be accommodated, if congruent with the final cost estimation.
6. Job costing should be flexible and scalable enough to accommodate any kinds of industrial or commercial jobs available for cost estimation.
Features of Job Costing:
According to Eric Kohler, “Job costing is a method of cost accounting whereby cost is compiled for a specific quantity of product, equipment, repair or other services that move through the production process as a continuously identifiable unit, applicable material, labour, direct expenses and usually a calculated portion of the overhead being charged to job order.”
Some of the characteristics of the job costing process are.
- Most of the manufacturing and non-manufacturing entities have acquired the job costing process
- The entities which have adopted job costing manufacture goods over customers demand and not for stocks
- In such entities, the total work is assessed into various jobs and also each job is appraised as a separate cost unit.
- In this method, the production is not a continuous one
- An account is opened for the particular jobs including all the extra things, to know the exact cost of the job.
- As every job is different, the procedure of job costing for it also differs
- The job of the cost is finalized after the job is completed.
- The real-time profit or loss is decided, only after comparing the actual cost with the charged cost of the job
- Using job costing, the profit and each job’s cost can be found out separately
Here the organization does not have to spend on selling and distribution, the customers are responsible for placing orders and collecting the goods
Some of the Organization types which adopted job costing are,
- Printers Machine tool manufacturing industries
- Interior decorations
- Advertising concerns
- Furniture making industry
- Musical instruments manufacturing industry
- Management consulting industry
- Toy making industry
- Engineering workshop
The above mentioned are few objectives of costing. Now let us look at the advantages and disadvantages of cost accounting
Advantages of Job Costing:
1. Job costing acts as a form of analysis detailing all the type of costs that are present throughout the manufacturing process. This includes the direct costs, the labour costs, and the overhead charges.
2. It acts as a gauge determining the profitability of the job and helps for the future customers or companies to decide whether to take up the job or not. It also gives us an idea about the feasibility of the job.
3. Job costing prevents duplication of work because it helps in the estimation of a similar job. This helps in a company quoting the price of a job, it can always depend on the pricing of a previous job as a reference.
4. The efficiency of the manufacturers can also be taken into observation while taking account of their job costing and their associated expenses.
5. Ruination and defective work can be found out through job costings and it can be immediately corrected through certain individuals responsible for the job.
6. Budgetary control comes into action when taken consideration of the various overhead charges which are predetermined for each department.
7. Job costing information is used more for job contacts where the price of the job depends on the amount of the work done, rather than depending on the final fixed price.
8. It evaluates the quality of the work through various statistical techniques.
9. Job costing provides an easy calculation of cost overheads for specific needs, and in a precise manner.
10. Job costing enables the supervisors to keep track of various components such as money, materials and the performance of the employees.
Disadvantages of Job Order Costing:
1. Based purely on costs. This method, is disadvantageous in fixing prices for the complete process, as the costs are recorded along each step. Hence it makes is difficult to prevent unwanted costs and expenditures occurred in between the processes.
2. It is very expensive because records are to be made for each and every step of the order. Starting from the materials list to the final product statement. Hence capital is needed to keep such records properly.
3. There is no exact procedure for estimating the job cost since there are no specific methods to differentiate direct and indirect costs occurring in a process.
4. This method of price estimation, may not be useful for jobs which are cost-efficient and fast-paced.
5. No standard procedure to follow while estimating. The only thing that can be followed is the need for supervision when calculating costs. So as to prevent any miscalculations and forgery of the prices and materials respectively.
6. More and more clerical work is required to detail about the measures and quota taken in each and every step of the project from the start to the finish.
7. Highly expensive because of the number of people working for a single project and unwanted expenditures may also be present.
8. No control of costs, since quality control and price control are usually done after the estimation of the final price. That too price control can also be done under a limit. Only to visible price variations, there is a chance of hidden costs that may not be recorded.
9. These kinds of jobs are only applicable, depending on the nature of the market and not on the nature of the job assigned. This becomes useless when the behaviour of the consumer market doesn’t support such jobs, more and more expenditure for man, machine and materials takes place.
10. During inflation and recession, such jobs are useless and comparing such job costs are fruitless and a waste of time. Ordering job costs during the time of inflation is not considered smart.
11. No form of correction can take place if the actual profit is less than the estimated profit. The only thing we can do while calculating job costs is preventing loss to both the consumer and the manufacturer.
12. Since overheads are allocated to each department on a predetermined basis, there is no strict method to control the cost of the project using job costing.
13. Record keeping is what keeps the process of job costing alive. If there is no sufficient record work, then it can cause a huge downfall to the whole project and it may lead to a huge loss to the manufacturer.
14. There is no 100% accurate estimation of the total final cost of a job using job costing.
Job costing is an efficient method in keeping track of the expenditure against the given revenue, that is, the income or the fixed budget by the customer. It expands to all industrial professions and people of different designations.
Job costing depends on the type of work that is done, rather than being applicable to any kind of job. This way the result is suited to the customer’s needs and choices.
Usually, job costings are done by contractors, architects and consultants. People who own a small convenience or a hardware store doesn’t have to use job costing techniques. Using job costing helps you to focus on the strongest and the weakest link of the business.
Hence, it helps the manufacturers to focus on the strongest link to produce more and more profits while giving expert care to the weakest links, so as not to provide any unwanted losses.