Unit -1 Job Costing
Job costing as a distinctive method costing is a form of specific order costing which is
adopted to execute the work strictly according to customer’s specification. The production process
depends upon the member of orders received from customers. As such production is not standardised
and intermittent in nature. The goods manufactured are not for stocking but for immediate delivery
once it is complete in all respects.
The cost is ascertained separately for each job as every work order differs from customers to
customers. The purpose of job costing is to ascertain the profit or loss made on each job. Further cost
of job is compared with the estimated cost to indicate whether estimation was defective or the actual
cost incurred is excessive. Such an analysis helps in taking remedial action to improve efficiency and
also facilitate revision of estimates.
Meaning: 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.
Example of job costing are—foundries, printers, machine tool making industries, engineering
workshop, toy making concerns, furniture making concerns, management consulting concerns,
interior decorations, musical instruments, advertising concerns and so on.
Definition:
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 service that moves 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”.
From the above definition, it is clear that job costing is a method of costing under
which the cost of each job is ascertained separately. It is that form of specific order costing which
applies where work is undertaken to customer’s special requirements. As distinct from contract
costing, each job is of comparatively short duration.
Features of Job Costing:
1) Job costing is adopted by manufacturing concerns as well as non-manufacturing concerns.
2) Those concerns which follow job costing method produce goods not for stock but against specific
orders from customers.
3) Job costing is adopted in concern where the work done is analyzed into different jobs, each job
being considered a separate unit of cost.
4) 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.
5) Under job costing, the cost of each job is ascertained after the completion of the job.
6) As each job is different from other jobs, each job needs separate treatment under job costing.
7) 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.
8) Under this method, the cost of each job and the profit or loss made on each job undertaken is found
out separately
9) Under this method, production is intermittent/reassembly and not continuous.
10) The industries need not incur selling and distribution expenses as the customers themselves come
to place orders and collect the goods after production.
The main objectives of job costing:
1) The main objective of job costing is to ascertain the cost as well as the profit or loss on each job.
2) Another objective of job costing is to find out those jobs which are more profitable and those
which are not profitable or less profitable.
3) Control of costs, by comparing actual costs with estimated costs, is also one of the objectives of
job costing.
4) Another objective of job costing is to provide a basis for estimating or determining the cost of
similar jobs undertaken in future.
Procedure of Job Costing:
1) 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.
2. Estimation of the Price of the Job:
The cost accountant estimate 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.
3. 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.
4. 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
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.
5. 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.
6. Execution of Job and its Inspection:
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.
7. 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.
Job costing advantages:
(1) It is helpful to ascertain the cost as well as the profit or loss on each job separately.
(2) It helps the management to know about the profitability of the jobs.
(3) It is best suited for cost plus contract
(4) The data of the job costing are quite helpful in the preparation of future budgets
Disadvantages of Job Costing:
(1) It involves more clerical work for cost collection. Further, it involves more supervision. These add
to cost and make it costly.
(2) Under this method of costing, costs are required to be collected for a large number of small jobs.
So the chances of errors in cost collection are more in job costing.
(3) Job costing, being historical in nature, cannot be of much help for cost control unless it is
combined with estimated or standard costing.
