JOB COSTING
Job Costing: This method of costing is used in Job Order Industries where the production is
as per the requirements of the customer. In Job Order industries, the production is not on
continuous basis, rather it is only when order from customers is received and that too as per
the specific cations of the customers.
Consequently, each job can be different from the other one. Method used in such type
of business organizations is the Job Costing or Job Order Costing. The objective of
this method of costing is to work out the cost of each job by preparing the Job Cost
Sheet.
A job may be a product, unit, batch, sales order, project, contract, service, specific c
program or any other cost objective that is distinguishable clearly and unique in terms
of materials and other services used.
The cost of completed job will be the materials used for the job, the direct labour
employed for the same and the production overheads and other overheads if any
charged to the job.
The following are the features of job costing.
It is a specific order costing
A job is carried out or a product is produced is produced to meet the specific c
requirements of the order
Job costing enables a business to ascertain the cost of a job on the basis of
which quotation for the job may be given.
While computing the cost, direct costs are charged to the job directly as they
are traceable to the job.
Indirect expenses i.e. overheads are charged to the job on some suitable basis.
Each job completed may be different from other jobs and hence it is difficult
to have standardization of controls and therefore more detailed supervision
and control is necessary.
At the end of the accounting period, work in progress may or may not exist.
Various costs are recorded
Direct Material Costs: Material used during the production process of a job and
identified with the job is the direct material. The cost of such material consumed is the
direct material cost. Direct material cost is identifiable with the job and is charged
directly. The source document for ascertaining this cost is the material requisition slip
from which the quantity of material consumed can be worked out. Cost of the same
can be worked out according to any method of pricing of the issues like first in first
out,
last in first out or average method as per the policy of the organization. The actual
material cost can be compared with standard cost to find out any variations between
the two. However, as each job may be different from the other, standardization is
difficult but efforts can be made for the same.
Direct Labour Cost:
This cost is also identifiable with a particular job and can be worked out with the
help of ‘Job Time Tickets’ which is a record of time spent by a worker on a particular
job. The ‘job time ticket’ has the record of starting time and completion time of the
job and the time required for the job can be worked out easily from the same.
Calculation of wages can be done by multiplying the time spent by the hourly rate.
Here also standards can be set for the time as well as the rate so that comparison
between the standard cost and actual cost can be very useful.
Direct Expenses: Direct expenses are chargeable directly to the concerned job. The
invoices or any other document can be marked with the number of job and thus the
amount of direct expenses can be ascertained.
Overheads: This is really a challenging task as the overheads are all indirect
expenses incurred for the job. Because of their nature, overheads cannot be identified
with the job and so they are apportioned to a particular job on some suitable basis.
Pre-determined rates of absorption of overheads are generally used for charging the
overheads. This is done on the basis of the budgeted data. If the predetermined
rates are used, under/over absorption of overheads is inevitable and hence rectification
of the same becomes necessary.
Work in Progress:
On the completion of a job, the total cost is worked out by adding the overhead
expenses in the direct cost. In other word, the overheads are added to the prime cost.
The cost sheet is then marked as ‘completed’ and proper entries are made in the
finished goods ledger. If a job remains incomplete at the end of an accounting period,
the total cost incurred on the same becomes the cost of work in progress. The work in
progress at the end of the accounting period becomes the closing work in progress and
the same becomes the opening work in progress at the beginning of the next
accounting period. A separate account for work in progress is maintained.
Advantages of Job Costing
The following are the advantages of job costing.
a) Accurate information is available regarding the cost of the job completed and the
profit generated from the same.
b) Proper records are maintained regarding the material, labour and overheads so that a
costing system is built up
c) Useful cost data is generated from the point of view of management for proper
control and analysis.
d) Performance analysis with other jobs is possible by comparing the data of various
jobs. However, it should be remembered that each job completed may be different
from the other.
e) If standard costing system is in use, the actual cost of job can be compared with the
standard to find out any deviation between the two.
f) Some jobs are priced on the basis of cost-plus basis. In such cases, a profit margin is
added in the cost of the job. In such situation, a customer will be willing to pay the
price if the cost data is reliable.
g) Job costing helps in maintaining this reliability and the data made available becomes
credible.
Limitations of Job Costing
Job costing suffers from certain limitations.
These are as follows.
a) It is said that it is too time consuming and requires detailed record keeping. This
makes the method more expensive.
b) Record keeping for different jobs may prove complicated.
c) Inefficiencies of the organization may be charged to a job though it may not be
responsible for the same
