Job Costing

It is a part of the cost accounting where the amount of work done is calculated on the basis of number of jobs completed. It is a method which calculates expenses and revenue by ‘jobs’. Job order costing or job costing is a system for assigning manufacturing costs to an individual product or batches of products. For example- Industries like Printing Press, Automobile Garage, Repair workshops, Ship Building, Foundry and other similar manufacturing units.

In the Job Costing, cost is not taken on singular basis but as a bulk of objects. Job costing involves direct material, labor and expenses, commonly known as prime cost and also other overheads used for factory, office and selling.

Documents used in Job Costing System

  1. Production Order- It is an order given to the manufacturer to produce. It initiates the manufacturing process.
  2. Cost Sheet- Recording is done on cost sheet.
  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.

Objectives of Job Costing

  • Maintaining and development of each job by providing separate account for each and every process of job.
  • Estimation of the amount of a certain work on the basis of price of previous work.
  • Identification of profitable and non profitable jobs.
  • Removing of Non profitable jobs.
  • Differentiation of departments on the basis of cost taken and amount of materials required.
  • Job costing should be flexible and scalable enough to accommodate any kinds of industrial or commercial jobs available for cost estimation.

Advantages of Job Costing System

  • It acts as a form which analysis the cost that is present in the manufacturing process.
  • It determines the profitability of the job and also helps the company in future regarding taking up of jobs.
  • Efficiency of manufacturers can also be measured.
  • It helps in reducing the duplication of work by estimating the similar job.
  • 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.
  • Quality of the work is evaluated through statistical tools.

Disadvantages of Job Costing System

  • It is a costly process because recording has to be done for each and every step of the order.
  • It may not be useful for jobs which are cost efficient.
  • No control of costs because price control is done only after the estimation of the cost.
  • 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.
  • It is not 100% accurate and reliable.

Procedure

1) Receiving an enquiry- Customers generally do not give orders without examining the various aspects of the company and product. They usually study the rates, about the manufacturer, quality and then they make a decision. So, in the first step, they receive enquiries from the customers regarding the product.

2) Estimation of the price of the job- Cost of the job is ascertained by keeping the needs and preferences of the customer. Another factor is that, they also keep in track of the change in the cost of the materials, especially in the recent years and specify the difference in cost.

3) Receiving of Order- If the customer is satisfied with the job costs, he will place the order.

4) Production order- After accepting of the job, production order will be issued to the subsidiaries, which mean the starting up of production. 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.

5) Recording of Costs- In this step, the costs are recorded and collected for each kind of job.

6) Completion of Job- At the time of the completion, a report will be given to the accountant where the final calculation of the cost takes place.

7) Profit and Loss- After the completion of job, a report will be sent to the accountant department where the actual expenditure on the job will be calculated. After the calculation of actual expenditure, it will be compared with the estimated expenditure of the job, so as to calculate the profit and loss of the company.

Illustration:

Particulars Dept A Dept B Total For Factory as a whole
Direct Labor Hours 10000 14500 31,000
Budgeted Variable O/H 14500 17200
Budgeted Fixed O/H - - 31,000

Details of Job Cost

Direct Materials: 
a) Cast Iron- 15 kg @ $4 per kg
b) Gun Metal- 5 kg @ $12 per kg
Direct Labor Hours: 
Dept A- 20 hrs @ $2 per hour
Dept B- 15 hrs @ $1 per hour
Direct Expenses- Special tools $40 (to be paid by customer) 

Solution

XYZ Ltd
Job Cost Sheet

Particulars Qty Rate Details Total
Direct Materials:
Cost Iron 15 kg 4 60
Gun Metal 2 kg 12 24 84
Direct Labor:
Dept A 20 hrs 2 40
Dept B 15 hrs 1 15 55
Prime Cost 179
Add: Variable O/H
Dept A (14500/10,000) x 20 hours 20 hrs 1.45 29
Dept B (17200/14500) x 15 hours 15 hrs 1.19 17.85
Fixed O/H
(31000/31000) x 35 hours 35 hrs 1 35 81.85
Total Cost 260.85
Add: Profit @ 20% on sales or 25% on cost 65.21
Total amount to be charged 326.06