Introduction
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 specifications 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 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.
Meaning
Job costing may be defined as a system of costing in which the elements of cost are accumulated separately for each job or work order undertaken by an organisation. Industries which manufacture products or render services against specific orders use job costing or job order method of cost accounting. In the job costing system, an order or a unit, lot or batch of product may be taken as a cost unit, i.e. a job. Job costing is a method of costing in which cost units can be separately identified and need to be separately costed. The primary purpose of job costing is to bring together all the costs incurred for completing a job.
The system of job costing can be sub-divided into two categories viz. (a) Factory job costing and (b) Contract costing. A variant of job costing system is batch costing in which costs are accumulated for specific batches of products of a similar type ordered for manufacture.
Job costing is applicable to engineering concern, construction companies, ship-building, furniture making, machine manufacturing industries, repair shops, automobile garages and such other in factories where jobs or orders can be kept separately.
As production in a job order system is not a continuous process, careful planning and strict control is essential to avoid wastage of materials, man-power, machinery and other resources. On receipt of an order, the production and planning department prepares a suitable design for the product or job. It also prepares a bill of materials and an operation schedule. A production order is issued giving instructions to the shops to proceed with the manufacture of the product. This production order (also known as work order or job order record) constitutes the authority of the work. The production order usually lays down the quantity of materials required, time allowed for the operations, sale price, customer’s name, shipping instructions, etc. Sometimes the values of materials and labour are also indicated and then it serves the combined purpose of an order for manufacture as well as the cost sheet on which the cost of the order is compiled.
Every production order is assigned a number called the job number, job-order number, work order number.
Features
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 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.
Basic Principles & Special Terms
The basic principles, procedures in the accounting of material, labour and overhead costs and other special features of the job costing system are mentioned below:
Material Costs
An essential requirement of job order cost accounting is that direct materials and their cost must be traced to and identified with specific jobs or work orders. On receipt of a production order, the shop draws the requisite materials from stores. The withdrawals of material are made on materials requisitions on the authority of the bill of materials. The particular job order number for which material is drawn is indicated in each requisition. Surplus, excess or incorrect materials are returned from the shops to the stores with materials return note.
A daily or weekly analysis of materials requisitions, materials return notes and bills of materials is made and posted in the materials requisition journal. For cost accounting purposes, a materials issue analysis sheet is prepared showing the cost of materials issued against the various job order numbers. Direct material cost is posted on the cost sheet relating to the particular production order while, indirect materials cost is treated as overhead costs.
Labour Costs
All direct labour costs must be analyzed according to individual jobs or work orders. On the authority of operation schedule, time is booked on time sheets, job cards, time tickets or piece-work cards. The job cards are valued by the costing department; the wages paid are classified into direct and indirect labour and booked to production order and standing order numbers respectively. Labour summaries or wages analysis sheets are prepared for each accounting period; say a week. Amounts on account of overtime, idle time, shift-differential and fringe benefits may also be included in the wages analysis sheet. Direct labour costs are posted on the respective cost-sheets and indirect labour is treated as overhead costs.
Manufacturing Overheads
Overhead costs are accumulated against standing order numbers and against cost centers. Overhead rates, predetermined or actual as the case may be, are worked out for each centre. The amount of overhead cost recoverable on each job order is summarized in an Overhead Absorption or Applied Overhead Analysis-Sheet and is posted on the relevant cost-sheets. Usually, overheads are added only when the job is complete but, at the end of the accounting period, the amount of overheads which could be applied to incomplete jobs is ascertained for the purpose of establishing the extent of over or under absorption of overheads.
Completion of Jobs
Postings of direct material, direct labour and manufacturing overhead costs to the cost-sheet for a job or production order are made throughout the run of the job or order. On the completion of a job, a job completion report is sent by the production shop to the Production and Planning Department, with a copy to the Cost Office. Sometimes, information regarding completion is noted on the production order which is routed through Cost Office.
The expenditure booked under each element of cost is totaled up and the grand total of cost is arrived at.
Job Account
An account is kept for each job so that its cost and the various components of cost can be readily ascertained. There can be various forms in which the account may be maintained. The following, therefore, may be treated as illustrative (all figures are assumed).
Job Account
No………………………………………………. Date Commenced…………………………..
Brief Particulars……………………………. Date Completed……………………………..
Remarks………………………………………..
| Date | Particulars | Materials | Wages | Total | Total Cost | Amount |
| May 7 | Material analysis | 340 | 340 | Material Consumed | 560 | |
| May 7 | Wages analysis | 410 | 410 | Wages | 970 | |
| May 14 | Material analysis | 220 | 220 | Prime Cost | 1,530 | |
| May 14 | Wages analysis | 560 | 560 | Factory overheads (60% of wages) work cost | 2,112 | |
| Administrative overheads 10% of work cost | 211 | |||||
| 560 | 970 | 1530 | 2,323 |
Work-in-Progress
The cost of an incomplete job, i.e., a job on which some manufacturing operation is still due is termed as work-in-progress. If a production order has been only completed by the end of an accounting period, it is essential that the closing stock of the work-in-progress be determined. Unless this is correctly done, the profits for the period will be distorted. Determination of work-in-progress is frequently essential where periodic profit and loss account is required to be prepared for control purposes without reference to the closure of the accounting period.
Job-ticket/Job card: A job card or job ticket is used to record the time spent on each job, having a specified work order or job order number. Job cards may be of two types, one, which is a job cost card, and contains information regarding material consumption as well as time spent by operators. The other one is, in effect, a job ticket, which is issued to an operator by the supervisor and contains only the operation details. When the operator starts the work, he records the time either manually or through time recording clock on the card. The finishing time is recorded when the operation is completed. If there is any break in between, then time ‘out’ and time ‘in’ are also recorded indicating hours not used on job and shall be considered indirect labour hours. When the job is completed, the operator deposits the card with the supervisor, and collects the next job ticket. At the end of each day, the time-keeper collects all these cards and records the time for each job or process or operation. Followings are the feature of job ticket/job cost card:
- It reduces normal idle time.
- It gives clear, logical and suitable information to the costing department.
- It provides a very useful link between the production control and costing.
- Job card gives information about number and particulars of job accurately.
- The entries are made by costing officer in card at the time of commencement and completion of the job.
Applications of 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 specifications 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.
Companies that are likely to use a job costing system have a wide variety of products or services. These companies include printing shops, accounting firms, equipment companies, and construction companies. Companies that are likely to use a process costing system have homogeneous products or services. Such companies include automobile manufactures, food processors, and textile companies. Service industry companies most likely use a job costing system because each job is likely to have different quantities of materials and labour.
Advantages of Job Costing
Job costing offers the following specific advantages:
- It helps management to detect which jobs are profitable and which are not. Estimates of cost for similar work in the future may be conveniently made on the basis of accurate record of job costs. This assists in the prompt furnishing of price quotations for specific jobs;
- The cost of materials, labour and overhead for every job or product in a department is available regularly and periodically, enabling the management to know the trend of cost and thus by suitable comparison, to control the efficiency of operations, materials and machines;
- The adoption of predetermined overhead rates in job costing necessitates the application of a system of budgetary control of overheads with all the advantages.
- Spoilage and defective work can be easily identified with specific jobs or products so that responsibility may be fixed on departments or individuals.
- Job costing is particularly suitable for cost plus and such other contracts where selling price is determined directly on the basis of costs.
N.B. Job cost information can be used for estimation of future costs only after careful adjustments for variations likely to arise over time as well as for any difference in the size of the order. If major economic changes take place, comparison of cost of a job for one period with that of another becomes meaningless. Distortion of cost also occurs when the batch quantities are different.
Limitations of Job Costing
Job costing suffers from certain limitations.
These are as follows.
- It is said that it is too time consuming and requires detailed record keeping. This makes the method more expensive.
- Record keeping for different jobs may prove complicated.
- Inefficiencies of the organization may be charged to a job though it may not be responsible for the same.
In spite of the above limitations, it can be said that job costing is an extremely useful method for computation of the cost of a job. The limitation of time consuming can be removed by computerization and this can also reduce the complexity of the record keeping.
