What is Job Costing? – Definition
Job costing is a system in which costs are assigned to batches or job order of production. Job cost sheet has to be made under this costing system.
Job costing is the method of costing which applied to ascertain the costs of specific jobs or work -orders which are treated as contracts of small size. These jobs are generally dissimilar, of non-repetitive nature and may not be comparable with each other. This method is also known as ‘Job Lot Costing’ or ‘Lot Costing’.
Job costing may be described as one which is maintained for each job or product in which all expenses of material, labor, overheads are entered and cost of completing a job or manufacturing a product is calculated. Such a costing is described as job or terminal or specific costing.
Special Features of Job Costing
The special features of job costing may be summarized as follows:
- Under job costing, Production is carried on by a manufacturer against customer’s order and not for stock.
- Each job or work-order is of a specific nature.
- The Jobs or work-order generally executed in factories, workshops and repair-shops. But sometimes the job work is also done outside the factory or workshop e.g., the plumbing job, sewerage work, etc.
- The unit of costing, under this method, is a job or specific work-order.
- Under this method, the production and its requirements are determined first and then the expenses are ascertained in relation to it.
Objectives/advantages of job costing
The following are the main objectives of job costing, i.e., the advantages of job-costing:
(1). It is helpful in obtaining the cost of production of every product or job.
(2). It is helpful in ascertaining the profit (or loss) of the production or execution of the product or order or job.
(3). It is helpful in obtaining the profitability of the individual product, job or order.
(4). It is helpful in preparing the correct estimate of the cost of jobs etc, being undertaken.
(5). It is helpful in judging the operational efficiency of the activities of the enterprise.
(6). It is helpful in identification of operation from raw material is stage to that of the completion stage.
(7). It is helpful in making comparison with the actuals vis-a-vis estimates.
Suitability of Job Costing
Job costing method is most suitable to such activities as a printing press, painting and decorating, automobile garages, repair shops, electrical fittings, shipbuilding, engineering works, plumbing works, etc. where work is done according to the customer’s specifications.
Costing procedure under job order costing system
The various steps in the job costing system may be summarized as follows:
(a). Job Number
Production in any job industry is dependent upon the receipt of an order from the customer. When an order for a job is received and is accepted by the manufacturer, the order, as well as the job, is given a specific number by which they are known or identified. Such a number is known as ‘Job Number’.
(b). Production Order
After the acceptance of order, the production Planning department prepares a document known as ‘Production Order’. The Production Order contains the following particulars:
- Production Order No.
- Date of the Order
- Name of the Customer
- Description of the Job
- Drawings and Designs
- Bill of Materials No.
- Particular of Operations to be Carried out
- Departments and Machines Allotted for the Job
- Date of Commencement of Job
- Date of Completion
- Special Instructions, if any.
The Production Order is in the form of instructions issued to the foreman to proceed with the job. Thus, it serves as an authority to the foreman for starting the work. The specimen of Production Order as follows:
(c). Bill of Materials (BOM)
A Bill of Material is a list of all materials and parts required for a specific job. This document contains details of stores required and serves as an advance intimation to the storekeeper who may issue materials for the execution of the job on the basis of the Bill rather than on separate material requisitions. The responsibility for the preparation of Bill of Materials lies with the Production Planning Department. the foreman receives a copy of Bill of Materials along with the Production Order. The Bill of Materials authorizes the foreman to call for and receive the specified materials from the stores. If certain special tools are required for the job, a separate list thereof, known as Tool List, is also prepared.
(d). Recording of Costs
For recording all direct and indirect costs incurred in respect of each job, a job Cost Card or Job Cost Sheet is prepared by the costing department. The Job Cost Sheet shows the direct material costs, direct wages and overheads applicable to respective jobs. A Job Cost Card or Job Cost Sheet has to be designed to suit the need of the organization. The Specimen of a Job Cost Sheet is given below:
(i). Material Costs
Materials to job are issued from stores on the basis of Bill of Materials or Material Requisitions. Material Costs of a job can be ascertained from Bill of Materials or from the Materials Abstract prepared by the costing department on the basis of Material Requisitions. If any special material is purchased for a job, it is directly charged to the job concerned on the basis of Invoice. In case any surplus material is returned from the job to stores, the Job Account is given due credit for the value of the same.
(ii). Labor Cost
The labor cost of a job is ascertained on the basis of Job Cards. A circulating Job Card is issued with each job to record the labor hours spent on different operations and the total labor cost on the completion of the job.
(iii). Overhead Costs
Overhead costs are accumulated on a departmental basis and then apportioned to the various jobs executed by each department on some equitable basis e.g., direct labor hours, machine hours spent on each job. But in order to avoid delays in distributing overheads on an actual cost basis, overheads are generally charged at the pre-determined rates worked out on the basis of the previous period’s figures. Progress Reports are received from departments to assets the extent of work completed from time to time so as to ensure that the job is completed within the stipulated time.
(e). Completion of Job
On completion of a job, a job completion report is sent to the costing department. The total cost of a job is ascertained by posting all costs related to that job to the job cost sheet. If a job consists of a number of units of production, the total cost of the job is divided by the number of units in order to arrive at the cost per unit.
(f). Profit or Loss on Job
The amount of profit and loss on a job is computed by comparing the total cost of the job with sales price.
How to determine the cost of a job under job costing system?
The following direct costs were incurred on Job No. 105 of ABC Engineering Works:
Estimated at $7,500 for 10,000 hours normal working time of the factory.
You are required to calculate the cost of Job No. 105 and estimate the percentage of profit earned if the price quoted was $4,750.
(1). Overhead rates have been computed as follows:
Variable Overhead Rates:
(i). Department A = $5,000 / 4,000 hrs. = $1.25 per direct labor hour
(ii). Department B = $6,000 / $3,000 hrs. = $2.00 per direct labor hour
Fixed Overhead Rate:
= $7,500 / 10,000 hrs. = $0.75 per direct labor hour
(2). Percenatge of profit on cost has been calculated as follows:
= (Profit / Total Cost ) x 100
= (570 / 4,180) x 100
= 13.6% on cost