In this article we will discuss about:- 1. Meaning and Definition of Job Costing 2. Features of Job Costing 3. Objectives 4. Similarities 5. Procedure 6. Accounting System 7. Job Cost Sheet 8. Advantages 9. Disadvantages.
- Meaning and Definition of Job Costing
- Features of Job Costing
- Objectives of Job Costing
- Similarities between Job Costing and Contract Costing
- Procedure of Job Costing
- Accounting System under Job Costing
- Preparation of Job Cost Sheet
- Advantages of Job Costing
- Disadvantages of Job Costing
1. Meaning and Definition of 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.
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.
The characteristic features of job costing are:
(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 analysed 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 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.
Examples of industries which adopt 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.
The main objectives are of job costing are:
(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) Job costing is also intended to indicate, through the comparison of actual cost of a job with its estimated cost, whether the estimation is incorrect or the actual cost is excessive.
(5) Another objective of job costing is to provide a basis for estimating or determining the cost of similar jobs undertaken in future.
There are many similarities between job costing and contract costing, which are:
(1) Both job costing and contract costing are specific order costing.
(2) In the case of both job costing and contract costing, each job or contract constitutes a cost unit.
(3) Both methods have the same object to find out cost and profit.
(4) Under both the methods a separate account is opened.
(5) Under both the methods customer come to them, so there is no demand creation in the case of both.
(6) Under both the methods works are executed as per the specifications of the customers.
(7) In both the cases work commences on the receipt of order from the customer.
(8) In both the cases quotation is called by the customer before placing the order.
The procedure that is commonly applicable to a normal sale transaction equally applies in case of job costing.
This is explained under the following steps:
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. The estimated cost of the job is then informed to the prospective customer.
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. The job is known by this number until it is completed.
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, to the store-keeper to facilitate him to stock all the required materials, to cost accountant to enable him to prepare job cost sheet in order to ascertain the profit on every job completed.
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. This is done by the engineering department with consultation with the production planning department.
6. Execution of Job and its Inspection:
The job will be started as per the schedule of production. Necessary materials, employees, tools, etc. are used to complete the production. 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. Despatch 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.
There are four elements of cost (i.e. material, labour, chargeable expenses and overheads) which are also applicable to job costing.
They are discussed as under:
1. Materials Cost:
Materials are classified into direct and indirect materials on the basis of traceability of materials to the job. Those materials which are traceable to the job are treated as prime cost element and those not traceable to the job are treated as manufacturing overhead.
2. Direct Labour Cost:
The direct labour cost is debited to the job on which work is directly performed. Clock card is used to record the hours worked by each employee. At the end of each week, the payroll department uses the information on the clock card to calculate each employee’s pay. The clock card only records the total time worked by each employee.
It is used by the employee to indicate how much time he worked in a period and by the employer to determine how much to pay the employee for that work. A clock card does not record the time spent by each employee on the jobs. This information is recorded by the employees on a time ticket. A time ticket shows the date on which the work was completed, the employee’s name, name of the department, the time of starting and finishing the work.
If the work is performed directly on a job, the employee would record the job number, indicating the labour as direct labour. The cost accounting department collects all the labour time tickets, records the pay rate of the employee on the ticket and calculate the labour cost of the operation.
When overtime work is done on a job to speed up production with the view to expedite the delivery, the overtime wages is to be debited to that job on which overtime work is performed where overtime work is performed as a routine work it forms part of factory overhead.
3. Direct Expenses:
The direct expenses under job order industries usually include cost of designs, moulds, hiring of special tools and equipments and maintenance cost of such tools.
4. Factory Overheads:
In most cases pre-determined overhead rates are used for the absorption of factory overheads. The pre-determined overhead rate is calculated at the beginning of the year by estimating the total overhead cost for the year and then dividing either by direct labour cost or direct labour hours. Throughout the year the overhead rate is applied to calculate the overheads and thus charged to job.
Under job costing, a job cost sheet is prepared for every job. It presents the cost data relating to a job. It states the various elements of cost, such as, direct material, direct labour, direct expenses and overheads under the various division of cost like prime cost, works cost, cost of production and total cost. It also states the sale price and profit or loss made on a job.
Job costing has the following 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) It provides detailed analysis of the elements of cost which is quite useful for the preparation of cost estimates and quotations.
(5) Under this method of costing, spoilage and defective jobs can be easily identified and responsibility for the same can be fixed on specific departments or individuals.
(6) The data of the job costing are quite helpful in the preparation of future budgets.
(7) The cost data relating to completed jobs is helpful to the management to know the trend of material, labour and overhead costs and to control the future job costs.
9. Disadvantages of Job Costing:
Job costing is not free from defects. It suffers from certain limitations.
(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.