In this article we will discuss about:- 1. Meaning of Job Costing 2. Features of Job Costing 3. Procedures 4. Advantages.
Meaning of Job Costing:
CIMA defines Job Costing as “that form of specific order costing which applies, where work is undertaken to customers special requirements and each order is of comparatively short duration (Compared with those to which contract costing applies). The work is usually carried out within a factory or workshop and moved through processes and operations as a continuously identifiable unit. The term may also be applied to work such as property repairs and the method may be used in the costing of internal capital expenditure jobs”.
A job is a specific order for work usually carried out within a factory or workshop and moves through activities and operations as a continuously identifiable unit. Job costing is used in engineering jobs, construction companies, printing jobs, automobile servicing, ship building, furniture making, fabrication jobs etc.
A job is a cost unit which consists of a single order or contract. Job costing is a system in which the elements of cost incurred are specifically identifiable with the item being made to a customer’s specific requirements.
The costs of each job are recorded in Job Account. The unit of cost in job costing is the cost of the job itself. The cost of completed job will be the materials used for the job, the direct labour employed and the production overheads charged to it.
Features of Job Costing:
(a) It is a Specific Order Costing.
(b) The job is carried out or a product is produced to meet the specific requirements of the order. It may be related to single unit or a batch of similar units.
(c) It is concerned with the cost of an individual job or batch regardless of the time taken to produce it, but normally short duration jobs.
(d) Costs are collected to each job at the end of its completion.
(e) The costs of each job is ascertained by adding materials, labour and overheads.
(f) Only prime cost elements are traceable and the overheads are apportioned to each job on some appropriate basis and sometimes it is difficult to select a suitable method of absorption of overheads to individual jobs.
(g) Standardization of controls is comparatively difficult as each job differs and more detailed supervision and control is necessary.
(h) Work-in-progress may or may not exist at the end of the accounting period.
Procedures of Job Costing:
The Job Order Costing involves the following procedures:
(1) Each job is given a job number or work order number that identifies it and distinguishes it from every other job.
(2) Each job has a Job Cost Card prepared for it that bears the job number and which is used to collect all cost data relating to the job. Job Cost Cards must be carefully designed so that they effectively and logically collect all the cost data pertaining to the job. A proforma of Job Cost Card is shown in figure 11.1. This card is used for small jobs and for larger jobs, summary details will be entered in Job Cost Cards and supporting schedules relating to material labour and overheads will be enclosed.
(3) Materials requisitions are sent to stores. The material requisition note will be used to cost the materials issued to the job concerned, and this cost may then be recorded on a Job Card, which records all costs relating to a particular job. The cost may include items already in stock, at an appropriate valuation, and/or items specially purchased.
(4) A Job Time Sheet is given to the worker who is to perform the first operation of the job. The times of his starting and finishing the operation are recorded on the Tim e Sheet, which is then passed to the person who is to carry out the second operation, where a similar record of the times of starting and finishing is made. When the job is completed, the Job Time Sheet is sent to the Cost Office, where the time spent will be costed and recorded on the Job Card.
(5) The job tickets would be priced by reference to day and overtime rates, piece work and bonus rates. The materials issued would be priced using the stores record cards employing on pricing methods like LIFO, FIFO, Average price etc.
(6) During production stage all the direct costs like direct material, direct labour and direct expenses are charged to the job and a share of overheads of each cost centre that the job passes through is charged by means of overhead absorption rates.
(7) When the job is completed and sent to the finished goods store, all the direct costs and factory overheads apportioned to it should be specified on the Job Cost Card. The sum of the cost is called, factory, production or works cost and are charged to the Job Account in the Work- in-Progress Ledger.
(8) When the job is sold or delivered, its share of administration, selling and distribution overhead is charged to it and the cost of delivery is charged and recorded on Job Cost Card and the sum of all costs charged to the job is the total cost of the job.
(9) The difference between the total cost and selling price of the job represents profit or loss on the job completed.
Advantages of Job Costing:
The advantages of Job Costing are as follows:
(a) The profit or loss made on each job can be measured if cost is set against the price tendered for the job.
(b) It generates the cost data useful for the analysis and control by the management.
(c) It highlights whether or not a job is likely to be profitable or not.
(d) It readily fits into the double entry system, and lends itself to performance evaluation and review of costs.
(e) Job costing enables a comparison to be made with performance on other jobs so that inefficiencies are identified and rectified.
(f) Some jobs are negotiated on a ‘cost plus’ basis, if there is difficulty in estimating a price for a certain job and the customer agrees to pay the cost of the job plus an agreed percentage as a profit margin. In cost plus jobs it is essential to maintain reliable costing records.
(g) The cost incurred to date on the job are known before the job is completed, and any mistakes or excessive costs show up at an early stage.
The major disadvantage of Job costing is that it is too expensive, time consuming in maintenance of cost records for each job undertaken.