Meaning of Job Costing
Job costing means the process of identifying the total cost incurred for completion of job according to the specifications and instructions of customers.
Business using Job Costing
Job costing is otherwise called as job order costing, job cost accounting, specific order costing, production order costing, job lot costing and lot costing. Job means a piece of work done by the worker in an organization. Jobs are undertaken according to the customer’s specifications.
The job costing is applied by the industries, which are undertaken according the requirements of customers. For example, printing, machine tool manufacturing, foundries, repair shops, garages and the like. These industries are known as jobbing type industries. They applying job costing method.
Definition of Job Costing
There are two methods followed for the ascertainment of cost under job costing method. They are
- Specific order costing and
- Operating costing.
ICMA defines Specific Order Costing as,
the category of basic costing methods applicable where the work consists of separate contracts, jobs or batches, each of which is authorized by a specific order or contract.
ICMA defines job costing as
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.
Features of Job Costing
The following are the features of job costing.
1. The products are produced only against customer’s order and not for maintaining stock for sale.
2. The costs are accumulated to each job separately.
3. A job is performed according to the customer’s specifications.
4. The job costing method falls under the category of specific order costing.
5. Each job is differentiated from others. The reason is that the specification of one customer is differing from other.
6. There is no continuous production.
7. Each job requires special attention and skill for completion.
8. There is no large-scale production of goods.
9. All the jobs are not passed through all the departments.
10. The unit of measurement of each job is unique and special.
11. There is no standardization of jobs.
12. The costs incurred for a job is separately recorded and maintained.
13. A job is charged with its own costs.
14. A separate cost sheet is prepared for each job.
15. Work in progress at any time depends on the number of jobs in hand at that time. A separate work in progress record is maintained for each job.
16. If a job involves number of operations for completion, job tickets are issued to know the progress of completion of job.
17. The main object of job costing is ascertainment of profit or loss of each job separately.
18. All direct costs are charged to work in progress accounts.
19. Manufacturing overheads are charged to departmental accounts.
20. A job may be specifically executed or an assembly type.
Subdivision of Job Costing
The job costing may be divided into two categories. They are factory job costing and contract costing. If a job is done in a small size, factory job costing method is followed. If a job is done in large size, contract-costing method is followed.
Factory Job Costing and Contract Costing
Factory job costing is followed if a job is undertaken to meet the customers’ special requirements. The work performed against every job or product manufactured against every order is taken as a unit of cost. The repair of a two-wheeler or developing a software or formation of furniture is regarded as a unit of cost ie job.
The time required to complete a job is shorter than the time required to complete a contract. But, the principles followed in job costing and contract costing is one and the same. Jobs are normally carried out in workshops while contracts are mostly executed in outside. In a factory, jobs are carried out in different departments. Each job is pass on various departments according to the nature of job to be completed but not through all the departments.
How are price estimated in Job Costing
A price for the job is to be conveyed to the customer while accepting a job. A price is estimated in job costing. The proposed materials are taken into account and their accurate market value is considered. The cost of labour may be approximated. Overhead absorption rate is followed for estimating factory overhead.
Similarly, administration, selling and distribution overheads are also estimated. Finally, a percentage of profit is added with total cost to estimate the price for job and tendered to the customer. The extent of percentage of profit is the policy matter of the management. This type of estimation is highly useful for submission of tenders and quotations.
The main purpose of job costing is to determine the profit or loss on each job. The estimated costs are recorded in the job cost sheet and the actual incurred costs are also collected for each job separately. Then, a comparison of actual cost is made with the estimated cost in respect of each job to know the level of profit.