Job Costing: Meaning, Applications, and Features
Nowadays, customers demand everything customized, from mobile covers to expensive cars. Each product or service is designed uniquely and hence differs in terms of material, quality, quantity, or all three. Calculating the cost for each differentiated product is tricky, especially when companies don’t know which costing method is appropriate for such conditions.
Job Costing is a cost accounting method designed to help companies track the costs of producing customized or individual jobs or projects. This approach suits job order industries where production is done according to the customer’s requirements.
Production does not take place continuously in job order industries. It only begins once the customer places a specified and customized order. Therefore, each job is different from the others. This costing method calculates the cost for each job using a Job Cost Sheet.
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Table Of Content
- What is Job Costing?
- Applications of Job Costing
- Features of Job Costing
- How to Calculate Job Costing?
- Job Costing Example
What is Job Costing?
Job Costing, also known as project-based costing, is the method of tracking costs related to a specific product, project, or job. It is used in construction companies, ship-building, engineering concerns, furniture making, repair shops, automobile garages, machine manufacturing industries, and factories where jobs or orders can be kept separately.
This cost accounting concept allows business owners to track the cost of an individual job in detail. It helps them analyze individual costs and find cost-cutting methods for similar projects in the future. This method breaks each project cost into three major heads known as cost elements: material, labor, and overheads.
As a job order costing system does not involve continuous production, it requires constant planning and strict control to avoid wasting resources such as manpower, material, machinery, etc. A job may be a contract, product, service, unit, batch, sales order, project, or specific program. Also, any other cost objective regarding materials and other services used is unique.
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Applications of Job Costing
Construction Industry: The construction industry extensively uses this method. Each construction project is unique and is considered a separate job. Job costing tracks the costs of materials, labour, and other expenses for each project separately.
Manufacturing Industry: Job costing tracks the costs of producing individual products or batches. For example, a furniture manufacturer may use this method to track the costs of producing a specific type of chair or table.
Printing Industry: This method tracks the costs of printing individual jobs such as books, magazines, and brochures. Each job is considered a separate project and is used to track the costs of materials, labor, and other expenses incurred for each job.
Consulting Industry: The consulting industry tracks the costs of consulting services to individual clients. Each consulting project is considered a separate job. It tracks the labour, travel, and other expenses incurred for each project.
Healthcare Industry: It tracks the costs of medical services to individual patients in the healthcare industry. Each patient has a separate job. This method tracks the costs of labor, medical supplies, and other expenses incurred for each patient.
Features of Job Costing
It is a cost accounting method that tracks the costs of producing a specific product or service. The following are its features of job costing:
Customized Production
It is used when the products or services are customized to the customer’s requirements. Each job is unique and requires different inputs, resources, and processes.
Specific Cost Identification
This costing method enables the identification and allocation of all the costs associated with each job, including direct costs such as labor, materials, and equipment and indirect costs such as overhead.
Cost Control
It helps in cost control by tracking the costs of each job and comparing them with the estimated costs. This enables managers to identify and rectify any cost overruns or inefficiencies in the production process.
Accurate Pricing
It provides an accurate basis for pricing the product or service, considering the actual costs of each job and adding an appropriate profit margin.
Budgeting
This method is also useful for budgeting, as it provides a detailed breakdown of the costs associated with each job. This enables managers to estimate future costs more accurately and prepare budgets accordingly.
Detailed Records
This method requires detailed records of all the costs associated with each job, which helps in financial reporting and analysis.
Analysis of Profitability
It provides a basis for analyzing the profitability of each job or customer, which helps in making strategic decisions about future business opportunities.
How to Calculate Job Costing?
Accountants must dig deeper to find the accurate cost of producing a particular product or service. Analyzing performance from financial documents such as balance sheets and income statements will not solve the purpose. Calculating Job Costing includes adding material, labour, and overheads (expenses). But to estimate the accurate job cost, it requires in-depth analyses of these components:
Material Costs
A crucial aspect of job order cost accounting involves the identification and specific recording of direct materials and their associated costs with individual jobs or work orders. It involves direct material costs (materials that comprise the finished product) and indirect material costs (materials required to complete the job but not part of the final product). A direct cost usually includes raw materials, while an indirect cost might include tools or machinery used to make a product or office supplies. You can calculate material costs by adding all direct and indirect costs together.
Labor Costs
All direct labor costs must be analyzed according to individual jobs or work orders. A timesheet, job card, time ticket, or piece-work card tracks time-based on the operation schedule. Wages paid to direct and indirect labour are classified in the costing department and categorized into production orders and standing orders. Accountants prepare labour summaries or wage analysis sheets for each accounting period, say a week. Amounts for idle time, overtime, shift-differential and fringe benefits can also be included in the wages analysis sheet.
Labor costs = (Number of working days x daily pay rate x number of workers)
Manufacturing Overheads
A standing order number and a cost center are used to accumulate overhead costs. As the case may be, each center’s overhead rates are determined or actual. The Overhead Absorption or Applied Overhead analysis sheet consolidates and posts the allocated overhead cost for each job order onto the relevant cost sheets. Generally, we add overheads only when the job is over but at the end of the accounting period.
Job Costing Example
Scenario: An Indian graphic design studio receives three separate orders: designing a logo, creating a brochure, and developing a website.
Job Costing Breakdown:
Job 1 - Logo Design:
| Cost Type | Amount (₹) |
|---|---|
| Material Costs | 2,000 |
| Labor Costs | 5,000 |
| Overheads | 1,000 |
| Total Job Cost | 8,000 |
Job 2 - Brochure Creation:
| Cost Type | Amount (₹) |
|---|---|
| Material Costs | 1,500 |
| Labor Costs | 7,500 |
| Overheads | 1,500 |
| Total Job Cost | 10,500 |
Job 3 - Website Development:
| Cost Type | Amount (₹) |
|---|---|
| Material Costs | 3,000 |
| Labor Costs | 15,000 |
| Overheads | 2,000 |
| Total Job Cost | 20,000 |
Total job cost= Total (Job 1 + Job 2 +Job 3)
Total Job Cost: ₹3,000 + ₹15,000 + ₹2,000 = ₹20,000
Each job's cost is individually calculated, demonstrating how job costing is applied when a business handles multiple distinct projects. This method allows the studio to accurately track and allocate costs for each specific job.
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Conclusion
Job costing is a valuable accounting method that can help businesses accurately price their products or services, control costs, and make informed business decisions. By identifying all the direct and indirect costs associated with each job, businesses can ensure that they are making a profit on each job and improve their overall profitability.
FAQs
What is Job Costing?
Job costing is an accounting method used to calculate the cost of specific jobs or projects. It is particularly useful for businesses that provide customized products or services, allowing them to track the expenses incurred for each job and ensuring that the pricing covers the costs and generates profit.
How Does Job Costing Work?
In job costing, all costs related to a specific job or project, including materials, labor, and overhead, are recorded and tracked separately. This detailed cost information helps in assessing the profitability of each job, aiding in pricing and future project planning.
Why is Job Costing Important?
Job costing is crucial for businesses offering custom products or services as it provides precise cost information for each job. This accuracy is essential for setting appropriate prices, estimating project costs, budgeting, and ensuring that each job contributes positively to the companyu2019s financial health.
What are the Components of Job Costing?
Job costing involves several components, including direct materials, direct labor, and manufacturing overhead. These costs are allocated to individual jobs or projects, providing a comprehensive view of the total cost and enabling effective cost management and pricing strategies.
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