Job Costing, Features, Process, Types, Preparation, Advantages and Disadvantages

Job costing is a method of cost accounting that is used to determine the cost of a specific job or project. It is used primarily in manufacturing, construction, and service industries where the cost of each job or project needs to be accurately tracked and allocated.

In job costing, the costs of a particular job are accumulated and tracked separately from other jobs or projects. The costs are then allocated to the specific job or project based on a predetermined cost driver, such as labor hours or materials used. The cost driver is selected based on the nature of the job or project.

Job costing is important for businesses because it allows them to accurately determine the cost of each job or project, which can help them to price their products or services competitively. It also allows them to identify areas where costs can be reduced or eliminated, which can improve profitability.

Features of Job Costing

Job costing has several key features that distinguish it from other costing methods. These features include:

• Customization: Job costing is ideal for businesses that provide customized products or services, where each job or project is unique and requires individual attention.
• Direct costs: Job costing focuses on direct costs associated with a specific job, such as labor and materials, rather than indirect costs that are shared across multiple projects.
• Cost control: Job costing allows businesses to closely monitor and control costs on a per-job basis, which can help to improve profitability.
• Profitability analysis: Job costing provides a detailed breakdown of the costs associated with each job, which can be used to determine the profitability of the job and the overall business.
• Flexibility: Job costing can be used in a variety of industries, including construction, manufacturing, and service businesses.
• Accuracy: Job costing provides a high level of accuracy in determining the true costs associated with each job, which can help businesses to make informed decisions about pricing and resource allocation.

The Process of job costing typically involves the following steps:

• Identifying the job or project: Each job or project is identified and assigned a unique job or project number.
• Collecting costs: All direct and indirect costs associated with the job or project are collected and recorded. Direct costs include the cost of materials, labor, and any other costs that can be directly attributed to the job. Indirect costs include overhead costs such as rent, utilities, and administrative expenses.
• Allocating costs: Once the costs are collected, they are allocated to the specific job or project based on the predetermined cost driver.
• Analyzing the results: The costs and revenues associated with the job or project are analyzed to determine the profitability of the job.
• Creating a job cost sheet: A job cost sheet is created to summarize the costs and revenues associated with the job or project. The job cost sheet is used to monitor the progress of the job and to compare the actual costs to the estimated costs.

Job Costing objectives

The primary objective of job costing is to determine the cost of each job or project. However, there are several other objectives of job costing, including:

• Cost control: Job costing helps businesses to identify areas where costs can be reduced or eliminated, which can improve profitability.
• Pricing: Job costing helps businesses to accurately determine the cost of each job or project, which can help them to price their products or services competitively.
• Profitability analysis: Job costing helps businesses to analyze the costs and revenues associated with each job or project, which can help them to identify the most profitable jobs and projects.
• Resource allocation: Job costing helps businesses to allocate resources more efficiently by identifying the jobs and projects that require the most resources.
• Performance measurement: Job costing helps businesses to measure the performance of their employees and departments by tracking the costs associated with each job or project.

Job Costing Procedure

The job costing procedure typically involves the following steps:

• Job identification: Each job or project is identified and assigned a unique job number.
• Cost estimation: An estimate of the direct and indirect costs associated with the job is prepared.
• Material requisition: The materials required for the job are requisitioned from the stores.
• Labor allocation: The labor required for the job is allocated and tracked based on the hours worked.
• Overhead allocation: The overhead costs associated with the job, such as rent, utilities, and administrative expenses, are allocated based on a predetermined cost driver.
• Record keeping: All costs associated with the job are recorded in a job cost sheet, which includes the job number, date, materials used, labor hours worked, and overhead costs.
• Job analysis: The actual costs associated with the job are compared to the estimated costs to determine if the job is profitable.
• Invoice preparation: Once the job is completed, an invoice is prepared based on the actual costs incurred.
• Job closure: The job is closed out in the accounting system and the actual costs are transferred to the general ledger.

Types of Job Costing with formula

Specific Order Costing:

Total Cost of Job = Direct Material Cost + Direct Labor Cost + Direct Expenses + Indirect Expenses

Batch Costing:

Total Cost of Batch = Direct Material Cost + Direct Labor Cost + Direct Expenses + (Indirect Expenses ÷ Number of Units Produced)

Contract Costing:

Total Cost of Contract = Total Cost of Work Certified + Cost of Work in Progress

Multiple Costing:

Total Cost of Job = Prime Cost + Factory Overheads + Administrative Overheads

Service Costing:

Total Cost of Service = Direct Cost of Service + Overhead Cost of Service

Composite Costing:

Total Cost of Job = Material Cost + Labor Cost + Expenses + Overhead Cost

Accounting System under Job Costing

Under job costing, the accounting system typically involves the following:

• Job cost sheet: A job cost sheet is used to record all costs associated with a specific job. This includes direct costs such as materials, labor, and subcontractor costs, as well as indirect costs such as overhead expenses.
• General ledger: The general ledger is used to record all financial transactions for the business, including those related to job costing.
• Payroll system: The payroll system is used to track employee time and allocate labor costs to specific jobs.
• Accounts payable: The accounts payable system is used to track and pay bills related to the job, such as materials and subcontractor costs.
• Accounts receivable: The accounts receivable system is used to invoice customers for work completed on the job and to track payments received.
• Cost of goods sold: The cost of goods sold account is used to record the direct costs associated with the job, such as materials and labor.
• Overhead allocation: Overhead costs are allocated to specific jobs based on a predetermined cost driver, such as labor hours or machine hours.
• Profit and loss statement: The profit and loss statement is used to track the revenue and expenses associated with each job, and to determine the profitability of the business as a whole.

Preparation of Job Cost Sheet

The job cost sheet is a key document used in job costing to record all costs associated with a specific job or project. The following are the steps involved in preparing a job cost sheet:

• Identify the job: The first step is to identify the specific job or project for which the job cost sheet is being prepared.
• Record direct materials costs: The next step is to record all direct materials costs associated with the job. This may include the cost of materials used in the production of the product or service, as well as any shipping or handling costs.
• Record direct labor costs: The next step is to record all direct labor costs associated with the job. This may include the cost of wages, salaries, and benefits for employees working on the job.
• Record subcontractor costs: If any work is subcontracted out to another company, the cost of this work should be recorded on the job cost sheet.
• Record indirect costs: Indirect costs, such as overhead expenses, should also be recorded on the job cost sheet. These may include rent, utilities, and administrative expenses.
• Calculate total costs: Once all costs have been recorded on the job cost sheet, the total cost of the job can be calculated. This will include both direct and indirect costs.
• Calculate job profitability: To determine the profitability of the job, the total cost can be compared to the revenue generated by the job. This will provide insight into the overall profitability of the job and the business as a whole.

Advantages and Disadvantages of Job Costing