Job costing involves the calculation of costs involved in a construction “job” or the manufacturing of goods done in discrete batches. These costs are recorded in ledger accounts throughout the life of the job or batch and are then summarized in the final trial balance before preparing the job cost or batch manufacturing statement.
Job costing results in discrete “buckets” of information about each job that the cost accountant can review to see if it really should be assigned to that job. If there are many jobs currently in progress, there is a strong chance that costs will be incorrectly assigned, but the very nature of the job costing system makes it highly auditable.
Purpose of Job costing
On a simple level, job costing which applies to builders in the modern world, can be defined as a management control process of tracking and categorizing every cost incurred in business. The costs are usually associated with a particular job or construction project and then further categorized by the costs’ relation to labor, burden, materials, subcontracts, equipment, etc. In most job costing systems, the costs are also associated with tasks on the job or types of work completed.
The goal is to get a detailed information about how and why costs are incurred. Knowing this information can help a contractor with the following:
Tracking the progress of jobs as they are worked, as opposed to after they are finished.
Improving the estimating and scheduling process by discovering where estimated costs frequently vary from actual costs.
Controlling purchasing and use of materials and labor by uncovering trends in spending.
Determining which areas of the business are most or least profitable
Thus we can say that job costing can benefit contractors of every trade and size. The ability to point the specific areas where money is made will lead to a successful business.
Advantages of Job Costing
Job costing offers a detailed analysis in the form of the costs of materials, labor and overheads and therefore it helps the company in allocating overheads at a predetermined rate.
Bit helps the company in determining the profitability of a job, which in turn will help the company in deciding whether to take a particular job or not.
Job costing facilitates the estimation of the cost of a similar job and therefore it helps the company in avoiding duplication of work because if company has to quote price for similar job than it can quote it on the basis of previous job costing method.
With job costing, we can calculate each job order cost. With this, we need not to find all the cost of product. For this, we need to prepare job order card and collect all direct material cost, labour cost and overhead cost relating to this. Suppose, we get an order of specific equipment of a machine. The company can make machinery in whole and also produce a specific equipment in machine treated as specific job order and then after making, its cost and price is calculated.
In job costing, we can composite cost of all jobs by adding each job’s direct material cost, labour cost and overhead cost.
Job costing can also be used if you are doing repair work by yourself.
Disadvantages of Job Costing
Job order costing needs a great deal of clerical work in recording of transactions related to it and therefore many companies tend to avoid this method of costing.
Since overheads are allocated on estimation this method may not yield 100 percent accurate result and may lead to errors while quoting the price for a product or service.
Uses of Facts job costing
Job control allows jobs to be set up, modified, and removed from the accounting system.
Job charging accumulates expenses, revenues and receipts associated with a particular job.
Job costing applies overhead rates to the direct costs associated with a job in order to calculate the full costs for that job.
Automatic job billing bills the full costs for a job to the appropriate organization by automatically generating an internal payment voucher (for internal jobs) and receivable transactions (for external jobs).
Job clearing and purging closes a job and finally purges it from the system.
Job costing Example
Ankit engineering co. engaged in job work has completed all the jobs in hand on 30th Dec. 2009 except job no. 447. The cost sheet on 30th Dec. 2009 showed direct material and direct labour cost of Rs. 40,000 and Rs. 30,000 respectively as having being incurred on job no. 447. The cost incurred by the business on 30st Dec. 2009, the last date of the accounting year were as follows :
Direct material Rs. 2000 Direct labour Rs. 8000 Indirect labour Rs. 2000 Misc. Factory overhead Rs. 3000
The company follows the practice to make job absorbed factory overheads on the basis of 120% of direct labour cost. Prepare a composite job cost sheet for job 447 showing analytical computation. If any, of the value of WIP on job no. 447.
Options available in job costing in Facts software