What is Job Costing?

When the specific order costing is applicable, that time for some products, the experts try to find out job costing orContract costing is a contract between two parties known as a contractor and contractee. Specific job orders are undertaken for a relatively larger time frame, which may take years to complete, and the billing is done after finishing each milestone in the contract.read more contract costingContract CostingContract costing is a contract between two parties known as a contractor and contractee. Specific job orders are undertaken for a relatively larger time frame, which may take years to complete, and the billing is done after finishing each milestone in the contract.read more of the product to get the exact costing of the particular work.  It is prevalent in those industries where the production is done in batches.

The treatment of abnormal loss is also covered in this. This type of sheet helps the inventory manager keep track of the inventory, and he can inform the management when required to avoid any delay in the production.

Components

The following is the list of components.

  • Direct MaterialDirect MaterialDirect materials are raw materials that are directly used in the manufacturing process of a company’s goods and/or services and are an essential component of the finished goods manufactured.read moreDirect LaborDirect ExpensesPrime CostPrime CostPrime cost is the direct cost incurred in manufacturing a product and typically includes the direct production cost of goods, raw material and direct labour costs. It is an essential part of total manufacturing expenses. Costing and effective pricing of the goods are primarily determined on their basis.read moreCost of Production

Mechanism

Let’s look at this mechanism.

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  • Each year a Job cost sheet is prepared by an accounting expert.Details of material, labor, and overheads are given.Ascertainment of employee cost to each job separately;On completion of the job, the total overhead is charged on the jobs separately.

Example of Job Costing Accounting

Let’s take an example.

In a paper mill, the manufacturing cost of the entire production is $1,000, and 5% of the production is generally rejected or not used. The realizable valueThe Realizable ValueRealizable value is the net consideration from sales proceeds of any assets in the normal course of business after deduction of incidental expenses. It is common for the valuation of inventories under International Financial Reporting Standards and other accepted accounting policies.read more of the rejected products is $20. The typical loss as per company norms is estimated at 2%. How to find the job costing of different products?

Solution:

  • Loss due to rejection is 5% i.e. 5% of $1000 = $50.Normal Loss is 2% i.e. 2% of $1000 = $20.Therefore, the abnormal loss = $50 – $20 = $30.

Therefore, the normal and abnormal loss ratio comes out to be $20:$30 = 2:3.

If the rejection is inherent, the same cost is incorporated into the manufacturing cost. But if it is not identified with the jobs, the cost due to rejection is settled with factory overheadsFactory OverheadsFactory Overhead, also called Factory Burden, is the total of all the indirect expenses related to the production of goods such as Quality Assurance Salaries, Factory Rent, & Factory Building Insurance etc. read more.

The manufacturing cost will be written off in the profit and loss statement.

The distribution of the cost as per its job will be done as follows:

  • Work in progress = $50.Material Cost = $20.

Abnormal loss of $30 will be allocated in the ratio 2:3:

  • Therefore,Overhead = $302/(2+3) = $12Manufacturing cost written off to Profit and Loss = $303/(2+3) = $18

Advantages

Some of the advantages are as follows:

  • Provides Details: The complete details of the material, overheads, and labor can be ascertained because the cost is segregated job-wise.Profits Assessment: The profits from each job can also be ascertained separately.Production Planning: It helps the organization plan, and the storekeeper can easily manage his inventory.Budget: They can also help the organization in making their budgets. The estimation can be drawn easily by following the job costing method.Abnormal Loss: They can also help the organization in making their budgets. The estimation can be drawn easily by following the job costing method.

Disadvantages

Some of the disadvantages are as follows:

  • Expensive: This technique is beneficial. It requires an expert to do the same. For any big organization, when there are a lot of transactions, it is difficult for them to ascertain the cost. Therefore, they are required to hire an expert, and the expert charges professional fees.Cumbersome: In the case of a big organization, where there is lots of material, labor, and overheads used, the detailing of each item to prepare the cost sheet becomes cumbersome.Fails to Consider Inflation: It fails to consider the inflation effects. When the cost sheet is prepared, all the details are recorded, but the process of the job costing cost sheet is such that the effect of inflation cannot be incorporated due to its limitations. Therefore, it gives a wrong calculation of profits, especially if the cost sheet is prepared in the middle of the month.Market Condition: The market condition for preparing a job cost sheet is critical. Sometimes uninvited factors like labor strikes, nonavailability of products, etc., make the calculation inaccurate.

Important Points

  • Whenever the organization is ascertaining the normal loss during the finalization of the cost sheet, the loss is evenly adjusted to the total output.Whenever there is an abnormal loss, the loss is adjusted under the profit and loss account statement.Whenever the mistake in the cost sheet is due to the incorrect entries in the inventory books, rectification is done by charging the cost to its inspection department, not the manufacturing department.

Conclusion

The job costing mechanism in accounting is technically a very efficient way of determining the cost of each job in a production unit. The management can easily understand which item is profit-generating and which is loss-making. The organization can avoid such future items and think of adding another substitute for the same. All in all, the cost allocationCost AllocationCost Allocation is the procedure of recognizing & assigning costs to different cost objects like a product, department, program, customer, etc., as per the cost driver serving as the base for this process. read more is done through this process very smoothly. All the expenses are evenly distributed.

However, it is a known fact that whenever any organization thinks of having an efficient mechanism, they have to bear the cost for the same. Only big organizations can afford this. The experts are hired to control the costing mechanism, which is costly.

Each job or work for the production is considered a separate item. The profits can be easily identified by adjusting the losses. Still, due to its cumbersome detailing, the cost sheet loses its importance, and most organizations fail to include the entire material, labor, and overhead details in their cost sheet. If this loophole can be fixed, then job costing will become very efficient for all organizations.

This article has been a guide to what job costing is and its meaning. Here we discuss the example of job costing accounting along with its components, advantages, and disadvantages. You can learn more about accounting from the following articles –

  • Standard CostingActivity-Based CostingAbsorption CostingIncurred CostSalary vs Wages