Job Order Costing System Definition Types And Examples

Job Order Costing System Definition

For example, professional services like doctors, lawyers, and chartered accountants are client-specific. Therefore, the job order costing method calculates the cost of these services.

Types of Costs Involved in Job Order Costing

A job order costing typically involves three types of costs:

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Job Order Costing (wallstreetmojo.com)

Direct Material – Direct materials are the major contributors to job order costing. These costs are entirely dependent on the quality and quantity of finished goods. Raw materialsRaw MaterialsRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished goods.read more directly consumed for completion of specific jobs or manufacturing of finished goods come under direct material.Direct Labor – In job order costing, the cost of laborCost Of LaborCost of labor is the remuneration paid in the form of wages and salaries to the employees. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes.read more used in a specific job is identified and added to the cost of production. Direct labor cost is calculated based on workforce and hours worked. If the particular job provides service, direct labor costs comprise almost 80%–90% of the total cost.Overhead – Overhead costsOverhead CostsOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more incurred in manufacturing a product or providing service other than the direct labor and direct material like rent, electricity, depreciation, legal fees, and any other. Some overhead costs are variable, and some are fixed.

Features of Job Order Costing System

In job order, each job has its characteristics.In this type of cost, each job is done against customer orders only, not as a regular production.In this costing method, each job is treated as a cost centerCost CenterCost center refers to the company’s departments that don’t contribute directly to the corporate revenue; however, the firm has to incur expenses for keeping such units operative. It comprises research and development, accounting and human resource departments.read more.

Example of Job Order Costing

Let’s take the example of a job order costing system.

Notebook Inc is a printing & stationery company that has received an order of 5000 copies of invoices from one of its customers. According to the specification provided by the customer as of August 1, 2019, notebook Inc has to deliver on or before August 20, 2019. As per the company, they can finish the work within ten days. Therefore, they started on August 5, 2019, and assigned this work as a job no. 10/2019. The belowIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more cost has been incurredCost Has Been IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more by the company while completing this job:

Direct Materials: In producing one copy of the invoice, two units of raw material are required. Therefore, for the production of 5000 documents, 10000 units of natural material will be consumed, which the company has procured at different dates as per requirement. Initially, the cost of raw materials was $10 per unit. However, from August 13, 2019, it has increased by $1 because of a shortage of raw materials in the market. As a result, the total cost of raw material consumed is $ 10,500.

Direct Labor: In producing one copy of the invoice, one workforce hour is required, and the cost of one workforce hour is $5. To complete this job, 5000 workforce hours have been consumed, which the company has taken on different days according to the availability of raw materials. The total cost of direct laborCost Of Direct LaborDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more is $ 25,000.

Manufacturing Overhead: The cost incurred by the company is $20,000, which includes depreciation of plant and machinery, factory and office rent, and other overheads consumed in the production of these 5000 copies of invoices.

Advantages of Job Order Costing

It helps management analyze the material, labor & overhead costOverhead CostOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more incurred in production or completion of the job.It helps in the identification of the efficiency of machines and the workforce.The job order costing method helps in cost controlCost ControlCost control is a tool used by an organization in regulating and controlling the functioning of a manufacturing concern by limiting the costs within a planned level. It begins with preparing a budget, evaluating the actual performance, and implementing the necessary actions required to rectify any discrepancies.read more and better utilization of resources.With the help of the job order costing method, management can ascertain which job is profitable and which is not.It helps compare a similar job that will be done in the future and become the basis of future employment.It also helps identify the scrap and defects that arise in the production or completion of the job and take steps to minimize this.

Disadvantages of Job Order Costing

It is time-consuming and costly as it involves daily and specific job-wise recording of material, labor, and overhead.A cost comparison is problematic because, in this method, the cost sheet is prepared for each job separately according to the specification.If two or more jobs are going simultaneously, there is a risk of posting the cost of one position in another job.In job order costing, overhead costs are based on estimates. It is also challenging to know if the overhead cost is directly linked with the specific job because most overhead facilities are used for more than one job. Therefore, there is a chance of excess/shortage of 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.It mainly depends on the expertise of the production manager. Therefore, someone allocating costs to a specific job must know of it. A small mistake can change the product’s price.

Conclusion

Job order costing is valid only for organizations based on customer requirements and where one job is different from another so that they can calculate the cost. It is costly because it requires skills and knowledge to identify, analyze, and control costs. Still, it is vital to identify all theAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more incurred in completing an assignment. Otherwise, the company can lose it because they cannot assign one job cost to another job.