Job Costing - Easy to understand

JOB COSTING

Introduction

Methods in which cost is calculated will depend on the type of industry and nature of goods manufactured. Method applied for calculation of cost of Tyre manufacturing will be different from Interior decoration business. Behaviour of cost varies according to the nature of business

What does job mean ?

Job refers to a specific order received. Each job is unique since production is carried out on the specific instruction of the customer.

Examples

For example, if an order is received for Interior decoration from a customer having 3000 sq. ft. room may not be the same when compared with another customer order having the same size of room. It all depends on type of material, method, and style in which the decoration should be done.

TV servicing has similar nature. Value of Work executed on one TV may not be the same that of the other.

Definition

‘Job order costing’ or ‘specific order costing’ means ascertaining costs of each job, work order or project separately. This method is also called as ‘production order costing’ or ‘terminal order costing’. It is adopted by many undertakings, which manufacture products against specific orders.

Adoptation of Job Costing.

Both manufacturing and non-manufacturing concerns follow this method.

Manufacturing concerns adopting this method are printing press, machine tool manufacturing, Interior decoration, etc.

Non-manufacturing units such as general engineering works, auto-repair shop, etc..

Highlights

The main objective of this costing is to determine profit or loss earned or suffered in executing each job (i.e. orders received).
Before accepting a job, costs are estimated.
The actual costs are compared with estimated costs.
Thus correct estimation can be made and profitable and un-profitable jobs can be identified.

Features

1. Production is carried out against customer’s order and specification.

2. The cost of each job is ascertained. Each job has its own characteristics and so different degrees of attention and skill are required for different jobs.

3. The nature of the job decides the process of each job in passing from department to department, because production is not made for stock, but against orders.

4. Each job is different from others.

5. A separate cost sheet is made for each job. Each job is given a certain number, by which it is identified. In cost sheet full details of costs are entered, the date of commencement, completion of the job and actual and estimated costs written side by side.

Advantages

It helps to know or distinguish the profitable from unprofitable jobs/orders.
It helps in preparation of estimates while sending quotations for similar jobs.
It collects cost data and detailed analysis of cost by elements and functions.
It helps in future production planning.
Cost data under job costing help in preparing budgets for future.
Spoilage and defective work can be discovered by every specific job and management can take effective steps in reducing these to minimum. In certain cases, this responsibility of bad work is fixed on persons or departments.
The method facilitates quotations in cost + contracts.
It helps the management in fixing the selling prices of special orders.
It is useful for statistical purposes in the determination of the trends of the different types of the jobs and their relative efficiencies

Methods of Ascertainment of Job Cost.

Each job has Direct and Indirect costs.

Direct costs includes the volume and value of Material and labour consumed. Difficulties are not found in estimating these direct costs since they are measurable depending on job requirement.

For example. If an order is received for 1000 wedding cards, Material required and Labour cost on the job can be easily estimated.

Indirect cost includes overheads – Production, Office, Administrative, Selling and Distribution overheads. Since these indirect costs are not directly attributable to units of production, estimation should be done. Methods of estimation of indirect cost is given below

Methods of Estimation of Indirect costs.

Estimation is done using historical cost (I mean information from past records)

Method 1. Based on Machine hours or Labour hours.

This method is suitable when data relating to machine hours or labour hours worked for different department is available. Cost records serve as the basis for calculate past overheads and machine hours or labour hours worked.

Machine hour rate or Labour hour rate is worked out based on Indirect cost incurred and Machine or labour hour worked.

Overhead rate =	Overheads (Indirect costs)
	Machine hours or Labour hours

Machine hour or Labour hour rate (Overhead rate) is used to compute cost of job.

Proforma showing computation of Job Cost

Direct Materials required for the job Direct Labour required for the job Other Chargeable expenses for the job	Qty x Rate Labour Hrs x Rate	XXXX XX XX
Prime Cost of the job Overheads (Indirect Cost)	Labour hrs x Overead Rate	XXXX XX
Total cost of job Add: Desired Profit	(As a % of Cost or Sales)	XXXX XX
Price to be quoted for the job		XXXX

Method 2. Based on Estimation of Overheads using historical cost.

When data relating to Machine hours or Labour hours are not available Method 1 cannot be adopted. Estimation of Overheads (Indirect costs) can be done as a percentage of related costs.

a.Production overheads or Works overheads - As a percentage of Direct Wages

Production overhead rate =	Production Overheads	X 100
	Direct Wages

b.Office & Administration overheads - As a percentage of Works Cost.

Office & Admin. overhead rate =	Office & Admin. Overheads	X 100
	Works Cost

c.Selling & Distribution overheads - As a percentage of Cost of goods sold ^*

Selling & distribution overhead rate =	Selling Overheads	X 100
	Cost of goods sold

^*Alternatively Selling and Distribution overheads can also be absorbed as a percentage of Works Cost. Where:

Selling overhead rate =	Selling Overheads	X 100
	Works Cost

d.Profit as a percentage of Cost of Sales (Total Cost)

Profit rate =	Production Overheads	X 100
	Cost of Sales

Proforma showing computation of Job Cost

Direct Materials required for the job Direct Labour required for the job Other Chargeable expenses for the job		XXXX XX XX
Prime Cost Add: Works Overheads	As a % of Direct labour	XXXX XX
Works cost Add: Office and Administration Expenses	As a % of Works Cost	XXXX XX
Cost of Production Add: Selling and Distribution Expenses	As a % of Cost of production or Works cost	XXXX XX
Cost of Sales (Total cost of the job) Add: Desired Profit	As a % of Cost of Sales	XXX XX
Price to be quoted for the job		XXXX