Job Costing is the method of determining costs, including materials, labor, and overheads for a project or any specific orders from a customer. Such an approach helps to trace the costs of particular customer orders. Also, it helps a company to see if it can reduce the costs in later projects. Moreover, it also helps determine if a company can bill any excess charges to the client. Such a costing method determines cost at the ground or unit level. Another name for this costing method is project-based accounting.
Job Costing – Who Uses It?
This method is apt to get the cost of developing a custom machine or custom software or customizing a car for a client. Other industries or firms that use it are shipping, film studios, auditing, and more. A business that uses such a costing method usually has the following characteristics:
- It produces products as per the client’s specifications.
- It makes items in distinguishable lots.
- The items that a company manufactures aren’t uniform.
- The firm can maintain separate files or information on each lot.
- The services provided to each client are unique.
Benefits of Job Costing
The following are the benefits of project-based accounting:
- Such a system provides thorough information on the materials, labor, and overhead cost for each project as when the company needs it.
- Job costing provides loads of information about each project. It helps the cost accountant to see if a cost relates to a particular project or not. Typically, a company has many jobs running, so an incorrect cost may get assigned to a project. Since the job costing system has so much information, it allows the accountant to audit and identify such errors quickly.
- If the project is for the long-term, then this costing system allows the accountant to regularly compare the cost information with the budget. If there is a variation, the accountant can inform the management. The management then takes corrective action to control the cost or talks to the client to revise the cost of the project.
- Since the company determines the cost of each project separately, it allows us to find out the profit or loss for that job easily.
- It allows the management to quickly identify the jobs that are more or less profitable and accordingly divert the resources.
- Such a costing system also develops a database for a company to determine the cost of such future jobs.
- It assists a firm to come up with the estimates or budget.
- Such a system also assists the company to come up with an accurate quotation for a project or job.
- Such data and costing systems are also used for cost-plus contracting.
The following are the drawbacks of project-based accounting:
- Job costing could prove a very technical job. Since it involves determining the actual costs of a specific project, it could take considerable effort from the accountant to accurately trace the cost for a project. Based on the information from the accountant, the billing office prepares the invoice for the client.
- The method to allocate the cost to a cost pool may not be accurate.
- Implementing this costing approach requires a lot of skills and manpower. So, it could prove costly for the company to implement such a costing system properly.
- Such a costing system does not consider the impact of inflation. It results in the wrong calculation of profits.
What does it include?
Job costing involves determining the following activities:
It includes determining the components cost and then tracing these costs to the specific product or project. In case of spoilage or scrap, an accountant charges the usual amount to the overhead cost pool for later allocation. For abnormal losses, the cost is charged directly to the cost of items that a company sells.
Once a company finishes work on the project, it transfers the complete job from work-in-process to the finished goods. After the sale or delivery of the project, the cost is taken out of inventory and moved to the cost of goods sold. The company, at the same time, also makes an entry for sale.
It includes determining the cost of the workforce or the employees who have contributed to completing that project or work. The amount of direct labor is charged to the specific project, while the indirect labor is attributed to an overhead cost pool and later is assigned to the jobs-in-hand.
It determines the total overhead costs and then identifies the cost for the project or specific job. For the non-direct costs, the accountant accumulates the costs in the overhead cost pools. Later from the pool, the costs are moved to open jobs based on pre-defined measures. Usually, allocating to cost pools could be a time-consuming process. But, there is an alternative to this as well, and it is by using standard cost.
An accountant first arrives at the standard rate per unit of activity for the standard costs using historical cost information. After this, the accountant allots these costs to running projects based on the number of units each job consumes.
Job Costing Process
Following is the usual process of a project that is based on job costing:
Before a client places an order, he or she usually inquires about the company about its offering. The client asks for details on quality, delivery time, and other information.
After the company gets an inquiry, the accountant tries to estimate the cost of the project. The accountant keeps in mind the specifications of the client and various cost elements. The accountant could develop the estimate based on similar projects they did in the past. Once the accountant prepares the estimate, it is vetted by the management, and then it is sent to the client.
If the client is okay with the estimate, they place the order. The client also confirms their requirement.
Producing the Order
The production department then prepares the order as per the specification of the client. The cost accountant prepares the job sheet based on the information from the floor employees.
Execution and Inspection
After the production, the manager inspects the final product to ensure whether it meets the clients’ requirements’. They also ascertain the total cost to ensure it is in line with the estimates.
Delivery of Product
After the inspection, the company properly packs the item and delivers the same to the client. The client then makes the payment.
The following type of documents help an accountant to come up with an accurate job costing system:
Manufacturing or production order – this document gives information on the volume of a product that it needs to manufacture.
Cost sheet – it is the most crucial document. It helps to record all costs at each level of production.
Other documents that help an accountant with this costing system are time tickets, tools, spare orders, inspection order, and more.
Job costing is very important for firms that do not deal with identical products. In such a case, this system allows us to accurately keep track of the expenses for each product or project. With the advent of technology, companies now use computerized job costing systems to assist with costing. This system is also used in cost-plus contracting.