What is Job Costing? Definition, Features, Advantages, Disadvantages

What is Job Costing?

The industries which manufacture articles or products or render services against specific orders, use the Job Costing method for ascertaining the cost per job or service. e.g. specific requirement of a customer, fabrication, repairs etc. Each job has a separate identity. Under this method, individual jobs are identifiable and each job become a separate cost centre.

Job Costing Definition

ICMA London define job costing as, “It is that category of basic costing method which is applicable where is the work consists of separate contract, job or batches each of which is authorised by specific order or contract.“

Examples of Job order industries are printing press, construction of buildings, bridges, ship-building, furniture making, machine tool manufacturing, repair shops, painting works etc.

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Features of Job Costing

Each job is identifiable from the stage of material till its completion and delivery. The following are the features of industries and firms where job costing is usually applied. The costing method has to be adapted to suit the specific features in an industry or a firm.

• Production is made or services are rendered against specific orders.
  
• A Job is clearly identifiable throughout the production process.
  
• Each job has its own characteristics and requires special attention.
  
• A distinguishing number is allotted to each Job order undertaken.
  
• Each of the job becomes a separate cost centre.
  
• Costs are charged directly to individual job orders.
  
• The manufacturing cost of a Job order can be found out only after the Job order is completed irrespective of the time taken for the same.
  
• Production is not made in anticipation of demand and for storing purpose.

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Job Costing Advantages

These are some important advantage of job costing which is given below:

1. Cost of each job as per order is ascertained separately. This helps in finding out the profit or loss on each individual job.
   
   
2. It enables management to detect those jobs which are more profitable and those which are not profitable.
   
   
3. It provides a basis for determining the cost of similar jobs undertaken in future. It thus helps in future production planning.
   
   
4. It enables the management to know the trends in costs.
   
   
5. Profitability ratio of different jobs can be found out.
   
   
6. It helps the managements to fix selling price of specific job on the basis of cost.
   
   
7. It enables the management to provide quotations for similar type of jobs.
   
   
8. Spoilage and defective work can be easily identified with specified jobs or products.
   
   
9. It enables the management to take corrective steps for improving the efficiency in future.
   
   
10. It is essential for cost plus contracts.

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Disadvantages of Job Costing

These are some important limitations of job costing which is given below:

1. Calculations are more and hence there is possibility of errors which may cause a serious loss.
   
   
2. A system of budgetary control may not be used effectively.
   
   
3. The system does not indicate any standard of performance efficiency.
   
   
4. Comparison of cost of a job over any period of time cannot be made if certain economic changes takes place in between.
   
   
5. It is expensive to operate as there is increase in clerial works.
   
   
6. Job costing is a historical costing which

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Process of Job Costing

These are Process of job costing which is given below:

1. Receiving an Enquiry
2. Estimation of the price of the job
3. Receiving of Order
4. Job Number
5. Production Order
6. Recording of Costs

Receiving an Enquiry

Before placing an order with the manufacturer, usually the customer will enquire about the price, quality to be maintained, the duration within which the order is to be executed and other specifications of the job.

Estimation of the price of the job

The cost accountant estimates the cost of Job after considering the various elements of cost and keeping in mind the specification of customers. This is based on the cost of execution of similar Job in the previous year and considering the possible changes in the various element of cost. The estimated cost of the job is then communicated to the prospective customer.

Receiving of Order

If the prospective customer accepts the quotation, the intention of acceptance is forwarded to the respective departments so that preparation work may begin even before the issue of the formal Production Order. The production control department receives the order.

Job Number

When an order has been accepted, an individual work order number must be assigned to each such Job so that separate orders are capable of being identified at all stages of production. Assignment of Job numbers also facilitates reference for costing purposes in the ledger and convenient for use in various forms and documents.

Production Order

Once the job is accepted the Planning department prepares Production Order. The Production Order is nothing but a form of instructions issued to the foreman to proceed with the manufacture of the articles. Several copies of Production Order are prepared and passed on to the following:

• All departmental foremen connected with the job.
• Store-keeper for issuance of materials.
• Tool room – an advance notification of tools required.

Recording of Costs

There are various costs required for the job. The raw material, the labour costs, overhead charges etc. are directly chargeable to that particular production order number. General Job Cost Sheet is prepared for each job.

• Materials: Materials Requisition, Bills of Materials or Material Issue Analysis Sheet.
• Wages: Operation Schedule, Job Card or Wages Analysis Sheet.
• Direct Expenses: Direct Expenses Vouchers.
• Overheads: Standing Order Number or Cost Account Number.
• Completion of Job: On completion of a Job report is sent to Costing Department. The expenditure under each element of cost is totalled and the total job cost ascertained.

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