Job Costing: Definition, Features, Procedure and Example

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Yarab A | Jul-20-2020

Definition of job costing

Job costing is a costing method used to determine the cost of specific jobs, which are performed according to the customer’s specifications. It is a basic costing method which is applicable where work consists of separate projects or contract jobs.

Features of job costing

  • Using job costing, the cost of each job is ascertained separately. This, in turn, helps in finding out the profit or loss on each job.
  • It enables management to detect those jobs which are more profitable and unprofitable ones.
  • Job costing provides the base for determining the cost of similar jobs to be undertaken in future as a part of future planning.
  • Helps in managing and controlling costs, by comparing the actual costs with the estimated cost. In short, the calculation of variances.

Types of business that use job costing system

Generally, the application of job costing method is followed in industries such as printing press, automobile garage, repair workshops, shipbuilding, foundry, and other similar manufacturing units, which manufactures according to customer’s specific requirements. A business that applies costing method usually has the following characteristics:

  • Production is carried out based on the customer's specification
  • Products are manufactured in distinguishable lots
  • Products produced are of not uniform nature
  • It is practical to maintain a separate record of each lot from the time production is begun until it is completed.

Advantages of job costing

  • Profitability for each job can be individually determined
  • Provides a detailed cost analysis of materials, labour and overheads for each job as and when required
  • The efficiency of the plant can be controlled by confining attention to costs relating to individual jobs.
  • Helps in preparation of estimates
  • Comparison of actual cost with estimated cost and calculation of variances.
  • Helps in identifying unprofitable jobs
  • Helps in providing a precise quotation for a product

Documents used in job costing

  • Manufacturing or production order: This document authorizes the manufacturing or production department to produce a specified quantity of a product which constitutes the job.

  • Cost sheet: In job costing, a cost sheet is often used to record costs incurred in stages of production. The cost sheet and job order work may also be combined, when costs are recorded on the production order document.

  • Other documents: The other documents such as material requisition slips, tools and spares order, time tickets, inspection order etc., are used by the dispatching department as a control mechanism to carry out the dispatching functions.

Job costing procedure and cost allocation for different activities

Activity

Procedure

Allocation

Materials

Stage 1: Procuring and storing in the warehouse

Stage 2: Picking up from the store and issued to a specific job.

Spoilage or scrap - Charged to overhead cost pool for allocation at a later stage

Abnormal loss (if any) - Charged directly to the cost of goods sold.

On completion of the job order, the cost of the entire job is shifted from work-in-progress inventory to finished goods inventory.

On the sale of goods, the cost of the asset is removed from the inventory account and shifted to cost of goods sold account when you record the sale transaction

Labour

Employee’s time is charged to a specific job which is then assigned to the jobs based on the labour cost of the employees.

Direct labour - Charged directly to individual jobs when it is directly traceable.

Indirect labour - Charged to an overhead cost pool and then assigned to various open jobs.

Overhead

Here, the overhead cost is accumulated in the cost pools and then costs are allocated to jobs.

 

Non-direct costs: - Accumulated into one or more overhead cost pools from where they are assigned to open jobs based upon the measure of cost usage.

The overhead allocation process for standard costs uses historical cost information to arrive at the standard rate per unit of activity and then allocate these amounts to jobs based on their units of activity.

 

The difference between allocated overhead costs derived from the standard costing method is subtracted from the actual cost incurred for the job. The variance from the above is dealt as given in the notes below.

 

Note: The variance from the overhead cost and actual cost can be dealt with in any of the following manners.

  • The variances are directly charged to cost of goods sold. (or)

  • It can be allocated to the individual activities such as finished goods, work-in-progress and cost of goods sold based on the ending balances in these accounts. (or)
  • It can be allocated to jobs which were open during the reporting period.

Job costing example

The following information was recorded in the books of ABC manufactures for the period ended 31-12-2019.

Cost

Completed Job

W.I.P

Raw materials supplied from stores

78,000

22,000

Wages

1,10,000

50,000

Chargeable expenses

8,000

2,000

Materials returned to store

1,000

-

  • Factory overheads are 80% of wages, office overheads are 25% of factory cost and selling and distribution overheads are 10% of the cost of production.
  • The completed job materialized for Rs. 4,50,000 /-

 

Consolidated Job Account as on 31.12.2018

Dr.                                                                                                                                            Cr.

 

Amount

 

Amount

To Raw materials         

          Consumed        78,000

Less: Returned to

                  Store.          1,000

 

 

 

 

  77,000

By sales (amount materialized on jobs completed)

4,50,000

To wages

1,10,000

 

 

To chargeable expenses

     8,000

 

 

To factory overheads (80% of wages i.e. 1,10,000 * 80 / 100)

   88,000

 

 

Factory Cost

2,83,000

 

 

To Administrative overheads (25% of factory cost i.e. 2,83,000 * 25 / 100)

   70,750

 

 

Cost of Production

3,53,750

 

 

To selling and distribution overheads (10% of cost of production i.e. 3,53,750 *10 / 100)

  35,375

 

 

Total cost/cost of sales

3,89,125

 

 

To transfer to Profit and loss account

  60,875

 

 

Total

4,50,000

Total

4,50,000

 

How do business track and prepare job cost sheet?

Given the complexities associated with managing costs for each job, most businesses have automated the preparation of job sheet using accounting software. The accounting software or TallyPrime software helps you manage and track multiple jobs easily. Know more about TallyPrime's features. Tracking material movement across the jobs, consumption and asserting profitability is easier using accounting software. With reports and summaries available instantly, informed decisions can be made on-time.

job costing report format

Job costing report generated using Tally.ERP 9

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