Job Costing: Definition, Features, Procedure and Example

Yarab A |Updated on: December 29, 2021

Definition of job costing
Features of job costing
Types of business that use job costing system
Job costing procedure and cost allocation for different activities
Job costing example

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.