Job costing is one of the accounting practices used to find the cost of a product or service, such as process costing. While process costing is used in manufacturing identical products in large quantities, Job costing is used when the products are distinct and are manufactured in small quantities. It is designed to allocate the costs to a specific job or a service. Job costs are typically broken down into three parts, materials, labor, and overheads.
Primary Goals of job costing
Table of Contents
- By successfully finding the cost estimate for the job, we can obtain a better selling price in the future which helps to increase the profits.
- Job costing helps find the inefficiency and losses in the different levels of the manufacturing process.
- It also helps us to discover where improvements can be made to obtain the utmost efficiency.
Areas of Use
Manufacturers
The manufacturing sector’s profit depends upon the scale of units. Job costing helps to estimate and allocate the costs of material, labor, and overheads.
Construction companies
A job in the construction business comprises a large quantity and wide range of materials; hence they rely on job costing to complete the job within the budget and remain profitable.
Transportation and logistics providers
Transportation is a complex service because of factors like delivery variations depending upon the parcels’ shelf life. Job costing helps to evaluate these problems and allocate the cost to the particular job.
Steps for Calculating Job Costing with Example
Identify the job that is the chosen cost object
When the job is ascertained, we must gather information regarding the costs. The most reliable source to collect this information is the source document. A source document is an original record or proof supporting the accounting system’s journal entries.
E.g., Suppose a shirt manufacturing unit produces 500 shirts in a year. When the job is finalized, we will collect data regarding the costs incurred.
Identify Direct Costs of the Job
There are two main direct costs, namely direct material and direct labor. Information regarding the cost of direct material can be obtained from the material requisition record in which the orders made by the supervisor according to the product specification are kept. The source document for direct labor is the labor time record which keeps information regarding the time taken to complete the job, and based on the time taken; wages are paid.
E.g., The per meter price of the cloth is 10 rupees, and 1 shirt requires 5 meters of cloth; hence the direct material will be 25,000 rupees (5*10*500) for ordering the cloth for 500 shirts. In the same way, if the per hour rate for labor is 50 rupees and it takes him 1 hour to make 1 shirt, then the direct labor will be 25000 rupees (50*500) for 500 shirts.
Select the Base for Allocating Indirect Costs
Indirect costs are expenses that are not directly accountable to one cost object. These indirect costs are assigned to the different cost drivers.
E.g., if The depreciation on machinery is 15,000 during the year, we will take a cost driver such as machine hours to make 500 shirts, then we will have 500 hours. 30 rupees per shirt (15000/500) is the indirect cost of depreciation.
Prepare a Cost Pool Comprising Expenses with the Same Base
When the accountant believes that direct labor hours can be used to allocate indirect manufacturing costs, He will create a cost pool, namely indirect manufacturing overheads, which will comprise all the indirect costs of the manufacturing department.
E.g., If there is more than one indirect cost, in the given case, there was an indirect cost for repairing machinery for 5000 rupees. So a cost pool can be created by adding the depreciation in step 3, and 5000 rupees as both the expenses can be allotted by taking the base of machine-hours, and 20,000 rupees (15000+5000) will be considered as indirect manufacturing overheads.
Find the Indirect Cost Per Unit as Per the Base
The actual indirect cost rate would be found by dividing the total indirect expenses in step 4 by the allocation base in step 3.
E.g., the Rate per unit will be found by dividing the 20,000 rupees (total indirect expense) obtained in step 4 by 500 hours (total allocation base); we will get 40 rupees.
Calculate the Total Indirect Costs
The indirect cost can be obtained by multiplying the actual quantity of each different allocation base by the indirect cost rate found in step 3.
E.g., we will get the indirect costs by multiplying 500 hours by the 40 rupees, and we will get the 20,000 rupees.
Calculate the Total Costs
The total cost will be obtained by adding the total direct costs and total indirect costs assigned to the job.
E.g., We will add the direct costs obtained in step 2, which is 50,000 rupees, with the indirect costs obtained in step 6, which is 20,000 rupees, we will get a total cost of 70,000 rupees.
Role of Technology in Job Costing
The introduction of various accounting software has helped to do the job costing much more efficiently and has reduced the chances of errors considerably. Following are the advantages of this software.
- Accounting software helps to do the job costing easier and speedier because all the information can now be saved and easily accessed. Estimated expenses can be categorized, and detailed costs can be found.
- When job costing is carried out efficiently, A company can make better pricing estimates and give the consumer a better deal, i.e., not overpriced or underpriced for the job.