Job costing

Job costing
1. Introduction
1.1 Meaning
1.2 Applicability
1.3 advantages
1.4 Limitations
1.5 Principles
1.6 Reports in Job Costing
1.7 Process costing v/s Job Costing
1.8 Companies Using Job Costing
2. Costing Procedure
2.1 Process of Job Costing
2.2 Job Cost Sheet/ Card
2.3 Format of Job Costing
2.4 Collection of Costs for a job
3. Accounting for Job Costing
4. Consequences of Incorrect Job Costing
5. Conclusion
6. Bibliography

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 MEANING

CIMA London defines Job Costing as “the category of basic costing methods
which is applicable where the work consists of separate contracts, jobs or
batches, each of which is authorized by specific order or contract.”
According to this method costs are collected and accumulated
according to jobs, contracts, products or work orders. Each job or unit of
production is treated as a separate entity for the purpose of costing.
Job costing is carried out for the purpose of ascertaining cost of each
job and takes into account the cost of materials, employees and overhead etc.
The job costing method is also applicable to industries in which
production is carried out in batches. Batch production basically is of the same
character as the job order production, the difference being mainly one in the size
of different orders.

Industries which manufacture products or render services against specific orders
as distinct from continuous production for stock or sales use the job costing or
job order method of cost accounting. The method is also known under various
other names, such as specific order costing, production order costing, job lot
costing or lot costing.

Every order in job costing is separate and it is not essential that the same
manufacturing operations be carried out or the same materials be utilized in
respect of each. However, several identical orders or identical products may be
combined together to form lots or batches, each such lot or batch constituting a
job order.

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 APPLICABILITY

Companies in many industries can use job order costing, though a variety of
products offerings complicates the tracking of products.
Manufacturing companies
Manufacturing companies incorporate job order costing as a means of controlling
usage of raw materials, equipment of production and labor hours. These businesses
consider a separate job of each customer order for the purposes of job order costing.
Alternatively, smaller value projects may be grouped under a single job heading.
White collar businesses
Companies in the white collar sector of business, including accounting businesses,
law firms and private investment companies can use job order costing to manage
client accounts individually. For example, accounting firms can consider each client
as an individual job. On daily basis cost order sheet prepare contain detail about
client dealing and hours spend by client.
Medical services businesses
Medical services businesses including hospitals, medical billing companies and
small doctor’s offices, can use job order costing to consider each patient or bill as an
individual job. In service industries, including the medical field, record-keeping for
job order costing can be more complex than in other industries because these
businesses offer a wide array of services.
Retail companies
Retail companies, including clothing producers and retail outlets, in clothing
company every job incurred expense according to size, color design and style. Retail
companies and other businesses to track expenses to create a variety of job order
cost models to show how costs vary from product to product.
Film studio
Businesses in the entertainment industry, including film studios, can prepare a
separate job order cost sheets for each film. Costs of direct materials (costumes,
props, set design fees, etc.) and direct labor (actors salaries, directors payments, and
extras) are charged to each film’s job cost sheet.

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 ADVANTAGES

Job costing offers the following advantages:
(a) The cost of material, labor and overhead for every job or product in a
department is available daily, weekly or as often as required while the job is still in
progress.
(b) On completion of a job, the cost under each element is immediately
ascertained. Costs may be compared with the selling prices of the products in order to
determine their profitability and to decide which product lines should be pushed or
discontinued.
(c) Historical costs for past periods for each product, compiled by orders,
departments, or machines, provide useful statistics for future production planning and
for estimating the costs of similar jobs to be taken up in future. This assists in the
prompt furnishing of price quotations for specific jobs.
(d) The adoption of predetermined overhead rates in job costing necessitates
the application of a system of budgetary control of overhead with all its advantages.
(e) The actual overhead costs are compared with the overhead applied at
predetermined rates; thus, at the end of an accounting period, overhead variances can
be analyzed.
(f) Spoilage and defective work can be easily identified with specific jobs or
products.
(g) Job costing is particularly suitable for cost-plus and such other contracts
where selling price is determined directly on the basis of costs.

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 LIMITATIONS

The limitations of job costing are:
(a) Job costing is comparatively more expensive as more clerical work is involved
in identifying each element of cost with specific departments and jobs.

(b) With the increase in the clerical processes, chances of errors are enhanced.

(c) The cost as ascertained, even where they are compiled very promptly, are
historical as they are compiled after incidence.

(d) The cost compiled under job costing system represents the cost incurred under
actual conditions of operation. The system does not have any scientific basis.

 PRINCIPLES

The job costing method may be regarded as the principal method of costing since
the basic object and purpose of all costing is to
• Analysis and ascertainment of cost of each unit of production
• Control and regulate cost
• Determine the profitability

The basic principles enunciated for the job costing method are valid essentially for
all types of industry. For example, printing; furniture; hardware; ship-building;
heavy machinery; interior decoration, repairs
and other similar work.

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 REPORTS IN JOB COSTING SYSTEM

Report on profits on completed jobs:
A statement may be prepared monthly to indicate the gross profit earned on all
jobs completed during the month. This statement is useful for the management
for evaluating past performances. Net profit analysis may also be made in a
similar manner if administration, selling and distribution overheads for the job
are included in the statement.
Report on cost variances:
If cost estimates are developed, a cost variance report showing the deviations
of actual costs from the estimated costs may be prepared in order that
significant differences may be brought to light and investigated. The report
may be prepared separately for a job, or for a department showing the
variances in respect of all jobs undertaken by the department during a period.
 PROCESS COSTING V/S JOB COSTING

















JOB COSTING

PROCESS COSTING
(ii) A Job is carried out or a product is
produced by specific orders.
The process of producing the product has a
continuous flow and the product produced
is homogeneous.
(ii) Costs are determined for each job. Costs are compiled on time basis i.e. for
production of a given accounting period for
each process or department.
(iii) Each job is separate and
independent of other jobs.
Products lose their individual identity as
they are manufactured in a continuous flow.
(iv) Each job or order has a number
and costs are collected against the
same job number.
The unit cost of process is an average cost
for the period.
(v) Costs are computed when a job is
completed. The cost of a job may
be determined by adding all costs
against the job.
Costs are calculated at the end of the cost
period. The unit cost of a process may be
computed by dividing the total cost for the
period by the output of the process during
that period.

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 COMPANIES USING JOB COSTING

1) BOEING COMPANY



Boeing Company is the world’s leading aerospace company and the largest
manufacturer of commercial jetliners and military aircraft combined. Boeing
provides products and services to customers in 150 countries and employs
165,000 people throughout the world.
Since most of Boeing’s products are unique and costly, the company likely
uses job costing to track costs associated with each product it manufactures. For
example, the costly direct materials that go into each jetliner produced are
tracked using a job cost sheet. Direct labor and manufacturing overhead costs
(think huge production facilities!) are also assigned to each jetliner. This careful
tracking of production costs for each jetliner provides management with
important cost information that is used to assess production efficiency and
profitability. Management can answer questions, such as “How much did direct
materials cost?,” “How much overhead was allocated to each jetliner?,” or
“What was the total production cost for each jetliner?” This is important
information when it comes time to negotiate the sales price of a jetliner with a
potential buyer like United Airlines or Southwest Airlines.

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2) 20
TH
CENTURY FOX



20th Century Fox, Universal Studios, and Warner Brothers, incur a variety
of costs that are tracked using a job costing system.
For example, the production of a Harry Potter movie requires direct labor in the
form of actors, directors, editors, and the film crew. The direct materials
category includes costumes, extensive sets, and props. Overhead costs include
items such as depreciation of film production equipment, utilities in the editing
studio, and executive salaries for those overseeing the production of several
films concurrently.

Determining the production costs of movies and related profitability is important
for this industry since actors, directors, and others involved in the film are often
compensated based on a percentage of profits. Disagreements sometimes arise
between studios and actors regarding the accuracy of costs for movies,
particularly in the area of overhead. Some studios have been accused of
allocating too much overhead to individual films to drive down the reported
profitability of each film, thereby reducing the amount owed to those receiving a
portion of the profits.
3) Other companies such as Bechtel International (large scale construction), Walt
Disney Studios or Universal Studios (Movie Production), Firestone or jiffy
Lube (Workshop or Service Centres), Volkeswagen (Custom Campers), Ernst
& Young (Tax Division) also use Job Order Costing.

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 PROCESS OF JOB COSTING

Prepare a separate cost sheet for each job
• Disclose cost of materials issued for the job
• Employee costs incurred (on the basis of bill of material and time cards
respectively)
• When job is completed, overhead charges are added for ascertaining total
expenditure

 JOB COST CARD/SHEET

Each job order is asymmetrical to other due to specific and customised
requirements. To ascertain cost of a particular job, it is necessary torecord all the
expenditure related with a job separately. For this purpose, Job Cost card is used.
Job cost card is a cost sheet, where the quantity of materials issued, hours spent by
different class of employees, amount of other expenses and share of overheads are
recorded. This is helpful in knowing the total cost, profitability etc. of a job

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 FORMAT OF JOB COST SHEET

.The following is an illustrative format of Job Cost card/ sheet.

JOB COST SHEET
Description : JobNo.:
Blue Print No.: Quantity:
MaterialNo.: Date of delivery:
Referen ce No.:
Date commenced:
Date finished:
Date Reference Details Material Labour Overhead



Total


Summary of costs Estimated
(Rs.)
Actual
(Rs.)


For the job
Units produced
Cost/unit
Remarks
Prepared by:
Checked by:

Direct materia l cost Direct
wages Production overhead
PRODUCTION COST
Administration and Selling
&Distrib ution Overh eads

TOTAL COST
PROFI T /L OS S SELLING
PRICE

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 COLLECTION OF COSTS FOR A JOB

Collection of Materials Cost
An essential requirement of job cost accounting is that direct materials and
their cost must be traced to and identified with specific job or work order. This
segregation of materials cost by jobs or work order is brought by the use of separate
stores requisitions..
After the materials have been issued and the stores requisitions
have been priced, it is usual to enter the value of the stores requisition in a material
abstract or analysis book.

Collection of Labour Cost
All direct labour cost must be analysed according to individual jobs or work
orders. Similarly, different types of indirect labour cost also must be collected and
accumulated under appropriate standing order or expenses code number. The
analysis of labour according to jobs or work orders is, usually, made by means of
job time cards or sheets.
The abstraction of idle time costs under suitable standing order
or expenses code numbers is done and the amounts are posted to the relevant
departmental standing order or expense code number in the Overhead Expenses
Ledger at periodical intervals.
Collection of Overheads
Manufacturing overheads are collected under suitable standing order numbers
and selling and distribution overheads against cost accounts numbers. Total
overhead expenses so collected are apportioned to service and production
departments on some suitable basis.
The expenses of service departments are finally transferred to production
departments. The total overhead of production departments is then applied to
products on some realistic basis, e.g. machine hour; labour hour; percentage of
direct wages; percentage of direct materials; etc.

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Treatment of spoiled and defective work
Spoiled work is the quantity of production that has been totally rejected and
cannot be rectified.
Defective work refers to production that is not as perfect as the saleable
product but is capable of being rectified and brought to the required degree of
perfection provided some additional expenditure is incurred.
Defects arise in the following circumstances:

CIRCUMSTANCES TREATEMENT
1) Where a percentage of
defective work is allowed
in a particular batch as it
cannot be avoided.
When a normal rate of defectives has already been
established, if the actual number of defectives is within the
normal limit or is near thereto the cost of rectification will
be charged to the whole job and spread over the entire
output of the batch. If, on the other hand, the number of
defective units substantially exceeds the normal, the cost
of rectification of the number which exceeds the normal
will be written off as a loss in the Costing Profit and Loss
Account.
2) Where defect is due to
bad workmanship
In this case cost of rectification will be abnormal cost, i.e.,
not a legitimate element of the cost. Therefore, the cost of
rectification shall be written off as a loss, unless by an
arrangement, it is to be recovered as a penalty from the
workman concerned. It is possible, however that the
management did provide for a certain proportion of
defectives on account of bad workmanship as an
unavoidable feature of production. If that be the case, the
cost of rectifying to the extent provided for by the
management will be treated as a normal cost and charged
to the batch.
3) Where defect is due to
the Inspection
Department wrongly
accepting incoming
material of poor quality.
In this case the cost of rectification will be charged to the
department and will not be considered as cost of
manufacture of the batch. Being an abnormal cost, it will
be written off to the Costing Profit and Loss Account.

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 ACCOUNTING OF COSTS FOR A JOB
Entries in Control Accounts
1. For purchase of materials-
Stores Ledger Control A/c……………………………… Dr.
To Cost Ledger Control A/c*
2. For the value of direct materials issued to jobs-
Work-in-Process Control A/c…………………………… Dr.
To Stores Ledger Control A/c
3. For return of direct materials from jobs-
Stores Ledger Control A/c……………………………… Dr.
To Work-in-Process Control A/c
4. For return of materials to suppliers –
Cost Ledger Control A/c………………………………… Dr.
To Stores Ledger Control A/c
5. For indirect materials-
Factory Overhead Control A/c ………………………………………… Dr.
To Stores Ledger Control A/c

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6. For wages paid-
Wages Control A/c………………………………………… Dr.
To Cost Ledger Control A/c
7. For direct wages incurred on jobs-
Work-in-Process Control A/c……………………………. Dr.
To Wages Control A/c
8. For indirect wages –
Factory Overhead Control A/c…………………………… Dr.
To Wages Control A/c
9. For any indirect expense paid-
Factory Overhead Control A/c…………………………… Dr.
To Cost Ledger Control A/c
10. For charging overhead to jobs-
Work-in-Process Control A/c……………………………. Dr.
To Factory Overhead Control A/c
11. For the total cost of jobs completed-
Cost of Sales A/c………………………………………….. Dr.
To Work-in-Progress Control A/c

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12. The balance of Cost of Sales A/c is transferred to Costing Profit and Loss a/c; For
such transfer –
Costing Profit and Loss A/c………………………………. Dr.
To Cost of Sales A/c
13. For the sales value of jobs completed -
Cost Ledger Control A/c………………………………… Dr.
To Costing Profit and Loss A/c**
*General ledger adjustment account is the other name of Cost Ledger Control Account.
**The balance of Costing Profit and Loss Account shall now represent profit or loss. The
balance of Cost Ledger Control Account shall be carried forwarded. With the balance on all
the accounts trial balance can be drawn.

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 ILLUSTRATIONS

Illustration 1: As newly appointed Cost Accountant, you find that the selling price of Job No. 9669
has been calculated on the following basis:


Particulars
Amount
(Rs.)
Materials 12.08
Direct Wages – 22 hours at 25 paise per hour 5.50
Department A – 10 hours,
B – 4 hours,
Prime Cost
C - 8 hours
17.58
Plus 33% on Prime Cost 5.86
23.44

An analysis of the previous year’s profit and loss account shows the following:

Particulars
Amount
(Rs.)
Particulars
Amount
(Rs.)
Materials Used 77,500 Factory Overheads:
Direct Wages: A 2,500
A 5,000 B 4,000
B 6,000 C 1,000
C 4,000 Selling Costs 30,000

You are required to:

(a) Calculate and enter the revised costs using the previous year’s figures as a basis;

(b) Draw up a Job Cost Sheet;

(c) Add to the total job cost 10% for profit and give the final selling price.

Solution:


In order to draw up Job Cost Sheet, the factory overhead rates of different departments and
percentage of selling cost will have to be determined first on the basis of previous year’s figures as
follow:

Factory Overhead Rates: Amount (Rs.)

Particulars Department
Direct Wages (i)
A B C

Factory Overheads (ii) 2,500 4,000 1,000
Direct Labour Hours (D.W. x 4) (iii) 20,000 24,000 16,000
Factory Overhead Rates per hour (ii ÷ iii) 0.125 0.167 0.063

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Working Notes:

Materials used 77,500
Direct Wages [A = 5,000, B = 6,000, C = 4,000] 15,000
Factory Overhead [A = 2,500, B = 4,000, C = 1,000] 7,500
Works Cost 1,00,000
Selling Costs 30,000
Cost of Sales 1,30,000

Percentage of Selling Cost on WC =
30,000

× 100 = 30%

1,00,000


(b)

Cost Sheet

Job No. 9669 Period
Particulars
Amount
(Rs.)
Materials 12.08
Direct Wages:
Dept. A 2.50
Dept. B 1.00
Dept. C 2.00 5.50
Prime Cost 17.58
Factory Overheads:
Dept. A (10 hours. @ Rs 0.125) 1.25
Dept. B (4 hours. @ Rs 0.167) 0.67
Dept. C (8 hours. @ 0.063) 0.50 2.42
Works Cost 20.00
Selling Cost (30% of Works Cost) [Ref. working
notes] 6.00
Cost of Sales 26.00
(c)
Profit (10% on Cost) 2.60
Selling Price 28.60

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Illustration 2:
A shop floor supervisor of a small factory presented the following cost for Job no.555 to determine
selling price.
Particulars Per unit (Rs.)
Materials 70
Direct Wages 18 hours at 2.5 45
Dept. X-8 hours
Dept. Y-6 hours
Dept. Z-4 hours
Chargeable expenses (special stores items) 5
120
Plus 33% Overheads 40
160
Analysis of the Profit/Loss Account for 2016 shows the following:
Particulars
Amount
(Rs.)
Amount
(Rs.)
Particulars
Amount
(Rs,)
Amount
(Rs.)
Materials 1,50,000 Sales 2,50,000
Direct Wages:
Dept. X 10,000
Dept. Y 12,000
Dept. Z 8,000 30,000
Special stores items 4,000
Overheads:
Dept. X 5,000
Dept. Y 9,000
Dept. Z 2,000 16,000
2,00,000
Gross profit c/d 50,000

Gross profit b/d

2,50,000 2,50,000
Selling expenses 20,000 50,000
Net profit c/d 30,000

50,000 50,000


It is also noted that average hourly rates for the 3 departments, X, Y and Z are similar.

You are required:

(a) Draw up a job cost sheet;

(b) Calculate the entire revised cost using 2016 actual figures as basis;

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(c) Add 20% to total cost to determine selling price.
Solution:
(a)
Calculation of Departmental Overhead
Rates
Amount (Rs.)

Particulars Departments
X Y Z
(i) Direct Wages 10,000 12,000 8,000
(ii) Rate of wages per hour 2.5 2.5 2.5
(iii) Hours (i÷ ii) 4000 4800 3200
(iv) Actual Overheads 5000 9000 2000
(v) Department Overhead Rates per hour (iv ÷ iii) 1.250 1.875 0.625

(b) Revised job cost sheet


Particulars
Amount
(Rs.)
Materials 70
Labour:
Dept. X 8 x 2.5 20
Dept. Y 6 x 2.5 15
Dept. Z 4 x 2.5 10 45
Direct Expenses 5
Prime Costs 120
Overheads:
Dept. X 8 x 1.250 10.00
Dept. Y 6 x 1.875 11.25
Dept. Z 4 x 0.625 2.50 23.75
Total Cost 143.75
(c)
Add: Profit 20% 28.75
Selling Price 172.50

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 CAUSES OF FAILURE OF JOB COSTING ORDER

The following is the list of the most probable causes that would cause the job order
costing system of the company to fail:

Adequate System Not In Place: Job order costing requires an elaborate system in
place. In earlier times this was done with the help of paperwork i.e. job order sheets,
material tickets, labor tickets etc. This paperwork helped control the costs. In the
absence of this paperwork, companies will not be able to track the usage of labor
and material and therefore the costs associated with them. In modern times, we have
information technology to the rescue. Companies can now buy off the shelf products
for job order costing and use them to simplify the creation of the elaborate system.

Staff Not Well-Trained: The journal entries that need to be passed in a job order
costing system are considerably different from the ones that need to be passed
otherwise. The bookkeeping staff needs to be trained about the specifics of job order
costing. This training is often expensive and takes time. Only after the process has
been somewhat established, does a job order costing system give the benefits that it
has been touted to provide.

Absence of Experts: Job order costing system relies on experts to make certain
decisions. For instance the allocation base needs to be selected, predetermined
overhead rates need to be created and such other tasks need to be done. These tasks
require skill and judgment. Only a person that is thorough with the operations of the
firm can do these tasks. Thus the firm must ensure that they have relevant expertise
before they begin adopting the technique.

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 CONSEQUENCES OF INCORRECT JOB COSTING

The causes of incorrect job order costing can be quite grave. They have been listed
below:
Wrong job orders taken: A wrong system leads to wrong allocation of costs. So
the jobs that are unprofitable for the company look profitable. This ends up in the
company taking wrong jobs. Over a period of time, this leads to losses.
Customers Billed Incorrectly: If customers are billed incorrectly, they are going to
be dissatisfied. Dissatisfied customers look for other alternatives. So the company
can be sure that they will lose orders going forward. Also, the reputation of the
company may be irreversible hampered.

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All companies have to accumulate and allocate costs. Each company has to decide
how it is going to do that. Companies pick a method that works well for them, and is
cost effective.

A well designed accounting system should generate reports for a large variety of
uses. Of course, it must provide the necessary information for annual financial
statements; and it should also help in the preparation of special reports, like sales tax
and payroll reports. It should help managers track and manage inventories, open
orders, accounts receivable and accounts payable.

There are many different types of costing systems that management and cost
accountants may come across. Each of these costing systems may handle certain
entries in a different way. There are two main types of cost accounting systems.
Companies select a method that best matches the flow of work in their business.

In job order costing, costs are accumulated by jobs, orders, contracts, or lots. The
key is that the work is done to the customer's specifications. As a result, each job
tends to be different. Job order costing is used for construction projects, government
contracts, shipbuilding, automobile repair, job printing, textbooks, toys, wood
furniture, office machines, caskets, machine tools, and luggage.

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 BIBLIOGRAPHY/ REFERENCES
 S.N. Maheshwari & Mittal (5
th
Edition)
 https://www.icai.org/post.html?post_id=124311
 https://icmai.in/studentswebsite/
 http://www.essay.uk.com/essays/business/essay-job-order-cost-systems/
 https://2012books.lardbucket.org/books/accounting-for-managers/s06-
how-is-job-costing-used-to-tra.html
 http://www.boeing.com
 https://www.foxstudios.com/
 https://www.managementstudyguide.com/consequences-of-incorrect-
job-order-costing.htm