JOB COSTING

Introduction
As mentioned in the first chapter, the term costing refers to the techniques and processes of determining
costs of a product manufactured or services rendered. The first stage in cost accounting is to ascertain the
cost of the product offered or the services provided. In order to do the same, it is necessary to follow a
particular method of ascertaining the cost. The methods of costing are applied in various business units to
ascertain the cost of product or service offered. Different methods of costing are required to be used
indifferent types of businesses. For example, costing methods used in a manufacturing business will differ
from the methods used in a business that is offering services. Even in a manufacturing business,
some business units may have production in a continuous process, i.e. output of a process is an input of
the subsequent process and so on, while in some businesses production is done according to the
requirements of customers and hence each job is different from the other one. Different methods of
costing are used to suit these diverse requirements. These methods of costing are discussed in detail
in this chapter.
5.2 Methods of Costing
As mentioned in the above paragraph, the methods of costing are used to ascertain the cost of product or
service offered by a business organization. There are two principle methods of costing. These
methods areas follows] Job CostingII] Process Costing Other methods of costing are the variations of
these two principle methods. The variations of these methods of costing are as
follows.I] Job Costing: Batch Costing, Contract Costing, Multiple Costing.II] Process
Costing: Unit
or Single Output Costing, Operating Costing, Operation Costing The Job Costing and its variations are
discussed in detail in the following paragraphs. I]
Job Costing
This method of costing is used in Job Order Industries where the production is as per the requirements of
the customer. In Job Order industries, the production is not on continuous basis, rather it is only when
order from customers is received and that too as per the specifications of the customers. Consequently,
each job can be different from the other one. Method used in such type of business organizations is the
Job Costing or Job Order Costing. The objective of this method of costing is to work out the cost of each
job by preparing the Job Cost Sheet. A job may be a product, unit, batch, sales order, project, contract,
service, specific program or any other cost objective that is distinguishable clearly and unique in terms
of materials and other services used. The cost of completed job will be the materials used for the job, the
direct labor employed for the same and the production overheads and other overheads if any charged to
the job. The following are the features of job costing.
1. It is a specific order costing
2. A job is carried out or a product is produced is produced to meet the specific requirements of the
order
3. Job costing enables a business to ascertain the cost of a job on the basis of which quotation for
the job may be given
4. While computing the cost, direct costs are charged to the job directly as they are traceable to the
job. Indirect expenses i.e. overheads are charged to the job on some suitable basis.
5. Each job completed may be different from other jobs and hence it is difficult to have
standardization of controls and therefore more detailed supervision and control is necessary.
6. At the end of the accounting period, work in progress may or may not exist.

5.3 Methodology used in Job Costing

As discussed above, the objective of job costing is to ascertain the cost of a job that is produced as per the
requirements of the customers. Hence it is necessary to identify the costs associated with the job and
present it in the form of job cost sheet for showing various types of costs. Various costs are recorded in
the following manner.
Direct Material Costs:
Material used during the production process of a job and identified with the job is the direct material. The
cost of such material consumed is the direct material cost. Direct material cost is identifiable with the
job and is charged directly. The source document for ascertaining this cost is the material requisition
slip from which the quantity of material consumed can be worked out. Cost of the same can be worked
out according to any method of pricing of the issues like first in first out, last in first out or average
method as per the policy of the organization. The actual material cost can be compared with standard cost
to find out any variations between the two. However, as each job may be different from the other,
standardization is difficult but efforts can be made for the same.
Direct Labor Cost:
This cost is also identifiable with a particular job and can be worked out with the help of Job Time
Tickets which is a record of time spent by a worker on a particular job. The job time ticket has the
record of starting time and completion time of the job and the time required for the job can be worked out
easily from the same. Calculation of wages can be done by multiplying the time spent by the hourly rate.
Here also standards can be set for the time as well as the rate so that comparison between the standard
cost and actual cost can be very useful.
Direct Expenses:
Direct expenses are chargeable directly to the concerned job. The invoices or another document can be
marked with the number of job and thus the amount of direct expenses can be ascertained.
Overheads:
This is really a challenging task as the overheads are all indirect expenses incurred for the job. Because of
their nature, overheads cannot be identified with the job and so they are apportioned to a particular job on
some suitable basis. Pre determined rates of absorption of overheads are generally used for charging the
overheads. This is done on the basis of the budgeted data. If the predetermined rates are used, under/over
absorption of overheads is inevitable and hence rectification of the same becomes necessary.
Work in Progress:
On the completion of a job, the total cost is worked out by adding the overhead expenses in the direct
cost. In other word, the overheads are added to the prime cost. The cost sheet is then marked as
completed and proper entries are made in the finished goods ledger. If a job remains incomplete at the
end of an accounting period, the total cost incurred on the same becomes the cost of work in progress.
The work in progress at the end of the accounting period becomes the closing work in progress and the
same becomes the opening work in progress at the beginning of the next accounting period. A separate
account for work in progress is maintained
Advantages of Job Costing
The following are the advantages of job costing.
Accurate information is available regarding the cost of the job completed and the profits generated from
the same.
Proper records are maintained regarding the material, labor and overheads so that a costing
system is built up

Useful cost data is generated from the point of view of management for proper control and
analysis.
Performance analysis with other jobs is possible by comparing the data of various jobs. However
it should be remembered that each job completed may be different from the other.
If standard costing system is in use, the actual cost of job can be compared with the standard to
find out any deviation between the two.

Some jobs are priced on the basis of cost plus basis

In such cases, a profit margin is added in the cost of the job. In such situation, a customer will be willing
to pay the price if the cost data is reliable. Job costing helps in maintaining this reliability and the data
made available becomes credible.
5.5 Limitations of Job Costing
Job costing suffers from certain limitations. These are as follows.
It is said that it is too time consuming and requires detailed record keeping. This makes the
method more expensive.
Record keeping for different jobs may prove complicated.
Inefficiencies of the organization may be charged to a job though it may not be responsible for the
same.
In spite of the above limitations, it can be said that job costing is an extremely useful method for
computation of the cost of a job. The limitation of time consuming can be removed by computerization
and this can also reduce the complexity of the record keeping.
5.6 Format of Job Cost Sheet
The format of job cost sheet is given below.
XYZ LTD. JOB ORDER COST SHEET
Customer Invoice No. Selling Price Per Unit: Cost Per Unit:Date: Job Order No: Total CostProduct
Description
--------------------------------------------------------------------------A manufacturing firm generally produces goods based on demand forecasting. However, it sometimes
produces them also on receipt of order from its customers. Goods produced and works done as per
customers' order are called job. Therefore, the costing method designed to determine the cost of a job is
very essential. Job order costing is the costing system that determines the cost of the jobs received from
the client. Thus, job order costing system estimates the costs of manufacturing products as per customers'
orders.
--------------------------------------------------In order to be successful and survive, businesses must employ some type of product costing system. In
other words, they need to track the cost of making a product or furnishing a service. When a service is
rendered the customer is given an invoice detailing the material and labor costs.
Management needs to cost products for a number of reasons. To prepare the financial statements
management needs a Cost of Goods Sold figure on the Income Statement and an Inventory figure on the
Balance Sheet. For internal needs management needs product cost information to establish prices, to
compare actual with budgeted figures, to properly decide to make or buy, etc. Often outsiders such as
insurance companies or government agencies have a need for product cost information.
There are two broad product costing systems: Process Costing and Job Order Costing. Process costing is
used in industries where there is mass production of similar or identical productsfood products,

chemicals, cement, etc. Since each product is identical, product cost can be determined by dividing total
manufacturing costs by total units produced. This average cost applies equally to all units produced. Job
Order Costing is used by companies where products are identifiable by individual units or batchesauto
repair, tax return preparation, case in an attorneys office, ship construction, etc. The costs attributable to
a particular job are assigned directly to it.
In a manufacturing environment, costs are accumulated on a Job Cost Sheet (Exhibit 3-4, Page 95). Note
that the direct material cost comes from material requisition forms and the direct labor costs from
employee time tickets. However, since manufacturing overhead consists of numerous costs some of
which are not immediately available, Manufacturing Overhead is charged on an applied basis. At the
beginning of the year the company calculates a predetermined overhead rate by dividing estimated total
manufacturing overhead cost by estimated total units of allocation base. Note the example on Page
94. Overhead is charged to an individual job by multiplying the predetermined overhead rate by the
number of units of allocation base charged to the particular job.
-----------------------------------------------------------------------It means ascertaining costs of an individual job, work order or project separately. According to ICMA
London, job costing is that form of specific order costing which applies where work is undertaken to
customers specific requirements and each order is of comparatively of short duration. Under this
method of costing, each job is considered to be a distinct cost unit. As such, each job is separately
identifiable.
In the case of a job, work is usually carried out within the factory or workshop. Sometimes, a job is
accomplished even in the customers premises. This method of costing is applicable to ship building,
printing, engineering, machine tools, readymade garments, shoes, hats, furniture, musical instruments,
interior decorations etc.
Features:
1.
2.
3.
4.
5.
6.

Each job has its own characteristics, depending up on the special order placed by the customer.
Each job is treated as a cost unit.
A separate job cost sheet is made out for each job on the basis of distinguishing numbers.
A separate work in progress ledger is maintained for each job.
The duration of the job is normally a short period.
Profit or loss is determined for each job independently of others

Advantages of Job costing:

1.
2.
3.
4.
5.

It helps to distinguish profitable jobs from unprofitable jobs

It helps to identify defective work and spoilage with a department or person
Selling price of special orders can easily be fixed.
It helps to prepare estimates of cost for submitting quotations and tender for similar jobs
It helps to control future cost.

Requisites of Job costing system:

1.
2.
3.
4.
5.

A sound system of production control

An effective time booking system
Clearly defined cost centre
Appropriate overhead absorption rate, and
Proper material issue pricing method.

Procedure for Job order costing system:

The Procedure for job order costing system may be summarized as follows:-

1. Receiving an enquiry from the customer regarding price, quality etc

2. Make an estimation of the price of the job after considering the cost incurred for the execution of
similar job in the previous year
3. Receiving an order, if the customer is satisfied with the quotation price and other terms of
execution.
4. If the job is accepted, a production order is made by the Planning department.
5. The costs are collected and recorded for each job under separate production order Number, and a
Job Cost Sheet is maintained for that purpose.
6. On completion of job, a completion report is sent to costing department.
STEPS IN JOB COSTING
Job costing is a process used when you bid on a project to perform a large-scale service or produce a
quantity of a product. A large contract may not do your business any good if the job is not going to be
profitable. Job costing measures the revenue produced against the expenses incurred to determine the
final profit earned.
1

Identify Job

The first step in the job-costing process is to identify the scope of the project or job. For a manufacturing
company, this might be an order to produce 10,000 widgets. For an architectural firm, it could mean the
design of a high-rise building. To accurately perform a job costing, it is important to know everything the
job entails.
2

Identify Costs

Step two is to identify the direct costs associated with the job. If the job is to manufacture 10,000 widgets,
there are direct costs involved including the raw materials and parts needed to make the widgets. The
other direct costs associated with a job are labor costs. Determine how many employee hours will be
needed to complete the job and multiply it by the average hourly wage.
3

Select Allocation Base

In addition to the direct costs associated with a job, the project will incur indirect costs. Examples include
the use of manufacturing equipment, power to run the equipment, salaries of supervisors or managers
overseeing the job, lighting and even the depreciation on the machines used in the process. Allocation
bases are determined by looking at previous jobs and seeing what the indirect costs totaled at the
completion of the project.
4

Indirect Costs

Once the allocation bases are defined, indirect costs are identified for the new project. Using the widget
manufacturing example, indirect costs might include the machine hours needed to make the widgets or
the number of supervisor hours to oversee the manufacture of the widgets.
5

Compute Rate

The cost allocation bases discussed in step three are total indirect cost figures based on completed jobs or
projects. Determine a single unit rate by taking the total cost figure and dividing it by the number of
single units that were produced in the prior project. This single unit rate will be used in the calculation of
indirect costs for the new project.
6

Compute Indirect Costs

To determine the total indirect costs, take the single unit cost rate that was calculated in step five and
multiply it by the number of units to be produced. This will provide the estimated total of all indirect
costs.
7

Compute Total Costs

The final step in the job costing process is to add the direct costs to the indirect costs that have been
calculated. The final figure is the estimated cost for the total project. Compare this figure with the figure
quoted to the customer to complete the job. The difference between the two figures identifies either the
profit or the loss for completion of the project.
Illustration I
From the following particulars calculate the cost of Job No.505 and price for the job to give a profit of
25% on the selling price.
Material
:
Rs. 6820
Wage details:
Department
X : 60 hrs @ Rs. 3 per hr
Y : 50 hrs @ Rs. 3 per hr
Z : 30 hrs @ Rs. 5 per hr
The variable Overheads are as follows:
Department
X : Rs. 5000 for 5000 hrs
Y : Rs. 4000 for 2000 hrs
Z : Rs. 2000 for 500 hrs
The total fixed expenses amounted to Rs. 20,000 for 10,000 working hours.
Calculate the cost of Job No. 505 and price for the job to give a profit of 25% on selling price
Solution:
Job Cost Sheet No. 505
Rs.
Direct Material
6,820
Wages:
Department X
60x3= 180
Department Y
50x3 =
150
Department Z
30x5=150 480
-----------------Prime Cost 7,300
Overheads: - Variables
Department X 60 x1 = 60
Department Y 50 x2= 100
Department Y 30x 4= 120 280

-----------------7,580
Fixed OH 140 x 2 = 280(60+50+30 x 2) 280
-----------------Total cost 7,860
Profit 25% on selling price ie 1/3 of cost 7860 x1/3 2, 620
----------------Selling price 10,480
Practical problem 1
The following information is extracted from the Job ledger in respect of Job No. 205
Materials Rs. 8,500
Wages: 80 hours @ Rs. 6 per hour
Variable OH incurred for all jobs is Rs. 10,000 for 4,000 labour hours.
Find the profit if the job is billed for Rs. 8,400.
Practical Problem 2
From the following information, ascertain the work cost of Job No. 505
The job was commenced on 10th January 2011 and completed on 1st Feb.2011. Materials used were Rs.
2,400 and labour charges were Rs. 1,600. Other details were as follows:
Indirect labour cost in the factory amounted to Rs. 1,200
Machine X was used for 50 hours @ Rs. 20 per hour
Machine Z was used for 40 hours @ Rs. 22 per hour