Shah Abdul Latif University

Khairpur Mirs

Sindh

DEPARTMENT OF COMMERCE

TOPIC: HOW JOB ORDER COSTING AND PROCESS

COSTING ARE IMPORTANT FOR CLASSIFICATIONS OF
COST AND COMPILING THE COMPREHENSIVE
REPORTS.
Teacher

Prof: dr:Mumtaz Junejo.

Author

SHEENA ANSARI (37)

M.Com (final)
Session 2015


IMPORTANCE OF JOB ODER
COSTING FOR CLASSIFICATION OF
COST AND COMPILING THE
COMPREHESIVE REPORTS

A job order costing system delivers a very efficient method to calculate the
exact expenses required for materials, labor, and overhead before producing
an item. Getting relevant information about manufacturing costs allows you
to evaluate profitability and decide whether you should produce that
particular item or not. Besides this great advantage, job order
costing delivers many unique benefits that set it apart from process costing
another commonly used cost calculation method in the manufacturing sector.
To understand why you should implement the first alternative into your
business, youre welcome to read the following seven paragraphs.
1.

Profitability: The job costing system allows you to assign costs

separately to individual operations and calculate the profit margin youll be

getting on each job. This way, you can decide which operations are more
profitable for producing a specific product. Although this particular function
indicates that the system is suitable especially for the companies that handle
custom orders, it can be used by any manufacturer who wants to get detailed
statistics regarding individual manufacturing operations.
2.

Performance: A job order costing system also enables you to assess

the performance of your employees. Unlike process costing, which

ascertains the qualities of an entire workgroup or department, job order
costing provides sufficient information to help you evaluate individual

performance data in terms of productivity, efficiency, and cost-control. With

the help of this tool, you can identify the employees who fail to meet
performance expectations.
Following are the advantages of job order cost accounting:
(i) It provides a detailed analysis of cost of materials, wages, and overheads classified by
functions, departments and nature of expenses which enable the management to
determine the operating efficiency of the different factors of production, production
centres and the functional units.
(ii) It records costs more accurately and facilitates cost control by comparing actuals with
estimates.
(iii) It enables the management to ascertain which of the jobs are more profitable than the
others, which are less profitable and which are incurring losses.
(iv) It provides a basis for estimating the cost of similar jobs taken up in future and thus
helps in future production planning.
(v) Determination of predetermined overhead rates in job costing necessitates the
application of a system of budgetary control of overheads with all its advantages.
(vi) Identification of spoilage and defectives with the respective production orders and
departments may enable the manager, lent to take effective steps in reducing these to the
minimum.
(vii) The detailed cost records of the past years can be used for statistical purposes in the
determination of the trends of cost of the different types of jobs and their relative
efficiencies.
(viii) It is useful in quoting cost plus contract.
Your goals are the material cost you hope to meet or beat, the labor cost you hope to
achieve, and the subcontractor cost you anticipate.
Once you have sold the job and production begins, you keep records of your expenses for
that job in each category of your estimate. How are you doing on meeting these goals?
This collection of data is critical to your success because it sets the stage for accuracy in
your future estimates. Only by gathering accurate and timely job cost information will
you be able to gauge job performance, and keep your estimating information up-to-date.

Job costing has a second important benefitas a big picture financial control. You are
working hard to keep total job costs at the percentage of income you target with your

Continue Monitoring: Job order costing allows you to monitor the

production process continuously, giving you enough time to identify
potential issues and make corrections to avoid catastrophic situations, such
as producing defective items or going over budget even before the
manufacturing process ends.
These are the top benefits of implementing a job order costing system in
your company. Regardless of your industry niche, you can use this system
alone or along with other systems to create a truly smart solution for your
business.

IMPORTANCE OF JOB
PROCESS COSTING FOR

CLASSIFICATION OF COST AND

COMPILING THE COMPREHESIVE
REPORTS

Many companies use some type of system to determine the minimum value
of produced products. Process costing is an allocation system companies use
to allocate cost for homogeneous items produced by a company.
Homogeneous products represent items that are very similar or
indistinguishable from each other. Lumber, soda pop and chemical products
are a few examples of homogeneous products. Process costing provides
companies with a few advantages and disadvantages.
1. Easy To Use.
Process costing is an easier system to use when costing homogenous
products compared to other cost allocation methods. Business owners

allocate business costs according to the number of processes each

good travels through in the production system. Each process applies
direct materials, labor and manufacturing overhead to the production
cost total. Management accountants take the total number of goods
leaving the process and divide the total process cost by this number.
This creates a simple average cost for each item produced.
2. Cost Containment
A business that implements a process costing system can better contain
manufacturing expenses. Under this system, each department is assigned a cost
center. A cost center is a number or code that identifies the purchases made by a
single department. As financial expenditures, such as the acquisition of supplies
and employee salaries, are made throughout the production process, each group
creates a report highlighting purchases that have been made under its respective
cost center.
These reports are compiled and reviewed by senior management. This data allows
them to identify inefficiencies within the supply chain. For example, a cost center
report may indicate that 50 percent of production costs come from the
procurement department. Management can then dictate steps that the procurement
team must take to minimize costs.
3. Inventory Control
The Internal Revenue Service requires all businesses that maintain an inventory to
meticulously track and report its supply. The IRS uses this information to
accurately value the business so that tax estimates can be made. Tracking
inventory can be a cumbersome task for very large corporations. This process can
be simplified, however, through the implementation of a process costing system.
Throughout the manufacturing process, each department documents any materials
purchased. In addition, each good is valued and added to the cost center report.
Management includes this information on the companys income tax returns.
4. Uniformity

Many organizations allow each of their departments to operate autonomously. For

example, the procurement department will have policies and procedure that are
completely unique and independent of those of the supply chain group. This can
be an incredibly ineffective way for a business to operate.
Each department, in this scenario, may have its own jargon, making
interdepartmental communication difficult. Furthermore, maintaining separate
systems and policies means that additional money and time must be spent to
cross-train employees. Through the implementation of a process costing system, a
company will ensure that every department, regardless of function, operates in a
uniform manner. This will allow members of the manufacturing supply chain to
be in sync with one another.
5. Easy To Use.
Process costing is an easier system to use when costing homogenous products
compared to other cost allocation methods. Business owners allocate business
costs according to the number of processes each good travels through in the
production system. Each process applies direct materials, labor and manufacturing
overhead to the production cost total. Management accountants take the total
number of goods leaving the process and divide the total process cost by this
number. This creates a simple average cost for each item produced.

6. Flexible
Business owners use process costing because it creates a flexible production
process. Companies needing to refine their process can simply add or remove a
process as necessary. This also allows companies to lower their production cost
for each good. Business owners typically look for ways to refine a production
process to increase cost savings. Eliminating redundant processes often achieves
this goal. Adding a process allows companies to produce slightly different goods
or improve product quality.