Job Costing - AjNext

Job Costing

BASIC UNDERSTANDING

In today’s world where every single person wants even the smallest of things as per his own specification may it be food, clothes, shelter, car, bikes, chocolates, cakes and what not. You just name it and search customised _________( your requirement) on google and there you go with hundreds of companies providing you with your required product. This is not just with the products but also with services we avail. You have private tuitions, personalised trainers and almost all the professionals providing services based on the requirements of their clients. These customised goods and services are nothing but jobs for these companies and every job is different form the next one turning up. So it is very obvious for such companies to decide the cost of each product / service so as to run the business efficiently and effectively.

INTRODUCTION

This method of costing is used in Job Order Industries where the production is as per the requirements of the customer. As requirement differs from person to person we can say none of the jobs manufactured are alike. 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. The objective of this method of costing is to work out the cost of each job by preparing the Job Cost Sheet.

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 authorised by specific order or contract.” Job costing is that form of specific order costing under which each job is treated as a cost unit and costs are accumulated and ascertained separately for each job. A job maybe a product, unit, batch, sales order, project, contract, service, specific program, any other cost objective that is distinguishable clearly and unique in terms of materials and other services used.

 

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.

BASIC FEATURES

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 made to meet specific requirements of the customer
3. Each job is treated as a cost unit.
4. All cost are accumulated and ascertained as per each job on the basis of which quotation of job may be given.
5. While computing costs, direct costs being traceable are charged directly whereas indirect costs are charged on some suitable basis.
6. Each job being different hence it is difficult to have standardisation of control and therefore more detailed supervision and control is necessary.

APPLICABILITY

The system of job costing can be sub-divided into two categories viz. (a) Factory job costing and (b) Contract costing. Job costing is applicable to :

1. Engineering concern
2. Construction companies
3. Ship-building
4. Furniture making
5. Machine manufacturing industries
6. Repair shops
7. Automobile garages &
8. Such other factories where jobs or orders can be kept separately.

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:

1. Analysis and ascertainment of cost of each unit of production
2. Control and regulate cost
3. Determine the profitability

PROCESS

As production in a job order system is not a continuous process, careful planning and strict control is required to avoid wastage of materials, man-power, machinery and other resources. On receipt of an order, the production and planning department prepares a suitable design for the product or job. It also prepares a bill of materials and an operation schedule. A production order is issued giving instructions to the shops to proceed with the manufacture of the product. This production order (also known as work order or job order record) constitutes the authority of the work. The production order usually lays down the date of commencement of order, quantity of materials required, time allowed for the operations, sale price, customer’s name, shipping instructions, date of completion, etc. Sometimes the values of materials and labour are also indicated and then it serves the combined purpose of an order for manufacture as well as the cost sheet on which the cost of the order is compiled. The journal entries to record all the costs are same as those dealt in Non – integrated accounts. Every production order is assigned a number called the job number, job-order number, work order number. All these details can be seen in Job cost sheet.

WORK-IN-PROGRESS

The cost of an incomplete job, i.e., a job on which some manufacturing operation is still due is termed as work-in-progress. If a production order has not been only completed by the end of an accounting period, it is essential to value the closing stock of the work-in-progress . Unless this is correctly done, the profits for the period will be distorted. Determination of work-in-progress is frequently essential where periodic profit and loss account is required to be prepared for control purposes without reference to the closure of the accounting period.

ADVANTAGES

1. To know a detailed analysis of cost of materials, labour and overheads charged to each job helping management to know the trend of cost.
2. To ascertain profit or loss made on each job.
3. Estimates of cost of similar work in future can be conveniently made helping in prompt furnishing in quotations for specific jobs.
4. The adoption of predetermined overhead rates in job costing necessitates the application of a system of budgetary control of overheads with all the advantages.
5. Spoilage and defective work can be easily identified with specific jobs or products so that responsibility may be fixed on departments or individuals.
6. Job costing is particularly suitable for cost plus and such other contracts where selling price is determined directly on the basis of costs.

LIMITATIONS

Job costing suffers from certain limitations.

These are as follows.
1. It is said that it is too time consuming and requires detailed record keeping. This makes the method more expensive.
2. Record keeping for different jobs may prove complicated.
3. 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.

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