Job costing

What is Job order costing?Advantages and disadvantages of Job order costing

Concept of job order costing

The act of producing goods and providing services according to the special demand or order of the customers is called a job. Now, it becomes necessary to ascertain the total costs of the job. Hence, the process of ascertaining the costs of job is called job order costing.

This technique can be used by repair workshop, tap and electricity connections, research center, Construction Company, advertising agency, auditing firm and other non-manufacturing organizations etc. under this method costs are accumulated for each job or work order separately. The jobs are usually carried out inside nether factory building and compete in short span of time. They can easily be distinguished from each other.

Character institute of management accountants (CIMA), London defines job order costing as "that form of specific order costing which is applied where is undertaken to customer's specific factory or workshop and moves through processes and operations as a continuously identifiable unit. The term may also be applied to work such as property repairs and the method may be used in costing of internal capital expenditure jobs."

From the above definition, it is clear that job order costing is a method of calculating the cost of a job that is carried against the specific demand of customer where the production process moves as a continuous identified unit.

Feature of job order costing
Following are the specific features of job order costing:
• Goods and services are produced according to the customers' orders. In other words, the goods are not produced for stocking in the warehouse.
• Each job bears some specific characteristics and needs special materials and labour.
• Each job is treated as a specific cost center.
• The cost of each job is calculated after the works is completed.
• It takes comparatively lesser time to complete a job.
• The supervisor of the materials and labour is easy

Objective of job order costing
The main objective/advantages of job order costing are presented below:
• To calculate the cost of each job by maintaining a separate account for each job order or order. It enables the calculation profit or loss from each job or order.
• It helps the management in estimating or quoting the price for an order or a job. Such estimations are made on the basis of the past cost records related to similar work.
• To help identify the profitable and non profitable job or order.
• To differentiate the cost of every job or order and production from one department to other.
• To compare actual costs and estimated cost for purpose of controlling the operational inefficiency.

Advantages and disadvantages or job order costing

The advantages of job order costing are as following:

(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.

The disadvantages of job order costing are mentioned below:

(i) It involves a great deal of clerical work in recording daily the cost of materials issued, wages expended and overheads chargeable to each job or work order which adds to the cost of cost accounting. Thus it is expensive.

(ii) The scope of committing mistakes is enough as the cost of one job may be wrongly posted to the cost of other job.

(iii) Cost comparison among different jobs becomes difficult especially when drastic changes take place.

(iv) Determination of overhead rates may involve budgeting of overhead expenses and the bases of overhead apportionment and absorption but unless such budgeting is complete i.e., extended to material, labour and expenses, its advantages are considerably reduced.

(v) Job costing is historical costing which ascertains the cost of a job or product after it has been manufactured. It does not facilitate control of cost unless it is used with standard or estimated costing.

Procedures of job order costing

The following procedures are involved in a job order costing:

a. Inquiry from customer: since the works under job order costing, are carried after the order from the customer has been received, the detail information about the job like the price, quality, durations for supply and other terms and conditions should be accumulated form t customers.

b. After estimation: after taking the detailed information about the job, the cost of completing the job is estimated. The cost estimation is made on to basis of part information and the current price level change. The pried to be quoted for a job is ascertained by adding a certain profit on the cost.

c. Receiving order: the customer places an order, if he/she is satisfied with the price, quality and other terms and conditions. The work is started after receiving the order.

d. Production order: after receiving the order, the planning department sends an order to the production department to produce the stated goods or services. The production department does not inanities the production in the absence of such order. A production order includes the details about the goods. The specimen of a production order is given below:

e. Cost ascertainment: a job cost sheet is prepared to calculate the cost of goods or services to be   produced according to the production order. Its specimen is as under.

Calculation of profit or losses: it is estimated by comparing the actual cost with the prices obtained.

f. Completion of job: after completing the job, the production department sends the information of the same to the cost accounting department. The cost accounting department compare the predetermined cost and actual cost to find the variance if any. It also determines the profit or loss by comparing the actual price of the job and the the total costs involves in it. For this, s statement is prepared which is called a cost sheet. The specimen of a cost sheet is given below:

1. What is job order costing?
He act of producing a proving to the special demand or order of the customers is called a job. Now, it becomes necessary to ascertain the total costs of the job. Hence, the process of ascertaining the costs of job is called job order costing.

This technique can be used by repair workshop tap and electricity connection, research center, Construction Company, advertising agency, auditing firm and other non-manufacturing organizations etc. under this method costs are accumulated for each job or work separately. The jobs are usually carried out inside the factory building and complete in short span of time. They can easily be distinguished from each other.

2. Mention the feature of Job Order Costing.
Following are the specific features of job order costing:
• Goods and services are produced according to the customer's order. In other words, the goods are not produced for stocking in the warehouse.
• Each job bears some specific characteristics and needs special material and labour.
• Each job is treated as a specific cost center.
• The cost of each job is calculated after the work is completed.
• It takes comparatively lesser time to complete a job.
• The supervisor of the material and labour is easy.