Methods of Costing: Job Costing

Methods of Costing: Job Costing

Job Costing:

According to ICMA London, “job costing is that form of specific order costing which applies where work is undertaken to customer’s 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.

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, specifi c program or any other cost objective that is distinguishable clearly and unique in terms of materials and other services used.

Application:

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. This method of costing is applicable to ship building, printing, engineering, machine tools, readymade garments, shoes, hats, furniture, musical instruments, interior decorations etc.

Features of Job Costing:

The following are the features of job costing:

  • It is a specific order costing
  • A job is carried out or a product is produced is produced to meet the specific requirements of the order
  • Job costing enables a business to ascertain the cost of a job on the basis of which quotation for the job may be given.
  • 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.
  • 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.
  • At the end of the accounting period, work in progress may or may not exist.

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.
  • Job costing helps in maintaining reliability and the data made available becomes credible.

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.

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.

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.

Practical Illustration:

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 wise:

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 wise:

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

Solution to any Practical Problem should be provided in precise & clear-cut manner. Use of Tables is not only time saving but also marks rewarding. Instead of directly jumping to the answer, it is advisable to write 1 or 2 lines about the concept involved in the question. An ideal solution may be as follows:

The question pertains to Job Costing – A popular method of costing used in Job Order Industries.

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.

Based on the given problem:

ParticularsWorkingAmount (Rs.)
Direct Material6820
WagesDeptt X – 60*3180
Deptt Y – 50*3150
Deptt Z – 30*5150
Variable OverheadDeptt X – 60*160
Deptt Y – 50*2100
Deptt Z – 30*4120
Fixed OverheadTotal Hrs (140) * Absorption Rate (2/-)280
( Absorbed @ 2/- per hr)
Total Cost7860 (A)
Profit Margin25% on sales or 1/3rd of Cost2620 (B)
Selling Price10480 (A)+(B)

Hence, the selling price should be Rs. 10,840 /-

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