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Job Costing – Definition, Features, Advantages and Limitations | Cost Accounting

Job Costing

In job costing, costs are accumulated separately for each job or work order undertaken by an organization. The job order method of cost accounting is used in industries which manufacture products or render services against specific orders. According to the job costing system, an order, lot or batch of product can be taken as a cost unit, i.e. a job. The job costing method is a method of costing in which the cost units can be identified separately and need to be separately costed. An important purpose of job costing is to gather all the costs incurred during the course of a job.

There are two primary types of job costing, viz. (1) Factory job costing and (2) Contract job costing. In batch costing, which assigns costs to specific batches of products ordered for manufacture of a similar type, costs are accumulated over time. A job costing system can be applied to engineering concerns, construction companies, shipbuilding, furniture production, machine manufacturing industries, repair shops, automobile maintenance garages, and any other factory where jobs or orders can be kept separately. Due to the fact that job-order production is not a continuous process, careful planning and tight control are essential to prevent wastage of materials, manpower, machinery, and other resources. Production and planning departments prepare a suitable design for a product or job upon receiving an order. They also prepare a bill of materials and an operating schedule.

Production orders are issued to the shops instructing them how to go about manufacturing the product. Production orders (also known as work orders or job order records) constitute the authority to do the work. As part of the production order, the quantity of materials required, the time for the operations, the sale price, the customer’s name, shipping instructions, etc. are detailed. Sometimes, the materials and labour costs are also included in the order, with it serving as a manufacturing order as well as the cost sheet for compiling the cost of the order. Work order numbers, job order numbers, and job numbers are all assigned to production orders.

Features of Job Costing

Features of Job Costing

  • This is a specific order costing
  • A job is completed or a product is produced in accordance with the requirements of an order
  • Job costing permits a business to determine the cost of a job from which a quotation can be derived.
  • As direct costs are traceable to the job, they are charged directly to the job when computing the cost.
  • Indirect expenses, such as overheads, are billed to the job on some suitable basis.
  • Each job may be unique, and so it is difficult to standardize controls, which necessitates more detailed supervision and control.
  • There may be or may not be work in progress at the end of the accounting period.

Advantages of Job Costing

Advantages of Job Costing

  1. It enables management to determine which jobs are profitable and which are not. With an accurate record of job costs, it is convenient to estimate the cost of similar work in the future. This enables accurate price quotations for specific jobs to be issued.
  2. Materials, labour, and overhead costs for every job or product in a department are available on a regular basis, allowing the management to see the trend in costs and, by comparison, control the efficiency of materials, machines, and operations.
  3. By adopting predetermined overhead rates in job costing, a system of overhead budgetary control is effectively implemented with all its advantages.
  4. Spoiled work and defective products can easily be identified with specific jobs or products, allowing departments and individuals to be held responsible.
  5. Job costing is particularly suitable for cost plus contracts and other types of contracts in which the selling price is directly influenced by costs.

Limitations of Job Costing

Limitations of Job Costing

  • The process is said to be too time-consuming and requires detailed records. Due to this, the method is more expensive.
  • Record keeping for different jobs can be challenging.
  • Inefficiency may be attributed to a job even if the organization does not bear any responsibility.

FAQs,

Which of the following would most likely use a job order costing system?

A) a company that manufactures chlorine for swimming pools
B) a swimming pool installer
C) a paper mill
D) an oil refinery

The Correct Answer for the given question is Option B) a swimming pool installer

Which of the following is not a characteristic of a job order costing system?

A) It is best suited for industries that manufacture custom goods.
B) It accumulates cost for each department within the factory.
C) It provides a separate record for the cost of each quantity of product that passes through the factory.
D) It uses only one work in process account.

The Correct Answer for the given question is Option C) It provides a separate record for the cost of each quantity of product that passes through the factory.

Which of the following is not a reason a service firm would use a job order costing system?

A) to help control costs.
B) to determine client billing
C) to determine department costs within the firm
D) to determine profit.

The Correct Answer for the given question is Option C) to determine department costs within the firm

Features of a job costing system include all but which of the following:

A) Separate manufacturing from other products.
B) Mass production.
C) Heterogeneity
D) Diversity of products produced.
E) Customization

The Correct Answer for the given question is Option B) Mass production.

Would an advertising agency use job order or process costing? what about a cell phone manufacturer?

A) Advertising agency—process costing; Cell phone manufacturer—process costing
B) Advertising agency—job order costing; Cell phone manufacturer—job order costing
C) Advertising agency—process costing; Cell phone manufacturer—job order costing
D) Advertising agency—job order costing; Cell phone manufacturer—process costing

The Correct Answer for the given question is Option D) Advertising agency—job order costing; Cell phone manufacturer—process costing

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