In this article we will discuss about:- 1. Definition of Job and Job Costing 2. Features of Job Costing 3. Objectives 4. Essential Pre-Requisites 5. Merits 6. Demerits 7. Estimating and Its Importance 8. Procedure 9. Forms.
Contents:
- Definition of Job and Job Costing
- Features of Job Costing
- Objectives of Job Costing
- Essential Pre-Requisites for Introduction of Job Costing
- Merits of Job Costing
- Demerits of Job Costing
- Estimating and Its Importance in Job Costing
- Procedure of Job Costing
- Forms or types of Job Costing
Definition of Job and Job Costing:
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Official Terminology of the CIMA London (Chartered Institute of Management Accountants) (Known earlier as I.C.M.A) defines the term ‘Job’ as “a customer order or task of relatively short duration”. Thus, job involves specific order by a customer and its duration is short.
CIMA definition of Job costing is “It is a form of specific order costing in which costs are attributed to individual jobs”. Thus, each ‘Job’ is treated as a distinct cost unit for which costs are accumulated.
Job costing is used for comparatively smaller works of shorter duration. Printing presses, machine tools manufactures, furniture makers, repair shops, foundries, etc., use this method extensively. It is essentially used to ascertain the cost and profit or loss of each job separately.
Features of Job Costing:
Each job is identifiable from the stage of material till its completion and delivery. The following are the features of industries and firms where job costing is usually applied. The costing method has to be adapted to suit the specific features in an industry or a firm.
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1. Jobs are undertaken against the orders of customers, as per their instructions.
2. Production, is not meant for stock and future sale. The production is not continuous.
3. The jobs differ from each other requiring different methods, materials or skills and treatment.
4. The jobs go through different operations and departments as per their specific requirements. There is no uniformity in the flow of production.
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5. Each job is treated as a cost unit and a production or job order number is issued. The job is identified with such number throughout the different stages of production.
6. Separate cost sheet is prepared for each job to ascertain its cost and profit.
7. Estimating the costs and quotations to the customers on that basis are widely practised.
The specific distinguishing features of operations in each firm should be noted while designing the exact system of cost accumulation, accounting and control.
Objectives of Job Costing:
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1. Ascertaining the cost of each job order, element, as accurately as feasible.
2. Enabling preparation of overhead quotations and tenders through reliable estimates.
3. Determination of suitable overhead recovery rates to absorb the overheads fully.
4. Providing proper valuation of work-in-progress at any given time.
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5. Establishing procedures for controlling and reducing costs over a period of time.
Essential Pre-Requisites for Introduction of Job Costing:
Successful usage of job costing method in the organisation requires the following:
(a) Material control system involving work orders, material requisitions, specification of materials, scrap reports, etc.
(b) Labour time booking procedure through job tickets or piece work tickets, idle time reports, etc.
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(c) An effective production control system.
(d) Proper classification, apportionment and absorption methods for the overheads.
Merits of Job Costing:
(i) It provides detailed analysis of costs of materials, labour and overheads. The costs are available any time they are required. The management can know the trend of costs and can control the operations more effectively.
(ii) It helps in distinguishing between the profitable and unprofitable jobs.
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(iii) It provides a basis for estimating costs for future quotations.
(iv) It helps in improving the future production planning.
(v) Adoption of predetermined overhead rates in job costing necessitates application of budgetary control with its advantages. Cost data from job costing is useful in the preparation of future budgets.
(vi) Spoilage of material and defective work can be identified with specific job. Determining responsibility and follow-up action can result in better future control over such losses.
(vii) It helps the management in fixing the selling prices of special contracts and also cost plus contracts.
(viii) The systematic costing records maintained for each job provide a reliable database for statistical trend analysis of costs over a period of time.
Demerits or Limitations of Job Costing:
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(i) The method needs an excellent system of production control, material control and labor control systems which may not be existing in most of the small firms.
(ii) It involves a lot of clerical work making it a relatively expensive method.
(iii) Costs of different jobs are not comparable since each job has its own features.
(iv) Absorption of overheads on the basis of predetermined rates is necessary which makes budgeting a prerequisite. The firm may not be practising budgeting system.
(v) Due to extensive clerical work involved, there is chance for mistakes.
(vi) Job costing ascertains costs only after the completion of jobs. So, for control purpose it is not much use unless it is combined with standard costing system or estimated costing.
Estimating and Its Importance in Job Costing:
Estimating is a vital part of job costing. The costing department prepares an estimate of the costs of each job before quoting price to the prospective customers.
Cost estimates of each job are based on the following:
Past experience,
Cost sheets of similar jobs, and
Forecasts of material, labour and overheads.
When a job is accepted, production order for the job is issued and estimated costs are recorded on the job cost sheet so that comparison of actual costs and estimated costs can be made at various stages of completion of the job. The estimated costs act like guidelines for the personnel involved with the job in different ways.
Job Costing Procedure:
The following are the different steps/involved in practice for each job in a firm:
(a) Customers’ Enquiry:
Routine enquiries are usually received from customers regarding the technical aspects of a job and the price to be paid by him. It may be formal or informal, written or oral.
(b) Quotation for the Job:
Based on the customer’s enquiry, detailed and specific estimates are made regarding the production aspects and the costs. A quotation is prepared and conveyed to the customer appropriately.
(c) Customer’s Order:
If the customer is satisfied with the quotation, he may place an order which may be accepted by the firm for execution.
(d) Production Order:
For every customer’s order accepted, a separate production order is prepared. This order includes specific instructions to the production departments to proceed with the work and it is the written authority for executing the job. Copies of the order with relevant instructions are circulated to all the departments and operation centres involved. Production control department will allot a job number or production order number which acts as the reference point for the job till it is finished and delivered.
(e) Cost Accumulation:
The costs pertaining to each job are collected and recorded with reference to the job number or production order number a job cost sheet or job cost card is opened for each job.
Entries in the card are made as follows:
(i) Material costs of the job are based on material requisitions or materials issue analysis sheet.
(ii) Wages are recorded with the help of wages analysis sheets, Time sheets and job cards.
(iii) Direct expenses are accumulated on the basis of relevant expense vouchers.
(iv) Overheads are accumulated with the use of standing order numbers or cost accounts numbers relevant to each overhead.
(f) Completion of Job:
The production control department sends a completion report to the costing department when a job is completed. The costing department compiles the different elements of cost and completes the job cost sheet. Any deviations from the estimated costs are also noted on the sheet for control purposes.
(g) Profit Recognition:
The total cost of the job is compared with the price charged to the customers. The difference represents profit or loss on the job which is transferred to costing P & L A/c.
Forms Used in Job Costing:
The following are some of the widely used forms under the job costing system:
(i) Production Order:
This is the written authority to the production department to perform a job.
(ii) Job Cost Sheet:
It is the ‘Core document’ of job costing method. Actual cost of materials labour and overheads are recorded along with the estimated costs in this sheet. The sheet usually reveals profit or loss of the particular job.
