JOB used when units are relatively expensive

JOB COSTING

Job order costing (job costing)
assigns costs to a specific job (a distinct unit, batch, or lot of a product or
service).

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Job order costing is used when the
product or service has costs that can be, and often need to be, tracked and
assigned to a specific job or service. For example, job costing is used for
capital asset construction (buildings, ships) in the manufacturing sector and
for advertising campaigns, research and development, and repair jobs in
the service sector. Costs for these products, projects, or services can be
easily tracked to the product, project, or service. 

 

Job-order costing is a system for allocating
cost to groups of unique products. It is applicable to the production of
customer-specified products. Each job becomes a cost center for which costs are
accumulated (costs are based per job)

Generally used when units are
relatively expensive and when costs can be identified to specific units or
batches of units (heterogeneous)

E.g., Job-cost systems are best
suited for customized production environments such as construction, aircraft
assembly, printing, etc. where a new job-cost record would be started every
time a new job (building project, airplane or print job) is started

 

Since costs are traced to specific
jobs, certain items that might otherwise be classified as manufacturing
overhead are classified as direct costs (e.g., warehouse costs)

 

Highlights of Job Costing

 

Used when the product or service has
costs that can be tracked and assigned to a specific job or service

Costs accumulated by job

Computes unit cost by job at the end
of the job

Gives a detailed breakdown of all of
the different types of costs; gross margin and gross profit margin can be used
to compare the company’s profitability across different jobs

Examples: research and development,
custom housing construction, and consulting projects.

 

 

 

 

The basic steps in using job costing
to assign costs to a job are; 

 

1. Identify the job, typically with a
unique identifier.

2. Trace the direct costs for the job
(direct materials, direct labour).

 3. Assign overhead to the job by multiplying
the amount of each cost allocation base associated with the job by the
related overhead rate. 

 

Job Order Costing Benefits and
limitations 

 

Job order costing can provide very
detailed results of a specific job or operation so it is ideal for specific
jobs. For large processes, job order costing is less valuable because it is
impractical to assign individual costs to mass-produced items on a daily basis.
Job order costing can accommodate multiple costing methods, such as actual,
normal, and standard costing, so it is flexible enough to be used by a wide
variety of companies. Job order costing can have a strategic value for a
business because it gives a detailed breakdown of all of the different types of
costs. The gross margin and gross profit margin can be used to compare the
company’s profitability across different jobs. For jobs that did poorly,
the company can analyze whether the cost overruns were from direct labor costs
and/or direct materials costs. 

 

From the description, job costing
sounds like a simple system to set up and operate. Earlier, there was a
reference to reporting on the cost of a completed job. However, there is a need
to know the cost on every in-process job. In fact, the sum of the costs on all
in-process jobs must be equal to the balance in the Work-in-Process Inventory
account. In many cases, additional capabilities will be built into the sys-tem
so that jobs that are in trouble can be identified early on and watched more
carefully. Finally, consider the difficulties when the final operation on a job
may take weeks between the first unit to complete and the last unit to
complete. Units will, of course, physically move into the Finished Goods
inventory and may, in fact, be shipped before the job has been completed. In
such a case, it may be desirable to provide a mechanism for relieving the job
at a standard or estimated unit cost and to debit Finished Goods Inventory so
there will be a good correspondence between the physical situation and the
accounting records.