What is Job Costing?
Job costing is a process of finding out the cost that is associated with a job or work, which helps analyze the applicable per unit cost of each job in the entire production. The job can be understood as a specific work or contract or batch, which is done or completed to achieve any goal.
In cost, when the specific orders costing is applicable, that time for some products the experts try to find out job costing or contract costing of the product to get the exact costing of the particular work. It is very popular in those industries where the production is done in batches.
The treatment of abnormal loss is also covered by the job costing mechanism. The job cost sheet helps the inventory manager to have a track on its inventory and he can intimate the management when required to avoid any delay in the production.
Components of Job Costing Accounting
Following are the list of components.
- Direct Material
- Direct Labor
- Direct Expenses
- Prime Cost
- Cost of Production
Let’s look at this mechanism.
- Each year a Job cost sheet is prepared by an accounting expert.
- Details of material, labor and overheads are given.
- Ascertainment of employee cost to each job separately.
- On completion of the job, the total overhead is charged on the jobs separately.
Example of Job Costing Accounting
Let’s take an example.
In a paper mill, the manufacturing cost of the entire production is $1,000, 5% of the production is generally rejected or not used. The realizable value of the rejected products is $20. The normal loss as per company norms is estimated at 2%. How to find the job costing of different products?
- Loss due to rejection is 5% i.e. 5% of $1000 = $50.
- Normal Loss is 2% i.e. 2% of $1000 = $20.
- Therefore, the abnormal loss = $50 – $20 = $30.
Therefore, the ratio of Normal loss and abnormal loss comes out to be $20:$30 = 2:3.
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Now, if the rejection is inherent then the cost of the same is incorporated in the manufacturing cost. But if it is not identified with the jobs, the cost due to rejection is settled with factory overheads.
The manufacturing cost will be written off to the statement of profit and loss.
The distribution of the cost as per its job will be done as follows:
- Work in progress = $50.
- Material Cost = $20.
Abnormal loss of $30 will be allocated in the ratio 2:3:
- Therefore,Overhead = $30*2/(2+3) = $12
- Manufacturing cost written off to Profit and Loss = $30*3/(2+3) = $18
Some of the advantages are as follows:
- Provides Details: In this, the complete details of the material, overheads, and labor can be ascertained because in job costing the cost is segregated job-wise.
- Profits Assessment: The profits from each job can also be ascertained separately.
- Production Planning: It helps the organization in production planning. The storekeeper can easily manage his inventory if he follows the job cost sheet.
- Budget: They can also help the organization in making their budgets. The estimation can be drawn easily by following the job costing method.
- Abnormal Loss: In job costing mechanism the abnormal loss can be identified and then it can be treated. The treatment for an abnormal loss will help the organization to get the correct profit earned by the organization during the year.
Some of the disadvantages are as follows:
- Expensive: This technique is very helpful. It requires an expert to do the same. For any big organization, when there are a lot of transactions going on, it is difficult for them to ascertain the cost. Therefore, they are required to hire an expert and the expert charges professional fees for the same.
- Cumbersome: In case of a big organization, where there are lots of material, labor and overheads used, the detailing of each item to prepare the cost sheet becomes cumbersome.
- Fails to Consider Inflation: It fails to consider the inflation effects. When the cost sheet is prepared all the details are recorded but the process of job costing cost sheet is such that the effect of inflation cannot be incorporated due to its limitations. Therefore, it gives a wrong calculation of profits especially if the cost sheet is prepared in the middle of the month.
- Market Condition: The market condition for the preparation of a job cost sheet is very important. Sometimes uninvited factors like labor strike, nonavailability of products, etc. make the calculation for the job cost sheet very inaccurate.
- Whenever the normal loss is being ascertained by the organization at the time of finalization of the cost sheet the loss is evenly adjusted to the whole output.
- Whenever there is an abnormal loss, the loss is adjusted under the statement of profit and loss account.
- Whenever the mistake in cost sheet is due to the wrong entries in the inventory books the rectification is done by charging the cost to its inspection department and not to the manufacturing department.
The job costing mechanism in accounting is technically a very efficient way of finding out the cost of each job in a production unit. The management can easily understand which item is profit-generating and which item is loss-making. The organization can avoid such items in the future and can think of adding another substitute for the same. All in all, the allocation of the cost is done through this process very smoothly. All the expenses are evenly distributed.
However, it is a known fact that whenever any organization thinks of having an efficient mechanism they have to bear the cost for the same. The experts are hired to control the costing mechanism and which are costly, only big organizations can afford this.
In this, each job or work for the production is considered as separate items. The profits can be easily identified by adjusting the losses but due to its cumbersome detailing, the cost sheet loses its importance and most organizations fail to include the entire material, labor, and overhead details into their cost sheet. If this loophole can be fixed, then the entire process of job costing will become very efficient to all organization.
This has been a guide to what is job costing and its meaning. Here we discuss the example of job costing accounting along with components, advantages, and disadvantages. You can learn more about accounting from the following articles –