What is Job Order Costing System?
Job order costing is a system of assigning the cost of production to a specific manufacturing job; this system is used when each output is different from others. This system is mainly used by those organizations that are providing customer-specific job it means the same product cannot be used by others. For example, Manufacturing of machinery & equipment as per the specification provided by the customer. Service provided by professionals like Doctor, Lawyer, and Chartered Accountants are client-specific therefore for determining the cost of these services is calculating by job order costing method.
Types of Costs Involved in Job Order Costing
In Job order costing different – different type of costs are involved which are mainly divided into below three categories:
- Direct Material – Direct materials are the major contributor to job order costing. Raw materials which are directly consumed for completion of specific job or manufacturing of finished goods come under direct material. These costs are completely depending on the quality and quantity of finished goods.
- Direct Labor – In Job order costing calculation cost of labor used in a specific job is identified and added to the cost of production. Direct labor cost is calculated on the basis of no. of manpower and no. of hours worked. If the specific job is related to providing service then direct labor cost is comprised almost 80% – 90% of the total cost.
- Overhead – Overhead costs are those cost which is incurred in the manufacturing of a product or providing service other than the direct labor and direct material like Rent, Electricity, Depreciation, Legal Fees and any other. Some overhead costs are variable and some are fixed.
Features of Job Order Costing System
- In job order, each job has its own characteristics.
- In this type of costing each job has done against customer order only not as a regular production.
- In this method of costing each job is treated as a cost center.
Example of Job Order Costing
Let’s take an example of job order costing system.
Notebook Inc is a printing & stationery company who has received an order of 5000 copies of invoices from one of its customer according to the specification provided by the customer as on 1st aug’19 and notebook inc has to deliver the invoice copy on or before 20th aug’19 to its customer. As per the company, they are able to finish the work within 10 days, therefore, they have started on 5th aug’19 and assigned this work as a job no. 10/2019. In completion of this job below cost has been incurred by the company.
Direct Materials: In Production of one copy of invoice two units of raw material is required therefore for production of 5000 copies, 10000 units of raw material will be consumed which company has procured at different – different dates as per requirement. Initially, the cost of Raw material was $ 10 per unit but from 13th aug’19 it has increased by $ 1 because of a shortage of raw material in the market. The total cost of raw material consumed is $ 10500.
Direct Labor: In the production of one copy of invoice one manpower hour is required and cost of one manpower hour is $ 5 therefore for completion of job 5000 manpower hours has consumed which company has taken at different – different days according to the availability of raw material. The total cost of direct labor is $ 25000.
Manufacturing Overhead: Cost incurred by the company is $ 20000 which includes depreciation of plant and machinery, factory and office rent and other overheads consumed in the production of these 5000 copies of invoices.
Advantages of Job Order Costing
Following are advantages of job order costing.
- It helps management in the analysis of the material, labor & overhead cost that is incurred in production or completion of the job.
- It helps in the identification of efficiency of machine and manpower.
- Job order costing method helps in cost control and better utilization of resources.
- With the help of job order costing method management can ascertain which job is profitable which is not.
- It helps in comparison with a similar job will be done in the future and become the basis of future jobs also.
- They also identified the scrap and defective arises in the production or completion of the job and accordingly steps can be taken to minimize this.
Disadvantages of Job Order Costing
Following are disadvantages of job order costing.
- It is a time-consuming and costly affair because of a recording of material, labor, and overhead on a daily basis and specific job-wise recording.
- A cost comparison is difficult because in this method the cost sheet is prepared for each job separately according to the specification.
- If two or jobs are going simultaneously then there is a chance of mistake as the cost of one job may be posted in another job.
- In job order costing overhead costs are based on estimates because it is difficult to know the overhead cost which is directly linked with the specific job because most of the overhead facilities are used for more than one job, therefore, there is a chance of excess/shortage allocation of cost.
- They mainly depend on the expertise of production manager, therefore, it is very important that a person who is allocating cost to the specific job has knowledge otherwise a small mistake can change the cost of the product.
Job order costing is useful only for those organizations which are work on the basis of customer requirements and one job is different from another so that cost of each job can be calculated but it is very important to identify all the cost which is incurred in completion of job otherwise it will be lost to the company because cost of one job cannot be assigned to another job. It is a costly affair because it requires skills and knowledge for identifications of cost, analysis and controls the cost.
This has been a guide to what is job order costing and its definition. Here we discuss features, types, and example of a job order costing system along with advantages, and disadvantages. You can learn more from the following articles –