With the advent of competition pricing has become a strategic issue. The companies have to accept the price which is determined by the marketplace. It is very important to control the costs and job order costing is one of the most important system to control the costs.
Read More. The relationship between the cash spent and when cash is recognized as an expense is fairly complex in job order costing. This relationship and the complexities that arise have been discussed in this article. Companies incur a variety of costs in their day to day operation. The article lists down the different types of costs that are usually incurred by an organization as well as their implications when it comes to job order costing.
One of the challenging tasks in job order costing is allocation of the overheads. The article discusses few systems which are used to allocate the overheads amongst jobs.
Pre-determined overhead costs are a necessary evil in job order costing. They are inaccurate but it is impossible to get by without them. Large companies usually are process oriented. Since every job is unique and has its own unique costs, there is a chance that the costs may slip out of control too soon. Hence, to avoid these, extensive documentation is required. Earlier these documents used to be filed and present in the office in the physical form. However, of late, they are available electronically.
This makes managing them much easier. Here is a list of the common documents that are used in a job order costing assignment. Job costing has traditionally been used in the manufacturing industry. Many people believe that manufacturing is the only place where job costing can be effectively used. However, as we shall see that is not the case. There is a huge number of service firms today where job costing is the norm. It is essential for a student of job costing to understand where and how it is used in the service industry.
Here are a few examples that will shed light on this issue:. Job order costing has been around for decades. The usefulness of this method has been thoroughly debated. There are points on both sides of the argument which make job order costing either a good or a bad option, depending upon the situation. However, since we know that job order costing has survived the test of time, there must be some serious merits to this technique.
Here is a list of the commonly mentioned advantages of using a job order costing system. The job order costing system has been severely criticized on many grounds. Some of the major criticisms against job order costing have been listed down below:. Job order costing is an elaborate procedure that requires an elaborate system.
Sometime companies find that job order costing is really expensive. It leads to a lot of expenditures in the form of increased overheads by employing more clerical staff to do the job order costing procedure. However, since the costs saved are significant, the increase in overheads in more than compensated for. This article mentions the procedure that is followed in organizations that have job order costing systems in place.
One of the major benefits of adopting a job order costing system is that helps make the organization lean. Many organizations spend a lot of money in wasteful activities. This amount is then charged to the customer as a cost.Learning objectives of the article:. One of the primary advantages of job order costing system is that the management team has ready access to all the costs incurred for each job being completed.
Job Order Costing: Features, Objectives and Procedure
This allows the team to examine each cost incurred, finding out why it happened, and determine how it can be controlled better in the future, thereby contributing to better ongoing levels of profitability. For example, a proper job record contains any special reworking costs, which a manager can then use to trace back to the specific reason why the rework was needed. Similarly, overhead allocations based on machine usage reveal problems with excess use, which might be the result of lengthy machine setups or break downs as well as longer than expected machine cycle times.
Another reason for using job order costing system is that it yields ongoing results for each job. This gives a company several advantages. One is that the accounting staff can monitor job accounts to see if costs are being posted to the wrong accounts and correct them right away, rather than waiting until the job closes and having to frantically review records to see why the results are different from expectations. Another advantage is that a company can monitor the costs incurred for longer jobs and have enough time to make changes before they close, based on the costing information revealed by the job costing system.
Yet a third advantages is that changes in the cost of a job can result in negotiations with cost-plus customers who are paying for all the costs incurred, so that they are fully aware of cost overruns well in advance and are prepared to pay the additional amounts. All these factors are the main advantages of using job order costing system in a computerized environment.
There are also several problems with job order costing system. One is that it focuses attention primarily on products rather than on departments or activities. This is not an issue if there are supplemental systems in place that record information about these other cost categories, but it leaves management with inadequate information if this is not the case.
An other difficulty is that overhead is generally allocated based on rates that are changed only about once a year. Considerable fluctuation in overhead costs over the course of a year can result both in over and under allocation of overhead costs to jobs during that period.
Another problem is specific to the use of normal costing. This practice involves the use of standards overhead rate rather than one that is based on actual costs and requires adjustment from time to time.
This is not just a technical accounting issue, for some jobs are fully reimbursed by customers who pay on a cost plus basis; if the overhead variance is a positive one, a company may not be able to charge its customers for the added costs if the related job have already been closed.
Another issue is that job costing has little relevance in some environments. For example, the soft ware industry have high development costs but almost zero direct costs associated with the sale of its products. The same problem arises in service industries, such as retailing, where there is no discernible product. These situations limit the most effective use of job order costing system to two areas—production and professionals services. The first case, production is an obvious use for the concept since there are high material costs that can be specifically identified with a job.
The same is true of professional services, but here the main cost is direct labor rather than direct materials. In most other cases job costing does not provide management with sufficient quantity of information to be useful. Data related to materials, labor, overhead, indirect labor, scrap, spoilage, and supplies must be entered into system capable of accurately assigning these costs to the correct jobs every time. In reality such systems are rife with mistakes due to the sheer volume of data transactions, keying errors, misidentification of jobs, and the like.
Problems can be resolved with a sufficient amount of error tracing by the accounting staff, but there may be so many that there are not enough staff members to keep up with them. Though these issues can to some degree be resolved through the use of computerized data entry system outweighs the benefits to be gained from it. When there is no fully proven method for accurately allocating overhead, such as through an activity based costing system the results of the allocation yield meaningless information.
This has been a particular problems for the companies that persist in allocating overhead costs based on the direct labor used by each job, Since a small amount of labor is generally being used to allocate a much larger amount of overhead, resulting in large shifts in overhead allocations based on small amount of labor is generally being used to allocate a much larger amount of overhead, resulting in large shifts in overhead allocations based on small changes in labor costs.
Some companies avoid this problem by ignoring overhead for job order costing purposes or by reducing overhead cost pools to include only overhead directly traceable at the job level. In this way, many costs are not allocated to jobs at all, but those that are allocated are fully justifiable. Clearly, one must weigh the pros and cons of using a job order costing system to see if the benefits outweigh the costs.
This system is a complex one that is prone to error, but it does yield good information about production-specific costs. Pros-I believe it is the most effective process for a manager in a company because of the strategic planning and goal setting behavior set up in working environment.
A manager meets goals in all area accept for job growth and future benefit for any employee who would want to grow and promotable in the company which is my take as one of the main downward cause of Job-order system.
What do you think would be the greatest challenge in maintaining a Job-Order Costing system for a manufacturing company?Read this article to learn about the features, pre-requisites, advantages and disadvantages of job order costing. Under this method, costs are collected and accumulated for each job, work order or project separately.
Each job can be separately identified and hence it becomes essential to analyse the costs according to each job. The industries, where this method of costing is applied, must possess the following features:. The nature of the job determines the departments through which the job has to be processed. The production is intermittent and not continuous. Thus, cost is ascertained for each job separately. This method is applicable to printers, machine tools manufacturers, foundries, general engineering workshops, advertising, interior decoration and case making etc.
This ultimately helps the management to judge the profitability of each job and decide the future course of action. Management can easily and accurately determine and quote prices of jobs of a similar nature which are in prospect. Following factors must be considered before adopting a system of job order costing:. In order to achieve the purposes of job order costing a considerable amount of clerical work will be involved and to ensure effective and workable system, the following factors are necessary:.
Thus it is expensive. It does not facilitate control of cost unless it is used with standard or estimated costing.A job order costing system is used when a job or batch is significantly different from other jobs or batches.
Cost accounting is usually fairly simple in these systems. Labor and materials are entered on a job ticket. Overhead is usually added to the amount the customer will be charged for labor and materials. If you go to an auto repair shop, they will start a job ticket just for the work to be done on your car. Your job ticket will show charges for labor and materials, just for your job. But it also includes an overhead charge — which is generally not stated separately.
The overhead charge covers the costs of operating the garage — tools and equipment, rent, insurance, maintenance, utilities, etc. It is a way to allocate overhead discussed belowand build it in to the amount charged to customers.
The garage will also make a gross profit on the parts they use to repair your car. This gross profit covers the cost of buying and maintaining a parts inventory, including department employee wages, insurance and warehousing costs.
These costs are recorded in ledger accounts throughout the life of the job or batch and are then summarized in the final trial balance before the preparing of the job cost or batch manufacturing statement. Job costing known by some as job order costing is fundamental to managerial accounting. It differs from Process costing in that the flow of costs is tracked by job or batch instead of by process.
The distinction between job costing and process costing hinges on the nature of the product and, therefore, on the type of production process:. The details here deal with a manufacturing firm, the same concept and procedures are used by many service organizations. The record keeping and cost assignment problems are more complex in a job order costing system when a company sells many different products and services than when it has only a single product or service.
Since the products are different, the costs are typically different. Consequently, cost records must be maintained for each distinct product or job. For example an attorney in a large criminal law practice would ordinarily keep separate records of the costs of advising and defending each of her clients. And a clothing factory would keep separate track of the costs of filling orders for particular styles, sizes, and colors of jeans.
A job order costing system requires more effort than a process costing system. Companies classify manufacturing costs into three broad categories: 1 direct materials, 2 direct labor, 3 manufacturing overhead. See manufacturing and non-manufacturing costs page As we study the operation of a job costing system, we will see how each of these three types of costs is recorded and accumulated.
Direct labor cost is handled in much the same way as direct materials cost. Direct labor consists of labor charges that are easily traced to a particular job. Labor charges that cannot be easily traced directly to any job are treated as part of manufacturing overhead. Manufacturing overhead must be included with direct labor on the job cost sheet since manufacturing overhead is also a product cost.
However, assigning manufacturing overhead to units of product can be a difficult task. Job order costing is also used in service organizations such as law firms, movie studios, hospitals, and repair shops, as well as manufacturing companies. Bar code technology can be used to record labor time—reducing the drudgery in that task and increasing accuracy.
Bar codes also have many other uses. One of the primary advantages of job order costing system is that the management team has ready access to all the costs incurred for each job being completed.
This allows the team to examine each cost incurred, finding out why it happened, and determine how it can be controlled better in the future, thereby contributing to better ongoing levels of profitability. Shows the use of several major types of cost accounting systems. All companies have to accumulate and allocate costs.
Each company has to decide how it is going to do that. Companies pick a method that works well for them, and is cost effective. Accounting is simply a way to organize information, and make it useful for the people who have to manage a business, and make decisions.A job order costing system is used to accumulate the costs associated with a specific batch of products.
This system is most commonly used for small batch sizes, and especially when the products within each batch are different from the products created in other batches.
In these situations, management wants to ensure that the costs incurred are reasonable when compared to the prices charged to customers. Without a job order system, it is likely that a business would quote the prices of some batches too low and incur losses that it is not aware of. An accountant using a job order costing system may track job-specific information on a job cost sheetor this information may be coded into a job order database, where each job is assigned a unique identifying number.
A job order costing system can be quite complex. It must track information from multiple sources, including the following:. The number of sources of information and the volume of detail that may be associated with a job means that the underlying records could contain any number of errors.
To mitigate the risk of errors, job order records must be scrutinized with great care. This is especially important when job costs will then be summarized and billed to customers under cost plus billing arrangements. In situations where large quantities of the same products are manufactured, a process costing system is used instead, since it provides a more streamlined approach to the related accounting.
Books Listed by Title. Articles Topics Index Site Archive. About Contact Environmental Commitment. It must track information from multiple sources, including the following: Supplier invoices, from which only those line items pertaining to a job should be charged to that job. Payroll records, from which the hours worked on a specific job are charged to that job, possibly also including payroll taxesovertimeand shift differentials.
Material costs, where inventory items are relieved from stock and charged to a job as used. An overhead allocationwhich is derived from a cost pool and charged to each job based on some form of usage, such as labor hours incurred or machine hours used. How to calculate payroll Retention ratio.
Copyright Job order costing system is generally used by companies that manufacture a number of different products. It is a widely used costing system in manufacturing as well as service industries. Manufacturing companies using job order costing system usually receive orders for customized products and services. These customized orders are known as jobs or batches.
A clothing factory, for example, may receive an order for men shirts with particular size, color, and design. When companies accept orders or jobs for different products, the assignment of cost to products becomes a difficult task. In these circumstances, the cost record for each individual job is kept because each job have a different product and, therefore, different cost associated with it.
The per unit cost of a particular job is computed by dividing the total cost allocated to that job by the number of units in the job. The per unit cost formula is given below:. Job order costing is extensively used by companies all over the world. According to a survey, Examples of manufacturing businesses that use job order costing system include clothing factories, food companies, air craft manufacturing companies etc.
Examples of service businesses that use job order costing system include movie producers, accounting firms, law firms, hospitals etc.
What is Job Order Costing ?
Skip to content Menu. Show your love for us by sharing our contents. Leave a comment Cancel reply.Let us make an in-depth study of Job Order Costing. After reading this article you will learn about: 1. Meaning of Job Order Costing 2.
Features of Job Order Costing 3. Objectives 4. Pre-Requisites 5. Advantages 6. Disadvantages 7. Job order costing is that form of specific order costing which applies where the work is undertaken as an identifiable unit such as:. Job costing is a method of cost accounting whereby cost is compiled for a specific quantity of product, equipment, repair or other service that moves through the production process as a continuously identifiable unit, applicable material, direct labour, direct expenses and usually a calculated portion of overheads being charged to a job order.
Under this method, costs are collected and accumulated for each job, work order or project separately. Each job can be separately identified and hence it becomes essential to analyse the costs according to each job. The industries, where this method of costing is applied, must possess the following features:. The nature of the job determines the departments through which the job has to be processed.
The production is intermittent and not continuous. Thus, cost is ascertained for each job separately. This method is applicable to printers, machine tools manufacturers, foundries, general engineering workshops, advertising, interior decoration and case making etc. This ultimately helps the management to judge the profitability of each job and decide the future course of action.
Job Order Costing: Features, Advantages and Disadvantages
Management can easily and accurately determine and quote prices of jobs of a similar nature which are in prospect. In order to achieve the purposes of job order costing a considerable amount of clerical work will be involved and to ensure effective and workable system, the following factors are necessary:. Thus it is expensive. It does not facilitate control of cost unless it is used with standard or estimated costing.
A cost accounting system should be so designed that it would be able to provide the necessary information for achieving control of cost and performance. Thus it shows in detail their cost components of the total cost of executing a job which may take the form of either a special order or job or a batch of orders.
A job cost sheet is prepared for every job which is undertaken on the basis of material requisition concerned. Labour cost on the basis of time clocked in respect of the job with the help of time tickets and factory overheads are added to these cost components according to some rational methods of overhead absorption.
The total cost of a job as indicated by the job cost sheet consists partly of direct cost and partly of costs arrived at by assignment, allocation, apportionment and finally by absorption. Thus it is clear that similar jobs executed during a certain time period are bound to have different units of production.
Unit cost is determined by dividing total cost by the number of units or a volume of goods produced there under. The customer will usually enquire about the price, quality to be maintained, the duration within which the order is to be executed and other specification of the job before placing an order.
The cost accountant estimates the cost of the job keeping in mind the specification of the customer. While preparing estimate, the cost of execution of similar job in the previous year and possible changes in the various estimates of cost are taken into consideration.
The prospective customer is informed with the estimate of the job. If the customer is satisfied with the quotation price and other terms of execution, he will then place the order.
If the job is accepted, a Production Order is made by the Planning Department. It is in the form of instructions issued to the foreman to proceed with the manufacture of the product. It forms an authority for starting the work. It contains all the information regarding production. It is prepared with sufficient copies so that a copy of the same may be given to all the departmental managers or for man who are required to take any part in the production.