Chapter 3 Adavanced Managerail Accounting

CHAPTER 3
JOB COSTING
Definition Of Job Costing

The term Job Costing may be defining as "in job costing, costs are collected and
accumulated according to jobs, contracts, products or work orders. Each job is
treated as a separate entity for the purpose of costing.
Features of Job Order Costing
Some of the important features of this method of costing are given below:
 Works or production are undertaken against the order of customers.
 Production is not as a continuous process because each job is accepted by
work order basis not
 for stock or future sales.
 Each job is treated as a separate entity for the purpose of costing.
 There is no unifonnity in the flow of production because of different
production process.
 Costs are collected and accumulated after the completion of each job or
products in order to
 find out profit or loss on each job.
 The jobs differ from each other requiring separate work in progress
maintained for each job.
Objectives of Job Order Costing
The following are the important objectives of Job Costing:
 Job costing provides accurate cost information for each job or product.
 It enables management to reduce the cost by making comparison of each
element of actual
 costs with estimated ones.
 It helps management to measure the operational efficiency and inefficiency
for each job or
 works to take effective decision making.
 This method enables management to providing proper valuation of work in
progress.
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Advantages of Job Order Costing
The following are the various advantages of Job order costing:
 It helps management to identifying profitable and unprofitable jobs.
 It provides required information for preparation of estimates while submitting
quotations for similar jobs.
 It facilitates effective cost control by evaluating operational efficiency of each
job or works.
 It helps management to fix selling price of each order or each job.
 Spoilage and defective works can be easily identified with each job or person.
 It facilitates the application cost-plus formula of pricing of large contracts.
 It facilitates the introduction of budgetary control of overheads, since the
overheads are charged
 on predetermined basis to arrive at the total costs.
Disadvantages
 This method is relatively involve more labour intensive. Thus, it is expensive.
 With increase in clerical work, there are chances for committing more errors
and mistakes.
 Job Costing is essentially historical costing. It does not provide for the control
of cost unless it is combined with estimated or standard costing system.
 It is difficult to make cost comparison among different jobs because each job
has its own features
Costing Procedure
The procedure of job costing may be adopted for costing purposes is briefly given
below :
1. Customer's Enquiry: Production or job order is executed on the basis of
enquiries received from the customers. The routine enquiries may be related to
expected estimated costs to be incurred, quality to be maintained and duration for
production planning etc.
2. Quotation for the Job: As per the customer's enquiry and specifications of work
or job, a responsible person is preparing the estimates or quotation and price is
fixed for a specific job. And the same conveyed to the customer appropriately.
3. Customer's Order: If the quotation is satisfactory to the customer, he may place
an order.
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4. Production Order: As soon as an order is received, the Production Planning and
Controlling Department will make out a production order. It is in the form of
instructions issued to the foremen to execute the order and to control its physical
progress. It contains all the information regarding the production. Accordingly
production control department assign a production order number for each order
or job.
5. Cost Accumulation: The Cost Accountant is responsible to prepare a Job Cost
Card on the basis of production order. It is also termed as "Job Cost Sheet." For
each job the costs are collected and recorded under separate production order
number. The sources of collection of costs are:
a) Direct material can be identified or obtained either from Bill of Materials or
Requisition Slips or Invoices in the case of direct purchases.
b) Wages paid to direct labour is associated with a job and can be identified or
recorded with the help of Time Sheet, Job Cards and Wage Analysis Sheet.
c) Direct expenses are identified on the basis of direct expenses vouchers.
d) Overheads are apportioned on some predetermined basis. It can be
accumulated with the use of standing order numbers or cost account numbers.
6. Completion of Jobs: After completion of a job, the final report is sent to the
costing department with regard to charging of material, labour, and overheads are
recorded on the job cost sheet. The actual cost recorded under each element of
cost is ascertained to find out the total cost. Any deviations from the estimated
costs are also noted to take the corrective actions.
7. Profit or Loss on Job: It is determined by comparing the actual cost with the
price obtained.
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CHAPTER 3

Definition Of Job Costing

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