Job costing is a cost accounting system that allocates the costs of producing a good or service to the particular products and services of the company that created them.
This gives management a clear picture of where money is being wasted and helps them make more informed decisions about which products and services to produce in the future.
The primary characteristic of the work order costing method is that no two orders are identical and that no two orders undergo the same production process.
Commonly, the job order system is used by manufacturing businesses that make items to a customer’s requirements, such as construction, contracting, machine tool manufacturing, furniture manufacturing, foundries, job printing, and general engineering. A job might be a product, unit, batch, sales order, project, contract, service, or special programme, or it can be any other cost target that is clearly recognisable and unique in terms of materials and other services utilised.
Job costing is not only the process of calculating the total cost of a product but also the analysis of individual elements of the production process which influence the cost. It is also the tracking of expenses related to the production.
Who Uses Job Costing System?
Job costing systems are most commonly used for the manufacturing industry, engineering industry and services (e.g. banking) industry.
The manufacturing industry is an industry whose output consists of physical products, most of which are manufactured or produced in some way. The manufacturing industry includes industries that make products from raw materials that are sourced from mines or produced in factories using the resources of the Earth, the sky, and the air. These types of products include:
1. Machinery (e.g. machinery tools)
2. Chemical products (e.g. dyes and fertilisers)
3. Electronics (e.g. microchips and televisions)
4. Textiles (e.g. cotton and synthetic fibres)
5. Vehicles and vehicle components (e.g. cars and motorbikes)
6. Clothing and fabrics
7. Paper and paper products (e.g. paper books, paper bags, paper plates, paper cups, paper tissues, and paper napkins)
8. Food and Beverage (e.g. meat, milk, vegetables, fruits and beverages)
9. Building materials (e.g. bricks and cement) 10. Household and Personal (e.g. soap, clothing and cosmetics)
Advantages of Job Costing
Job costing has the following advantages:
1. Costing is more precise because all costs are gathered and associated with a single order or product.
2. It’s straightforward, as direct materials and direct labour hours are tracked per product or job.
3. Cost sheets for jobs can be used to monitor efficiency and forecast future work.
4. It serves as a benchmark for comparing one job’s cost to another or for comparing a job’s cost sheet tea cost estimate to another job’s cost sheet tea cost estimate.
5. Job costing has other advantages, which include the fact that it gives a clear description of a job’s scope, allows for the tracking of a job’s progress and allows for an accurate and objective description of the cost of a job.
Disadvantages of Job Costing System
The basic limitation of the job costing system is the assumption that products are being sold in one batch at the unit cost. But most of the time, products are purchased in batches that are more than one. These batches have to be identified and then included in the sales transaction as one batch. The job costing system is not designed for this purpose and hence there are limitations with respect to identifying multiple batches. These limitations are:
Incomplete job description
In the case of the job costing system, the job is not described in detail; it is assumed that the material cost, material wastage, labour cost, time and materials consumed, overheads, etc., are taken care of. However, in most cases, the job is incomplete and hence there may be a huge difference between the actual cost and the unit cost.
It has been identified in a study that there are cases where even 50% of the material is wasted. This leads to a huge difference between actual and unit costs.
This has been highlighted as one of the biggest problems that the job costing system faces. Because the products are purchased in batches, the job costing system assumes that there is one unit of time taken in the process. But this is not true. In most cases, the time of the production line may vary, and the time taken may differ.
Job costing is the act of tracking the time, materials, and expenses that are involved in each or all of your activities. It is widely used for service organizations, craft industries, custom manufacturers with a low volume of standardized products, and any organization that sells its services or provides a service.
Job costing is the system that can help you to be better informed about the costs. This can help you to understand the cost of a product as well as help you to increase the efficiency of the company. For that, you need a job costing system. This system will help you to make more efficient decisions and also help you to reduce costs and increase revenue.
This not only serves to make you more aware of the cost of each job but also helps you plan financially for what might be coming in the future. It can be very helpful when deciding which jobs to take on