Job Costing

Which industries adopt Job Costing? Describe the procedure for recording costs under Job Costing.

Industries That Adopt Job Costing

Job Costing is particularly suitable for industries where products or services are produced based on specific customer orders or unique projects. These industries typically deal with customized or non-standardized products, and each job may have different requirements in terms of materials, labor, and overheads. The following industries commonly adopt this method of costing:

1. Construction Industry:
   
   • Construction companies use job costing for projects such as buildings, bridges, roads, or other civil engineering works. Each construction project is treated as a separate job with its own costs, timelines, and specifications.
     
2. Shipbuilding Industry:
   
   • Shipbuilding involves large, complex projects that vary greatly in terms of design, materials, and labor. Job costing helps to find the costs for each individual ship building or vessel being built.
     
3. Custom Furniture Manufacturing:
   
   • Companies that make custom-designed furniture, such as bespoke cabinets or specialty pieces, adopt job costing to track costs for each specific order or design.
     
4. Printing Industry:
   
   • Printing companies often receive orders for different types of prints (e.g., brochures, books, banners). Each print job is unique and is assigned its own job cost, considering materials, labor, and overheads.
     
5. Aircraft and Automobile Manufacturing (for Custom Orders):
   
   • In cases where a customer orders a unique design or specific modification of an aircraft or automobile, job costing is used to track the costs for that specific job.
     
6. Consulting Firms:
   
   • For professional services, such as legal, accounting, and IT consulting, job costing helps track the direct labor and expenses for each client or project.
     
7. Event Management:
   
   • Event planners adopt job costing to track costs for each event, including venue rental, equipment, catering, and staffing.
     
8. Film Production:
   
   • In the film and media industry, each film or project is considered a separate job, and costs are tracked accordingly (e.g., for cast, crew, equipment, and location expenses).
     
9. Specialized Engineering and Design:
   
   • Companies involved in engineering and design projects (such as architectural firms, machinery manufacturing) also use job costing to manage individual contracts or designs.
     

Procedure for Recording Costs under Job Costing

The job costing process includes tracking costs for each particular job or order. The goal is to allocate direct costs (materials and labor) and indirect costs (overheads) to each job separately, ensuring that the actual cost of each job is accurately recorded.

Here’s a step-by-step breakdown of how costs are recorded under job costing:

1. Job Order Creation and Cost Estimation

• Job Order: When a customer places an order or a new project starts, a job order is created. This document outlines the job’s specifications, expected costs, timeline, and resources needed.
  
• Cost Estimation: Before work begins, the company estimates the expected direct materials, direct labor, and overhead costs. This estimate helps in planning and setting up budgets.
  

2. Allocation of Direct Costs

• Direct Materials: The cost of materials that are directly traceable to the specific job is recorded. Materials used for the job are charged to the job order as they are requisitioned.
  
  • Example: If wood is used to make a piece of furniture, the cost of wood is directly assigned to that particular job.
    
• Direct Labor: The wages paid to workers who are directly involved in producing the job (e.g., carpenters, technicians, laborers) are recorded and allocated to the job.
  
  • Example: The time spent by a carpenter on a custom furniture job is charged to that specific job.
    

3. Allocation of Indirect Costs (Overheads)

• Overhead Allocation: These Indirect costs cannot be directly traced to a particular job, and these costs are allocated to each job using a predetermined overhead rate. This rate is usually based on factors such as labor hours, machine hours, or material costs.
  
  • Example: Factory rent, utilities, and supervisory salaries are overheads. If overhead is allocated based on labor hours, so that the overhead for each job is calculated using the number of labor hours worked on that same job.
    
  • Predetermined Overhead Rate (POHR) is often calculated as:
    
• POHR=Estimated Overhead CostsEstimated Base (e.g., labor hours or machine hours)POHR = \frac{\text{Estimated Overhead Costs}}{\text{Estimated Base (e.g., labor hours or machine hours)}}

4. Job Cost Sheets

• Job Cost Sheet: Each job has a job cost sheet that records all the costs associated with that job, including direct materials, direct labor, and allocated overheads. This sheet serves as the primary record for the job.
  
  • Example: The job cost sheet for a custom-made chair will have entries for wood (materials), labor hours worked (direct labor), and overhead costs based on the estimated overhead rate.
    

5. Recording the Costs in Accounting Books

• Material Requisition: When materials are issued for a particular job, the material requisition form is completed and the cost is added to the job cost sheet book.
  
  • Example: A material requisition is filled out when wood is pulled from inventory for a custom job.
    
• Labor Costs: Labor costs are recorded by timesheets or job cards. The total labor cost for each worker or team is then charged to the job.
  
  • Example: A job card for each worker involved in the project tracks their hours spent on the job.
    
• Overhead Costs: Overhead costs are applied using the predetermined rate based on the job’s labor or machine hours, and they are recorded on the job cost sheet.
  

6. Completion of the Job

• Once the job is completed, the job cost sheet is reviewed to ensure all costs have been properly allocated and assigned to a particular job.
  
• If the actual overhead costs differ from the applied overhead, an adjustment entry is made to reflect the difference in the book.
  

7. Billing the Customer

• After completing the job, an invoice is sent to the customer, which includes the total cost of the job, including direct materials, direct labor, and overhead costs.
  
  • Example: A construction company completes a building project and bills the client for the total cost recorded on the job cost sheet, adding a profit margin on top of the cost.

Journal Entries under Job Costing

To record costs under job costing, the following journal entries are typically made:

1.For Materials Issued to Job:

Dr. Work in Progress (Job Cost Sheet) [Material Cost]

Cr. Raw Materials Inventory [Material Cost]

2. For Direct Labor Cost:

Dr. Work in Progress (Job Cost Sheet) [Labor Cost]

Cr. Wages Payable (or Cash) [Labor Cost]

3. For Overhead Applied:

Dr. Work in Progress (Job Cost Sheet) [Applied Overhead]

Cr. Manufacturing Overhead [Applied Overhead]

4. For Completion of Job (Transferred from Work in Progress to Finished Goods):

Dr. Finished Goods Inventory [Total Job Cost]

Cr. Work in Progress (Job Cost Sheet) [Total Job Cost]

Conclusion

Job Costing is highly adaptable for industries that handle custom or unique orders, where each job or project has different materials, labor, and overhead costs. By accurately tracking and recording costs through job cost sheets, businesses can ensure efficient cost management, evaluate profitability per job, and bill customers appropriately. You can find the syllabus of cost Accounting on Gndu.

Essential questions of Cost Accounting

1. Methods of Cost Accounting.
2. Abc Costing Analysis.

Job Costing