Job costing

Job costing

The job costing method is mainly applied when the goods are produced, or services are rendered as per the customer’s order. On the other hand, batch costing is a type of job costing, in which goods are produced in a lot of similar units, called batches.

Whether we talk about business or industry, a costing system is required everywhere to fix the price of products, to ascertain the cost associated with the product, and so on. However, a single costing system is not capable enough to fulfill the requirements of various industries. Hence, different costing systems are designed, that businesses can use as per the nature of products, operations, and other parameters.

Basically, costing methods are classified into specific order costing and operation costing. Specific order costing is one where the product comprises of separate jobs, batches or contracts. So, it covers three costing methods, i.e. job costing, batch costing, and contract to cost. This article excerpt presents you all the important differences between job costing and batch costing, have a glance.

Job costing is described as a costing method, wherein customized production of goods or services are rendered. The method of costing is used when jobs are performed for different customers as per their orders. Under this system, each cost unit is treated as a separate entity, for costing purposes. Each job differs from another job in respect of:

• Material used
• Labors required
• Special customer needs

In this system, on the receipt of an inquiry from the client, the cost to be incurred is ascertained and based on the estimate, the price is quoted. The cost of material, labor and overhead incurred during the job is accumulated, and when the job is accomplished, these are compared with the quoted price, so as to determine the profit or loss of each job. It may extend to multiple accounting periods, and so they are not associated with particular periods.

Features of job costing:

(a) It is a Specific Order Costing.

(b) The job is carried out or a product is produced to meet the specific requirements of the order. It may be related to a single unit or a batch of similar units.

(c) It is concerned with the cost of an individual job or batch regardless of the time taken to produce it, but normally short-duration jobs.

(d) Costs are collected to each job at the end of its completion.

(e) The costs of each job is ascertained by adding materials, labor, and overheads.

(f) Only prime cost elements are traceable and the overheads are apportioned to each job on some appropriate basis and sometimes it is difficult to select a suitable method of absorption of overheads to individual jobs.

(g) Standardization of controls is comparatively difficult as each job differs and more detailed supervision and control is necessary.

(h) Work-in-progress may or may not exist at the end of the accounting period.

Advantages of Job Costing:

The advantages of Job Costing are as follows:-

(a) The profit or loss made on each job can be measured if the cost is set against the price tendered for the job.

(b) It generates the cost data useful for the analysis and control by the management.

(c) It highlights whether or not a job is likely to be profitable or not.

(d) It readily fits into the double entry system, and lends itself to performance evaluation and review of costs.

(e) Job costing enables a comparison to be made with performance on other jobs so that inefficiencies are identified and rectified.

(f) Some jobs are negotiated on a ‘cost plus’ basis if there is difficulty in estimating a price for a certain job and the customer agrees to pay the cost of the job plus an agreed percentage as a profit margin. In cost-plus jobs, it is essential to maintain reliable costing records.

(g) The cost incurred to date on the job are known before the job is completed, and any mistakes or excessive costs show up at an early stage.

The major disadvantage of Job costing is that it is too expensive, and time-consuming in maintaining of cost records for each job undertaken.

Batch Costing may be understood as a variant of job costing. In this system, a group of identical units, comprising of a batch is used as a cost unit, to estimate cost. To ascertain the cost per unit, the total cost of the batch is divided by the number of units produced in a batch, as represented below:

Cost per Unit = Total Batch Cost/ Total units in a Batch

For each batch, a cost sheet is prepared and maintained, by allotting a batch number. There is batch-wise preparation of material requisition notes, engagement of labor, and recovery of overheads.

This costing method is employed by firms to manufacture a large number of similar items or components, as they pass through the same process and so it is beneficial to ascertain their cost of production collectively.