Job costing: introduction; definition; components, characteristics; steps; applicability; classification and advantages

1.1 Introduction

In this type of costing method, two definitions have been used as follows;

Definition-1: Job Costing is the cost ascertainment process/approach or style or tactic adopted by an organization to collect cost data where cost units (job) can be identified separately and assigned cost individually. The reason why this approach is possible is that the job size is big enough to be a standalone assignment.

Definition -2: Job costing, also referred to job order costing which is a cost ascertainment approach which involves identifying the relevant cost elements affiliated to a particular job such as direct materials, direct labor, direct expenses and overhead costs and cumulating them to form the total cost for that specific job.

Components of job costing

2.1 Introduction

From these two definitions, it is clear that job costing entails;

1). Identification of the specific job to be undertaken by the producer/manufacturer.

2). Identification of the specific cost elements associated to that job.

3). Confirming if the cost elements, namely; direct material cost, direct labor, direct expenses and overhead costs are traced and attached to that specific job.

4). Cumulating or summing up all the monetary values of those production inputs (i.e., cost) to establish the actual cost of the specific job once it is complete.

NB1: That job costing method is one of the two key or mainstream classification of costing methods (the other one is operations costing method) which is based on the unit or output costing criteria.

Characteristics of job costing

3.1 Introduction

Job costing is a costing method which is dominated by the following characteristics which distinguishes it from other costing methods. These characteristics are, and not limited to;

1). The assignment is specific

In other words, the job to be undertaken is on the basis of strict guidelines. There are Terms of Reference (TOR) from the customer or client.

2). It is possible to trace exactly the cost elements associated to that job.

The job being undertaken is so distinct such that the producer can connect the specific input materials, labor and overhead that is associated to that job completion.

3). Jobs undertaken are different one from the other.

Since the clients are diverse, the jobs are also different. That is they are not similar. This is because the manufacturer may be dealing with different customers or the same customer/client but with different nature of jobs.

4). Overhead cost allocation/apportionment is based on the appropriate criteria.

The indirect cost associated to production of the job number in question is determined by a unique base from the other jobs such as surface area, size of the job etc.

5). Maintenance of separate account for each job.

Since the jobs are different in most of the times, the accounts for each job are necessary. That is, all the costs associated to that particular job will be debited in that particular account with a unique account number and the costs posted therein forms the total cost for that job.

6). Production process is not continuous.

Each job is independent of the next one and therefore, there is no continuity as it is in process costing method. Therefore, the jobs are in actual sense broken. That is, a job is initiated on the basis of an order made by the client.

7). Profitability of each job is established separately.

The profitability margin for each job is determined by the total cost of the inputs consumed by that particular job. So, each job has its own costing and setting of the profits thereof.

Steps for job order costing method

4.1 Introduction

The following steps are the most suitable stages to follow if you are to efficiently determine the total cost that is associated with the completed job/assignment.

STEP-1: Assign a Job number to each job from the different clients/customers.

STEP-2: Identify all direct material costs associated with the specific job and accumulate it accordingly.

STEP-3: Identify all direct labor costs associated with the specific job and accumulate it accordingly.

STEP-4: Identify all direct expenses associated with the specific job and accumulate it accordingly.

STEP-5: Allocate or apportion the job overhead cost as per the chosen appropriate basis

STEP-6: Sum up the total costs as per the cost breakdown you have used.

Applicability of job costing method

5.1 Introduction

Job costing is applicable or suitable where;

1). There is a variety of clients who have different interest with the manufacturing firm.

Job costing is more fitting for firms with a focus in serving the different clients which fall within their service provision objectives.

2). The manufacturer deals with production of a wide spectrum of products.

The organizations with this mission cover a wide space of services that they provide. They cannot afford to focus on one category of a product for they know clients also have diverse needs. Organizations which commonly use job costing methods are;

  • Printing shops
  • Office equipment firms
  • Construction firms

3).Production procedure is not a continuous process.

In other words, production activity is kindled or initiated when there is a new order. That is, until there is need by a client arising to be served buy the concerned firm, then no production can take place.

Classification of job costing method

6.1 Introduction

Job costing method is further broken down to;

6.1.1 Contract Costing Method

Contract costing method is also known as terminal costing method and it involves doing some assignment with set specification for another person for a payment. The contract costing method of ascertaining cost for a contract. Once the contract is completed as per the agreement of the two parties, the assignment is closed down.

6.1.2 Factory Costing Method

Factory job costing is entails undertaking a client’s assignment or job in a factory.  The focus is the assignment at hand and on its completion, the output is delivered to the client.

6.1.3 Batch Costing Method

Batch costing method is an approach of assigning costs on a task which is completed in batches. It entails manufacture of a large number of products or goods at the same time.

Advantages and disadvantages of job costing

7.1 Introduction

Job costing method is an approach which focus on assigning of costs on distinct assignments. Some of the advantages of using job costing method are;

7.1.1 Advantages of Job Costing Method

1). Help in determination of profitability level of firm products in the future.

The current record of how cost was assigned to the current product provides a guideline on setting the profit margins to be made.

2). Availability of clear cost data help the management in setting the selling price of the final product.

The selling price to be set is directed by the level of cost accumulation such that if the cost is more, the selling price will be high and the vice versa is true.

3). Optimal allocation of economic resources.

Job costing method is set in a manner that it is possible to monitor the usage of the resources available. So, the manufacturer or producer is in a position to identify cases where there is wastage and defections for each specific job and avoid such situations.

4). Job costing helps in adoption of predetermined overhead rates which again helps in the application of budgetary control system.

That is to say, before actual cost is incurred, the producer can plan earlier to know how to control costs/inputs for the inputs needed can be estimated through the costing method provided.

5). Job costing method foster the activity of delegation of duties amongst the employees.

Job costing method helps in delegation of duties to be undertaken by each employee at the work place. Hence level of responsibility to a department or individual worker is improved.

6). Avoidance of duplication of efforts.

The manufacturer is in a position to separate one job from the other and avoid overlaps in production which may result to resource wastage.

7). Increased production efficiency.

The manufacturer is in a position to assess the level of inputs and outputs and ensure that the former is minimized, hence improving efficiency and quality of the final product.

7.1.2 Disadvantages of Job Costing Method

1). Unnecessary expenditure or costs which take place between two processes may be unavoidable.

Job costing method is a difficult and costly/expensive venture for the small firms due to lack of economies of scale.

2). The job costing method does not cater for standard procedure in estimation of costs paid or incurred.

That is, the jobs are different and tackled differently unlike the way it is in process costing where uniformity of products prevails.

3). Job costing method is not applicable/suitable for fast moving jobs.

The category of jobs which are short lived may not be favored by this approach of costing method. This is because cost efficiency is naturally low.

4). Job costing method demands a lot of clerical work to be undertaken to accomplish a particular task.

There are several logistics that demand a lot of paper work in job costing for the sake of capturing all details of cost elements. This is cumbersome approach.

5). Job costing method is sunk or historical in nature.

Sunk cost are costs which have already occurred and they are never suitable for decision making in the future. You see, the producer relies on the already completed tasks as per past records which shows the incurred/actual cost of similar nature of job and therefore not suitable tool for future decision making.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.