Updated: Feb 24
What is Job Costing?
Job costing, also called project-based accounting, is the process of tracking costs and revenue for a specific job. Job costing will break down labor costs, materials, and overhead to look at each project in detail. It makes fewer assumptions than other costing methods.
Besides, Job costing is a system of expense monitoring in which a business only creates products to fill customer/client orders. Employees complete job order cost sheets for each order and usually separate expenses into three main categories: direct material, direct labor, and manufacturing overhead. Companies in many industries can use job order costing, though a variety of product offerings/services complicates the tracking of expenses.
Terms Similar to Job Costing: Job costing is also known as job order costing.
This method is a great tool for tracking the costs of specific jobs and checking them to see if future jobs can reduce costs. An alternative use is to see if any excess charges incurred can be charged to the customer's bill.
If a job is expected to run for a long time, the cost accountant can periodically compare the accumulated cost stored with its budget, and warn management in advance if the cost seems to exceed expectations. This gives managers time to control the cost of the rest of the project or may have to contact the customer to increase the bill to make up for some or all of the cost overruns.
What kind of businesses can use Job Costing?
A job order cost system is one in which a firm counts the costs for each separate "batch" of work separately. In other words, the company treats different jobs as separate things and therefore tracks the costs of each job separately from the other jobs. Because of this, a firm that uses this sort of system should be one whose jobs are not all the same.
In short, the kind of firm that should use this system is a firm that does many jobs that are distinguishable from one another.
1. Construction Industry
Job costing is commonly used in the construction industry, where costs vary widely from job to job. Construction projects require a range of inputs, from labor to various types of materials and tools. Identifying the exact cost of all inputs for specific jobs can be challenging. Costing techniques in construction management require input workers on the job and solid record-keeping. Job costing can be especially useful for construction project managers to keep track of their total job expenses.
2. Manufacturing Companies
Manufacturing companies incorporate job order costing as a means of controlling the usage of raw materials, production equipment, and labor hours. These businesses consider each customer order a separate job for the purposes of job order costing. Alternatively, manufacturers may group smaller value projects together under a single job heading. How manufacturers group jobs depends on the size of the company.
For example, a small business manufacturer may consider any job valued over $1,000 as a single job, but they may group smaller customer orders together in blocks of $1,000 for costing purposes.
3. White Collar Businesses
Companies in the white-collar sector of business, including law firms, accounting businesses, and private investment companies, can utilize job order costing to manage individual client accounts.
For example, accounting firms can consider each individual client a job. Firms complete job order cost sheets each business day, detailing how accountants are handling client accounts and how many hours a client's needs consume each day. This generates daily costs that businesses can use to measure how much money firms bring in each day versus the costs associated with job activities.
4. Medical Services Businesses
Medical services businesses, including hospitals, small doctor's offices, and medical billing companies, can use job-order costing to consider each patient or bill as an individual job. Record-keeping for job order costing in service industries, including the medical field, can be more complex than in other industries because these businesses offer a wide array of services. This requires medical service businesses and other service companies to keep detailed records of each specific job to determine costs correctly.
For example, a doctor's office may order patients based on the purpose of visits and the cost of treatments administered.
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5. Retail Companies
Retail companies, including clothing producers and retail outlets, employ job order costing to track sales of clothing by size, individual articles, and broader styles. This allows retail companies and other businesses to track expenses to create a variety of job order cost models to show how costs vary from product to product.
6. Entertainment Industry
Businesses in the entertainment industry, including film studios, can create separate job order cost sheets for each film the studios create. Job order cost sheets for film companies contain actor salaries, director payments, and crew wages as direct labor costs. Direct material costs can include props, costumes, utility costs for sound stages, and set design fees.
How to Calculate Job costing?
Calculate direct material Calculate direct material means calculating the cost of all materials used on the job. They are all the raw materials that go into your products. On the other hand, tools and cleaning supplies are called indirect materials and are included in overhead costs. If your product is a wheelbarrow, steel and wood are direct materials. You may have used hammers and blowtorches to make a wheelbarrow, but since they are not attached to the final product, they are not considered direct materials.
Calculate direct labor Direct labor costs are the wages of workers who have actual roles in the project. For example, factory workers are direct workers in manufacturing. Calculate the daily business cost of hiring all employees who will work on the project. the payroll day rate by your estimated time required to complete the work. If you are relying on subcontractors for work and your company is unable to complete the work, please include these costs in your total labor costs. This can help obtain estimates from each contractor.
Determine overhead rate Overhead costs are all the indirect costs that go into the project. Tracking overhead is tricky because you’ll need to rely on an approximation instead of a more exact figure. One way this is done is by using a predetermined overhead rate. You’ll need to estimate the total overhead costs of manufacturing, including factory rents, utilities, supervisory salaries, and machine maintenance in overhead costs. Many companies use total overhead costs for each project, such as 10% per job. Or, you can calculate your predetermined overhead rate. The predetermined rate is derived using the following calculation: The predetermined rate = Estimated amount of manufacturing overhead to be incurred in the period ÷ Estimated allocation base for the period Written as an equation, job costing is calculated like this: Total Job Cost = Direct Materials + Direct Labor + Applied Overhead
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Difference between Job Costing and Process Costing
Process costing is a method of costing used mainly in manufacturing where units are continuously mass-produced through one or more processes. The method used is to take the total cost of the process and average it over the units of production.
Key differences between Job costing and process costing
Job Costing is performed when producing special products and use process costing when producing standardized products.
In Job Costing, the cost will be calculated for each job, but in Process Costing, the cost of each process will be calculated first, and then it will be distributed to the number of units produced.
In Job Costing, the cost of each job is determined, but in Process Costing, the cost is ascertained after the completion of the job
Normal losses are verified carefully, while the abnormal losses are bifurcated in process costing. On the other hand, in job costing, losses are not bifurcated.
In Job Costing, the possibility of cost reduction is very small. Compared with process costing, the scope of cost reduction is relatively large.
Why Job Costing is Essential for Small Business Owners
To make money consistently, you need accurate estimating. In order to have accurate estimating, you need accurate job costing to give you constant feedback on your estimating system.
Job costing plays a vital role as a big picture financial control for business owners. When you run job costing reports, you will see which customers, projects, employees, and services are the most profitable. This type of insight allows companies to track their current operations, identify growth opportunities and improve their profitability and direct their employees to these major opportunities.
Furthermore, it helps future customers or companies to decide whether to take up the job or not. It also gives us an idea about the feasibility of the job.
Accurate job costing data is needed for three reasons:
– Help strengthen the cost control of ongoing work
– Prevent future work overspending
– Establish cost history for estimation
In conclusion, Job costing is a must in today’s business environment. It is a simple method of recording the costs of a manufacturing job, rather than a process. With a system, a project manager or accountant can keep track of the cost of each job, maintaining data that is often more relevant to the operations of the business.
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