Job Costing: Meaning, Applications, and Features

Job Costing: Meaning, Applications, and Features

7 mins read21.6K Views Comment
Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on May 8, 2024 13:49 IST

Nowadays, customers demand everything customized, from mobile covers to expensive cars. Each product or service is designed uniquely and hence differs in terms of material, quality, quantity, or all three. Calculating the cost for each differentiated product is a tricky affair, especially when companies don’t know which costing method is appropriate for such conditions.

2023_02_Job-Costing.jpg

Job Costing is a cost accounting method designed to help companies track the costs involved in producing customized or individual jobs or projects. This approach is suitable for job order industries where production is done according to the customer’s requirements. 

Production does not take place continuously in job order industries. It only begins once the customer places a specified and customized order. Therefore, each job is different from the others. This costing method calculates the cost for each job using a Job Cost Sheet. 

Enhance your financial expertise with comprehensive Cost Accounting courses covering key concepts. 

Table Of Content

What is Job Costing?

Job Costing, also known as project-based costing, is the method of tracking costs related to a specific product, project, or job. It is used in construction companies, ship-building, engineering concerns, furniture making, repair shops, automobile garages, machine manufacturing industries, and factories where jobs or orders can be kept separately. 

This cost accounting concept allows business owners to track the cost of an individual job in detail. It helps them analyze individual costs and find cost-cutting methods for similar projects in the future. This method breaks each project cost into three major heads known as cost elements: material, labor, and overheads. 

Difference between Job Costing and Process Costing
Difference between Job Costing and Process Costing
Job costing is used for unique, custom orders, tracking costs per job, while process costing averages costs across continuous, homogeneous production, ideal for mass manufacturing of similar items. Let's understand...read more

Difference between Job Costing and Contract Costing
Difference between Job Costing and Contract Costing
Job Costing is used for small-scale projects with distinct costs per job. On the other hand, Contract Costing applies to extended, larger projects, tracking comprehensive costs over the contract's duration....read more

As a job order costing system does not involve continuous production, it requires constant planning and strict control to avoid wasting resources such as manpower, material, machinery, etc. A job may be a contract, product, service, unit, batch, sales order, project, or specific program. Also, any other cost objective regarding materials and other services used is unique.

Target Costing: Meaning and Applications Advantages
Target Costing: Meaning and Applications Advantages
Target costing is a cost management approach used in businesses to determine the desired cost of a product based on market conditions and customer expectations. It involves setting a target...read more
Cost Audit: Meaning, Objectives, and Advantages
Cost Audit: Meaning, Objectives, and Advantages
A cost audit is a critical examination of cost accounts and records. It ensures the accuracy and adhere to cost accounting standards and other related regulations. It aids in detecting...read more

Applications of Job Costing

Construction Industry: The construction industry extensively uses this method. Each construction project is unique and is considered a separate job. Job costing tracks the costs of materials, labour, and other expenses for each project separately.

Manufacturing Industry: Job costing tracks the costs of producing individual products or batches. For example, a furniture manufacturer may use this method to track the costs of producing a specific type of chair or table.

Printing Industry: This method tracks the costs of printing individual jobs such as books, magazines, and brochures. Each job is considered a separate project and is used to track the costs of materials, labor, and other expenses incurred for each job.

Consulting Industry: The consulting industry tracks the costs of consulting services to individual clients. Each consulting project is considered a separate job. It tracks the labour, travel, and other expenses incurred for each project.

Healthcare Industry: It tracks the costs of medical services to individual patients in the healthcare industry. Each patient is a separate job. This method tracks the costs of labor, medical supplies, and other expenses incurred for each patient.

Budgetary Control: Meaning, Objectives, and Advantages
Budgetary Control: Meaning, Objectives, and Advantages
Budgetary control is a systematic process that helps organizations monitor and manage their financial performance by comparing actual results with planned budgets. It allows businesses to track expenses, identify variances,...read more

Elements of Cost in Cost Accounting
Elements of Cost in Cost Accounting
Elements of cost include Material, Labor, and Overhead costs. Material costs are the expenses on raw materials, Labor costs encompass wages and salaries, while Overhead costs cover indirect expenses like...read more

Features of Job Costing

It is a cost accounting method that tracks the costs of producing a specific product or service. The following are its features of job costing:

Customized Production

It is used when the products or services are customized to the customer’s requirements. Each job is unique and requires different inputs, resources, and processes.

Specific Cost Identification

This costing method enables the identification and allocation of all the costs associated with each job, including direct costs such as labor, materials, and equipment and indirect costs such as overhead.

Cost Control

It helps in cost control by tracking the costs of each job and comparing them with the estimated costs. This enables managers to identify and rectify any cost overruns or inefficiencies in the production process.

Accurate Pricing

It provides an accurate basis for pricing the product or service, considering the actual costs of each job and adding an appropriate profit margin.

Process Costing: Meaning and Advantages
Process Costing: Meaning and Advantages
Process costing is a cost accounting method used in industries where products go through continuous, standardized production processes. It calculates the average cost per unit by allocating total production costs...read more

Budgetary Control: Meaning, Objectives, and Advantages
Budgetary Control: Meaning, Objectives, and Advantages
Budgetary control is a systematic process that helps organizations monitor and manage their financial performance by comparing actual results with planned budgets. It allows businesses to track expenses, identify variances,...read more

Budgeting

This method is also useful for budgeting, as it provides a detailed breakdown of the costs associated with each job. This enables managers to estimate future costs more accurately and prepare budgets accordingly.

Detailed Records

This method requires detailed records of all the costs associated with each job, which helps in financial reporting and analysis.

Analysis of Profitability

It provides a basis for analyzing the profitability of each job or customer, which helps in making strategic decisions about future business opportunities.

Difference between Standard Costing and Budgetary Control
Difference between Standard Costing and Budgetary Control
The primary difference between Standard Costing and Budgetary Control is their focus. Standard setting cost benchmarks and analyzing actual costs against these standards for cost control. Budgetary control revolves around...read more

Difference between Budget and Budgetary Control
Difference between Budget and Budgetary Control
A budget outlines an organization's planned financial activities, blueprinting expected income and expenditures. Budgetary control, conversely, involves the ongoing comparison of actual financial results against the budget, implementing adjustments to...read more

How to Calculate Job Costing?

Accountants must dig deeper to find the accurate cost of producing a particular product or service. Analyzing performance from financial documents such as balance sheets and income statements will not solve the purpose. Calculating Job Costing includes adding material, labour, and overheads (expenses). But to estimate the accurate job cost, it requires in-depth analyses of these components:

Material Costs 

A crucial aspect of job order cost accounting involves the identification and specific recording of direct materials and their associated costs with individual jobs or work orders. It involves direct material costs (materials that comprise the finished product) and indirect material costs (materials required to complete the job but not part of the final product). A direct cost usually includes raw materials, while an indirect cost might include tools or machinery used to make a product or office supplies. You can calculate material cost by adding all direct and indirect costs together.

Labor Costs 

All direct labor costs must be analyzed according to individual jobs or work orders. A timesheet, job card, time ticket, or piece-work card tracks time based on the operation schedule. Wages paid to direct and indirect labour are classified in the costing department and categorized into production orders and standing orders. Accountants prepare labour summaries or wage analysis sheets for each accounting period, say a week. Amounts for idle time, overtime, shift-differential and fringe benefits can also be included in the wages analysis sheet. 

Labor costs = (Number of working days x daily pay rate x number of workers)

Manufacturing Overheads 

A standing order number and a cost center are used to accumulate overhead costs. As the case may be, each center’s overhead rates are determined or actual. The Overhead Absorption or Applied Overhead analysis sheet consolidates and posts the allocated overhead cost for each job order onto the relevant cost sheets. Generally, we add overheads only when the job is over but at the end of the accounting period.

Difference Between Marginal Costing and Absorption Costing
Difference Between Marginal Costing and Absorption Costing
The main difference between marginal costing and absorption costing is that in marginal costing, variable cost is treated as product cost, and fixed cost is treated as period cost. On...read more

Difference between Realisation Account and Revaluation Account
Difference between Realisation Account and Revaluation Account
A Realisation Account is specifically used during the winding up of a business to handle the sale of assets and payoff of liabilities, determining the final profit or loss. On...read more

Job Costing Example

Scenario: An Indian graphic design studio receives three separate orders: designing a logo, creating a brochure, and developing a website.

Job Costing Breakdown:

Job 1 - Logo Design:

Cost Type Amount (₹)
Material Costs 2,000
Labor Costs 5,000
Overheads 1,000
Total Job Cost 8,000

Job 2 - Brochure Creation:

Cost Type Amount (₹)
Material Costs 1,500
Labor Costs 7,500
Overheads 1,500
Total Job Cost 10,500

Job 3 - Website Development:

Cost Type Amount (₹)
Material Costs 3,000
Labor Costs 15,000
Overheads 2,000
Total Job Cost 20,000

Total job cost= Total (Job 1 + Job 2 +Job 3)
Total Job Cost: ₹3,000 + ₹15,000 + ₹2,000 = ₹20,000
Each job's cost is individually calculated, demonstrating how job costing is applied when a business handles multiple distinct projects. This method allows the studio to track and allocate costs for each specific job accurately.

Explore: Top Accounting Interview Questions with Answers

Check out More Topics Related to Job Costing

Cost Volume Profit Analysis: Components and Benefits
Cost Volume Profit Analysis: Components and Benefits
Cost-Volume-Profit (CVP) Analysis is a fundamental financial analysis tool that explores the relationship between costs, sales volume, and profitability. It assists businesses in understanding how changes in costs and volume...read more
Cost Audit: Meaning, Objectives, and Advantages
Cost Audit: Meaning, Objectives, and Advantages
A cost audit is a critical examination of cost accounts and records. It ensures the accuracy and adhere to cost accounting standards and other related regulations. It aids in detecting...read more
Standard Costing: Meaning, Advantages and Variances
Standard Costing: Meaning, Advantages and Variances
Standard costing is a cost accounting method where predetermined standards for costs and performance are established. It compares actual costs and performance against these standards to analyze variances and improve...read more
Classification of Costs: A Complete Guide
Classification of Costs: A Complete Guide
Cost can be divided into various basis- Time (Historical, Predetermined), Basis of Elements (Material, Labor and Overheads), Basis of function (Production, Marketing, Selling), Basis of Traceability, (Direct and Indirect Cost),...read more
Marginal Costing: Meaning and Advantages
Marginal Costing: Meaning and Advantages
Marginal costing is a cost accounting technique that focuses on the variable costs associated with producing one additional unit of a product or service. It helps in determining the contribution...read more

Conclusion

Job costing is a valuable accounting method that can help businesses accurately price their products or services, control costs, and make informed business decisions. By identifying all the direct and indirect costs associated with each job, businesses can ensure that they are making a profit on each job and improve their overall profitability.

FAQs

What is Job Costing?

Job costing is an accounting method used to calculate the cost of specific jobs or projects. It is particularly useful for businesses that provide customized products or services, allowing them to track the expenses incurred for each job and ensuring that the pricing covers the costs and generates profit.

How Does Job Costing Work?

In job costing, all costs related to a specific job or project, including materials, labor, and overhead, are recorded and tracked separately. This detailed cost information helps in assessing the profitability of each job, aiding in pricing and future project planning.

Why is Job Costing Important?

Job costing is crucial for businesses offering custom products or services as it provides precise cost information for each job. This accuracy is essential for setting appropriate prices, estimating project costs, budgeting, and ensuring that each job contributes positively to the companyu2019s financial health.

What are the Components of Job Costing?

Job costing involves several components, including direct materials, direct labor, and manufacturing overhead. These costs are allocated to individual jobs or projects, providing a comprehensive view of the total cost and enabling effective cost management and pricing strategies.

About the Author
author-image
Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio