Job-Order Costing is a cost accounting system used when jobs or projects are unique, like construction or custom manufacturing. It helps track costs for each job separately. By doing this, businesses can determine how much each job costs, see if it’s profitable, and decide on pricing and resources. It’s like keeping track of expenses for different projects to see how much they cost and if they make money.
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What is Job-Order Costing?
A job-order costing system is used in situations where many different products are produced each period.
For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month.
A particular order might consist of 1,000 stonewashed men’s blue denim jeans, style number A312, with a 32-inch waist and a 30-inch inseam. This order of 1,000 pairs of jeans is called a batch or a job. In a job-order costing system, costs are traced and allocated to jobs, and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit.
Certainly! Here’s a table that breaks down the information provided and highlights the key points:
| Order Details | |
|---|---|
| Product Description | 1,000 stonewashed men’s blue denim jeans, style number A312 |
| Waist Size | 32 inches |
| Inseam Length | 30 inches |
| Order Quantity | 1,000 jeans |
| Type of Order | Batch/Job |
In this example, a particular order consists of 1,000 stonewashed men’s blue denim jeans with a specific style number (A312), waist size of 32 inches, and inseam length of 30 inches. This order of 1,000 jeans is referred to as a batch or a job.
Other examples of situations where job-order costing would be used include large-scale construction projects managed by Bechtel International, commercial aircraft produced by Bombardier, greeting cards designed and printed at Hallmark, and airline meals prepared by Cara. Diverse outputs characterize all of these examples.
Each Bechtel project is unique and different from every other—the company may be simultaneously constructing a dam in Zaire and a bridge in Indonesia. Likewise, each airline orders a different type of meal from Cara’s catering service.
Discuss the Characteristics of a job order costing.
The salient features or characteristics of job costing can be mentioned below:
- Job costing is a product costing system that accumulates and assigns costs to a specific job.
- Word is carried out against customers’ orders and not for maintaining stock for sale.
- Work has to be carried out according to the specification of the customers.
- Companies that are likely to use a job costing system have a wide variety of products or services.
- A job cost sheet accumulates direct materials, direct labor, and factory overhead.
- Under job order costing a time ticket is used which shows the time worked on each job, the pay rate, and the total cost chargeable to each job.
- The companies which use job costing include printing shops, accounting firms, equipment companies, and construction companies.
Job Costing
Job-order costing is used in situations where many different products are produced each period.
For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month.
Accounting to job costing, costs are collected and accumulated according to the job. Each job or unit of production is treated as a separate entity for the purpose of costing. Job costing may be employed when jobs are executed for different customers according to their specifications.
Example of a Job Costing
Let’s us consider a construction company that specializes in building custom homes. Each home construction project is unique and tailored to the client’s specifications. The company uses Job Costing to allocate costs to individual construction projects.
Suppose the company is working on a specific project to build a custom home for a client. The project involves various costs, such as materials, labor, equipment, and subcontractors. The company tracks and allocates these costs specifically to the job.
For instance, the direct materials for the project, including lumber, concrete, electrical wiring, plumbing fixtures, and roofing materials, may amount to $100,000.
The direct labor costs, including the wages of carpenters, electricians, plumbers, and other workers involved in the construction, may amount to $150,000. Additionally, the company incurs overhead costs, such as project management salaries, insurance, utilities, and equipment depreciation, totaling $50,000.
| Cost Category | Amount | Percentage of Total Cost |
|---|---|---|
| Materials | $100,000 | 33.33% |
| Direct Labor | $150,000 | 50.00% |
| Overhead | $50,000 | 16.67% |
| Total Cost | $300,000 | 100.00% |
For this specific project, the materials cost accounts for approximately 33.33% of the total cost, the direct labor cost represents 50.00% of the total cost, and the overhead cost constitutes 16.67% of the total cost.
These percentages help the construction company understand the cost distribution within the project and evaluate the relative significance of each cost category in the overall cost structure.
By utilizing Job Costing, the construction company can attribute these costs directly to the specific project and track the expenses incurred throughout the construction process. This allows them to monitor the profitability and efficiency of the job and make informed decisions regarding pricing, resource allocation, and project management.
Please note that the actual costs in a Job Costing scenario can vary significantly depending on the nature and complexity of the project, as well as other factors such as location and market conditions.
Batch costing
Batch costing is a form of job costing; many similar units comprising the batch may be used as a cost unit for ascertaining cost. Batch costing is done when production consists of a definite number of articles or involves limited repletion work. Batch costing is followed in industries like the shoe, ball-point, and biscuit industries.
Example of Batch costing
Imagine a bakery that specializes in making different types of bread. They decide to make a batch of 500 loaves of wheat bread. The bakery uses Batch Costing to calculate the cost of the entire batch.
For this batch, they spend $500 on flour, yeast, salt, and oil. The labor costs, including the wages of bakers and assistants, amount to $1,000 for the entire batch. They also have overhead costs, like rent, utilities, and packaging materials, totaling $300.
To find the cost per loaf of bread, they divide the total cost of the batch by the number of loaves. In this case:
Certainly! Here’s a table that includes the calculations, journal entries, and additional relevant information based on the example of Batch Costing for a bakery producing a batch of 500 loaves of wheat bread:
| Cost Category | Amount | Calculation | Journal Entry |
|---|---|---|---|
| Ingredients | $500 | N/A | Debit: Raw Materials Inventory ($500) Credit: N/A |
| Labor | $1,000 | N/A | Debit: Labor Expense ($1,000) Credit: N/A |
| Overhead | $300 | N/A | Debit: Overhead Expense ($300) Credit: N/A |
| Total Cost | $1,800 | N/A | N/A |
| Cost per Loaf | $3.60 | Total Cost / Number of Loaves = $1,800 / 500 = $3.60 | N/A |
Please note that these journal entries represent the cost allocation for the batch and do not account for any revenue or sales. Additionally, the actual costs and specific accounts used may vary based on the bakery’s accounting practices and chart of accounts.
Total costs for the batch = $500 (ingredients) + $1,000 (labor) + $300 (overhead) = $1,800
Cost per loaf of bread = Total costs for the batch / Number of loaves in the batch = $1,800 / 500 = $3.60
By using Batch Costing, the bakery determines that the average cost per loaf for this batch of wheat bread is $3.60. This information helps them set prices, analyze profitability, and make decisions about production and resources.
Remember that the actual costs and quantities in a Batch Costing scenario can vary depending on the bakery’s operations and the size of the batch.
Differences between Job Costing and Batch Costing:
| Aspect | Job Costing | Batch Costing |
|---|---|---|
| Definition | Allocates costs to individual jobs or projects | Allocates costs to a group of similar products or services |
| Scope | Used for customized or unique products or services | Used for standardized or homogeneous products or services |
| Cost identification | Costs are traced directly to each job or project | Costs are allocated based on an average for the batch |
| Cost tracking | Each job has its own cost ledger or account | Costs are aggregated for the entire batch |
| Job size | Can be used for small-scale or large-scale projects | Typically used for larger batches of products or services |
| Cost accuracy | Provides a more accurate cost analysis for each job | Provides a more generalized cost analysis for the batch |
| Flexibility | Offers greater flexibility in tracking costs and allocating resources | Offers less flexibility compared to job costing |
| Production Frequency | Used for projects with irregular production or low frequency | Used for products/services with regular or high frequency |
| Cost Allocation Basis | Costs are allocated based on the specific job requirements | Costs are allocated based on the size or volume of the batch |
| Profit Analysis | Enables analysis of profitability for each individual job | Provides an overview of profitability for the entire batch |
| Material Handling | Job-specific materials are tracked and allocated | Materials may be pooled together for the entire batch |
| Labor Tracking | Labor costs are specifically assigned to each job | Labor costs may be averaged or distributed across the batch |
| Overhead Allocation | Overhead costs are allocated to each job based on specific factors | Overhead costs are allocated based on the batch size or volume |
| Cost Monitoring | Job costs can be closely monitored throughout the project | Costs for the batch are typically monitored at the end |
| Pricing Considerations | Each job can have unique pricing considerations | Pricing considerations are based on batch production costs |
| Examples | Construction projects, custom-made furniture, software development | Food processing, pharmaceutical production, clothing manufacturing |
When would job-order costing be used in preference to process costing?
Job-order costing is used when different products or services requiring separate costing are produced each period. Process costing is used when a homogeneous product, such as cement, bricks, or gasoline, is produced for long periods.
What is the purpose of the job cost sheet in a job-order costing system?
The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost.
Why do firms use predetermined overhead rates rather than actual manufacturing overhead costs in applying overhead to jobs?
If actual manufacturing overhead cost is applied to jobs, then the company must wait until the end of the accounting period to apply overhead and cost jobs.
If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely. Overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates.
The result would be high overhead rates in periods with low activity and low overhead rates in periods with high activity. For these reasons, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs.
If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?
Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not be sold; if sold, they may not be sold at prices sufficient to cover all costs.
It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs.