Job-Order Costing

There are many different types of costing systems; one of the costing systems is called job-order costing. Job-order
costing can be used in some circumstances where other types of costing such as process costing or normal costing would
not be as effective.

What Is Job-Order Costing?

Job-order costing is a costing system that is used to accumulate costs of products when products are made based on
specific customer orders. Each product produced is considered a job. These jobs could also be called batches, as each job
is generally a batch of similar products. Each batch should be individualized in some way to make it differentiated from
other batches for it to be a separate job. If batches are all identical, another type of costing (Process Costing) will be more
appropriate. Costs are tracked by job; the costs of producing each job include materials, labor, and overhead in a
manufacturing environment. Services rendered can also be considered a job.

The Job-Order Costing Process:

When a company operates using job-order costing, a specific set of events will usually occur with each job. Generally, the
process is as follows:
An order (or sales order) is received for the batch of products
A production order is issued from the sales order
Materials and labor are ordered and tracked for the set of products
Manufacturing overhead is allocated to the job using a predetermined rate (usually per labor hour or per machine
hour)
Actual manufacturing overhead will not affect the work-in-process account, instead it is charged to a control
account
Direct labor and materials are charged by the accountant to the work-in-process accounts using the actual amounts
incurred
These amounts are all tracked using a job-costing sheet, which will most likely be in a computerized format and a
subsidiary ledger is kept for each job then the costs of the job are divided by the number of units in the job to
arrive at an average cost per unit.
Abnormal spoilage (spoilage that is above and beyond what would be expected from the job) is considered a
period cost and is reclassified from the work-in-process account into a separate account so it can be addressed by
management.

When Is Job-Order Costing Appropriate?

Job-order costing is a type of costing that is appropriate and can be used in many different industries where many different
products are produced in each period and items sold in batches. For example, a T-shirt company that makes batches of Tshirts with company logos on them may use job-order costing, each company they work for could be classified as an
individual job. Job-order costing would probably not be used in other industries such as general manufacturing, as
products may not be specialized and therefore would not be classified in batches.
Job order costing system is also extensively used in service industries. Hospitals, law firms, movie studios, accounting
firms, advertising agencies and repair shops all use a variety of job order costing system to accumulate costs for
accounting and billing purposes. The details here deal with a manufacturing firm, the same concept and procedures are
used by many service organizations. In a law firm, for example, each client represents a "job," and the costs of that job are
accumulated day by day on a job cost sheet as the client's case is handled by the firm.

Record Keeping and Cost Assignment:

The record keeping and cost assignment problems are more complex in a job order costing system when a company sells
many different products and services and has only a single product or service. Since the products are different, the costs
are typically different. Consequently, cost records must be maintained for each distinct product or service.
Companies classify manufacturing costs into three broad categories:
(1) Direct Materials, (2) Direct Labor, (3) Manufacturing Overhead

Measuring and Recording Direct Materials Cost Under Job Order Costing System:
At the beginning of production process a document known as "bill of materials" is used for standard products. A bill of
materials is a document that lists the type and quantity of each item of materials needed to complete a unit of standard
product. In case where it is not possible to use a bill of materials because the product is not a standard product the
production staff determines the materials requirements from the blueprints submitted by the customer.

Measuring and Recording D/Labor Cost Under Job Order Costing System:
Direct labor cost is handled in much the same way as direct materials cost. Direct labor consists of labor charges that are
easily traced to a particular job. Labor charges that cannot be easily traced directly to any job are treated as part of
manufacturing overhead. The later category of labor cost is known as indirect labor and includes tasks such as
maintenance, supervision, and cleanup. Workers use time tickets to record the time they spend on each job and task. At
the end of the day, the time tickets are gathered and accounting department enters the direct labor hours and costs on
individual job cost sheets

Application of Manufacturing Overhead:

Manufacturing overhead must be included with direct labor on the job cost sheet since manufacturing overhead is also a
product cost but assigning manufacturing overhead to units of product can be a difficult task because:
1. Manufacturing overhead is an indirect cost. This means that it is either impossible or difficult to trace these costs
to a particular product or job.
2. Manufacturing overhead consists of many different items ranging from the grease used in machines to the annual
salary of production manager.
3. Even though output may fluctuate due to seasonal or other factors, manufacturing overhead costs tend to remain
relatively constant due to the presence of fixed costs.
Following two complications relating to overhead application should be considered:
1. Under applied overhead and over applied overhead calculation.
2. Disposition of any balance remaining in the manufacturing overhead account at the end of a period.

Multiple Predetermined Overhead Rates:

When a single predetermined overhead rate is used for entire factory it is called plant wide overhead rate. This is fairly
common practice-particularly in smaller companies. But in large companies, multiple predetermined overhead rates are
often used.

Predetermined Overhead Rate and Capacity:

Companies typically base their predetermined overhead rates on the estimated, or budgeted, amount of allocation base for
the upcoming period.

Recording Nonmanufacturing Costs:

In addition to manufacturing costs, companies also incur marketing and selling costs. These costs should be treated as
period expenses and charged directly to the income statement and therefore should not go into the manufacturing
overhead account.

Advantages of Job Order Costing System:

One of the primary advantages of job order costing system is that the management team has ready access to all the costs
incurred for each job being completed. This allows the team to examine each cost incurred, finding out why it happened,
and determine how it can be controlled better in the future, thereby contributing to better ongoing levels of profitability

Sample Job Cost Sheet

Job Number: 2B47
Department: Milling
Item: Special Order Coupling
For Stock:_______________
Direct Materials
Req. No
Amount
Ticket
14873
Rs.660
843
14875
Rs.506
846
14912
Rs.238
850
--------851
Rs.1,404
=====

Date Initiated :____________

Date Completed:____________
Units Completed:_2Units______
Direct Labor
Hours
5
8
4
10
------27
====

Amount
Rs.45
Rs.60
Rs.21
Rs.54
-------Rs.180
=====

Hours
27

Manufacturing Overhead
Rate
Amount
Rs.8/DLH
Rs.216

Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

*Rs.1,800/2units = Rs.900 per unit

Units Shipped
Rs.1,404
Rs. 180
Rs. 216
Rs.1,800
Rs. 900*

Date
March 8

Number
--

Balance
2