JOB/ORDER COSTING: AN OVERVIEW
In case of industries where production is done against customer’s order and not for stock, the applicable material, direct labour, direct expenses and some portion of overheads being charged to a job order varies lot. Therefore it is required to keep a separate record for each job or order from the beginning till it is completed. Such cost system is generally referred to as job order costing.
It is one of the important methods of cost accounting, whereby the cost of specific quantity of products, services or equipment etc. throughout the production process is compiled or in other words, costs is measured and accumulated for each job, order or project separately.
FEATURES OF JOB ORDER COSTING:
This method of accounting can be applied to industries consisting of the following features:
- Manufacturing on customer’s special order rather than stock purpose.
- Each job or order is characteristically different and need special treatment.
- The process of production is intermittent rather than continuous.
- Each job is a separate cost unit.
- Cost of production can be determined after the completion of job or order.
- The work-in-progress depends upon work in hand, hence varies from period to period.
ADVANTAGES OF JOB ORDER COSTING:
Following are some of the advantages of job order cost accounting:
- Cost of similar job: Measuring and accumulating costs of different jobs and orders separately will ultimately proves the base for determining the costs of similar jobs taken up in future and further helps in production planning.
- Cost Control: Comparing the cost involved in similar jobs as well as comparing the actual figures with the estimated cost will also help in facilitating cost control.
- Ascertain profitable jobs: It also helps the management in determining that which of the jobs are profitable than other and hence more of these jobs can be taken up in future to earn more profits.
- Provides detailed analysis: Determining applicable material, labour and overhead costs for different production centres and production units will help the management in determining the operational efficiency of different unit of organization.
- Cost plus contract: It is also useful in quoting cost plus contract in which a contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit.
DISADVANTAGES OF JOB ORDER COSTING:
Along with having a number of advantages, the method also has the following disadvantages:
- Expensive: Recording daily applicable cost, wages, direct expense and overhead expenses chargeable to each project, job or order will adds to the cost as well as paper work.
- Cost Comparison: Due to changing environment, technology and other drastic changes taking place rapidly, It becomes difficult to compare costs of two different projects.
- Historical costing: Under this method, the cost is generally determined after the completion of the project, hence the question of controlling costs does not arise.
OTHER IMPORTANT TOPICS INCLUDE:
- OBJECTIVES OF JOB ORDER COSTING
- PREREQUISITES OF JOB ORDER COSTING
- PROCEDURE OF JOB ORDER COSTING