Job Costing – Meaning, Benefits, Process and More
Posted on 19th Mar 2021
Job Costing is the method of determining costs, including materials, labor, and overheads for a project, or any specific orders from a customer. Such an approach helps to trace the costs of particular customer orders. Also, it helps a company to see if it can reduce the costs in later projects. Moreover, it also helps to determine if a company can bill any excess charges to the client. Such a costing method determines cost at the ground or unit level. Another name for this costing method is project-based accounting.
Benefits of Job Costing
The following are the benefits of project-based accounting:
Such a system provides thorough information on the materials, labor, and overheads cost for each project as when the company needs.
Job costing provides loads of information about each project. It helps the cost accountant to see if a cost relates to a particular project or not. Typically, a company has many jobs running, so an incorrect cost may get assigned to a project. Since the job costing system has so much information, it allows the accountant to audit and identify such errors quickly.
In case the project is for the long-term, then this costing system allows the accountant to compare the cost information with the budget regularly. If there is a variation, the accountant can inform the management. The management then takes corrective action to control the cost, or talk to the client to revise the cost of the project.
Since the company determines the cost of each project separately, it allows us to find out the profit or loss for that job easily.
It allows the management to quickly identify the jobs that are more or less profitable and accordingly divert the resources.
Such a costing system also develops a database for a company to determine the cost of such future jobs.
It assists a firm to come up with the estimates or budget.
Such a system also assists the company to come up with an accurate quotation for a project or job.
Such data and costing systems are also used for cost-plus contracting.
Drawbacks
The following are the drawbacks of project-based accounting:
Job costing could prove a very technical job. Since it involves determining the actual costs of a specific project, it could take considerable effort from the accountant to accurately trace the cost for a project. Based on the information from the accountant, the billing office prepares the invoice for the client.
The method to allocate the cost to a cost pool may not be accurate.
Implementing this costing approach requires a lot of skills and manpower. So, it could prove costly for the company to implement such a costing system properly.
Such a costing system does not consider the impact of inflation. It results in the wrong calculation of profits.
What does it include?
Job costing involves determining the following activities:
Materials
It includes determining the components cost and then tracing these costs to the specific product or project. In case of spoilage or scrap, an accountant charges the usual amount to the overhead cost pool for later allocation. For abnormal losses, the cost is charged directly to the cost of items that a company sells.
Once a company finishes work on the project, it transfers the complete job from work-in-process to the finished goods. After the sale or delivery of the project, the cost is taken out of inventory and moved to the cost of goods sold. The company, at the same time, also makes an entry for sale.