Job Costing Overview: Introduction
Whats is Job Costing? It is a form of specific order costing in which costs are attributed to an individual job. Job Costing is also referred to as unit costing. It is an order for goods or services made to a producer (the jobbing firm) with a defined specification.
NB: A job is not a contract but similar. In Contract Costing, the work involved is always bigger (usually takes more than 1 year to get it completed) and requires the contractor to work from the contractees chosen site. But, it is not like that in job costing.
Key Takeaway on Job Costing
- A job requires customers’ specifications.
- The job cost sheet is used to show costs for each job while the job cost info will be used to get information on the job.
- Job costing is usually attributed to a particular job or individual job.
- The main purpose of job costing is to establish the profit or loss on each job and to provide a valuation of work-in-progress.
- It is mostly applicable/applied within a factory or workshop.
- It can be applied to property repairs and internal capital expenditure.
- It is carried out to a particular customer order or work specification.
- It consists of a single order or contract.
In a nutshell, a job requires customers’ specification and the organization performing the job (I.e. the jobbing firm) to meet business goals.
Examination Guide on Job Costing
This guide explains how to calculate production overhead, non-production overhead and the calculation of profit. Most tested questions on this topic will require you to calculate the cost per job. The critical areas to consider are;
- Production Overhead
- Non-production Overhead, and
- The Calculation of Profit.
Before we look into those three critical areas, let’s understand the meaning of Overhead Cost and why it is important to know the different types of overhead cost especially as it relates to this topic.
What are the Overhead Expenses?
Overhead expenses are all cost on the income statement except for direct material, direct labor, and direct expenses. Examples of overhead expenses are; Accounting fees, Interest, Taxes, Utilities, Bills, Rent, Repairs, etc…
NB: In the course of solving job costing questions, you’ll have to understand and differentiate between production overhead costs and administrative overhead costs.
What are Production Overhead Costs?
These are indirect expenses that are associated with the processes used to produce or render a service. Examples of production overhead costs are; Depreciation of equipment used for the production process. The salaries of maintaining manufacturing managers, maintaining personnel, and the material management staff. Etc.
What are Administrative Overhead Costs?
These are costs that are not involved in the production or development of goods or services. Examples of administrative overhead costs are; The cost of office supplies. Salaries, wages, and commissions of the front office. Administration and office lease, Salary utilities. Etc.
With a basic understanding of these, let us talk about the critical areas to consider while answering job costing questions in the examination hall or while practicing and preparing for exams.
To calculate the production overhead costs, you’ll have to consider the overhead absorption rate (OAR). The production overhead is the multiplication of the Absorbed Overhead and the Actual Activity. I.e. (Production Overhead = Absorbed Overhead x Actual Activity)
NON PRODUCTION OVERHEADS:
The examiner will always give a guide to the question.
CALCULATION OF PROFIT:
The profit may be calculated as a percentage of cost or calculated as a percentage of the selling price.
Format for Calculating Job Costing
Yes, the aim of job costing is to calculate cost per job. Click here to download the format.
Characteristics of Job Costing
- Jobs are requested by target customers.
- Cost is incurred from the inception of the request until it is delivered to the customer.
- Customer specification varies.
- Items are produced according to specifications been made by a customer.
- Quantity produced is based on customers’ demand.
Introductory Video on Job Costing
We are currently working on two videos on this topic. The first video will be based on this summary which you just read and the second video on Job costing will be based on the practical examples and exam questions on this topic.