Definition of job costing
It is a form of specific order costing in which the cost of a single job or contract is calculated.
Commonly, in many industries, business itself decides the nature, composition, ingredients, shape, structure and volume of a product and then it tries to sell the product in the markets.
However, in some industries, it is the customer who decides the specifications of a product and business is required to carry out the production according to the specifications of customer. Therefore, each customer order is unique and separately identifiable. In such businesses, job costing is used to keep track of all the costs incurred on each job.
For instance, in furniture manufacturing business, customers select and decide particular designs and shapes of Beds, tables, chairs etc. Business estimates the cost on customer’s required design and quote a price by adding its required profit margin to the estimated cost. The customer will be given a required time for an order to be completed and when the order is completed, it will be delivered to the customer. In job costing business, each product is different from the other, so business needs to keep record for each job separately.
Examples of job costing
- Construction companies building structures according to client’s specifications
- Software companies designing a software per client’s needs.
- Accounting Firms consider each individual client when completing their job sheet.
Illustration – 1: For a specific job Z150, direct material of $90 was used. Direct labour is paid at the rate of $10/hour who worked 15 hours. Direct expenses amounted to $60. Production overheads are absorbed at the rate of $8 per labour hour. Non-production overheads are estimated at 150% of total prime cost. 20% profit is to be added on a mark-up basis in the total cost of the job.
What is total cost and selling price of job Z150?
Illustration – 2: A company operates a job costing system. Job number 252 requires $150 of direct materials and $400 of direct labour. Direct labour is paid at a rate of $25 per hour. Direct expenses for the job are $100. Production overheads are absorbed at a rate of $20 per direct labour hour and non-production overheads are absorbed at a rate of 140% of prime cost. Profit margin is to be calculated at 20%.
What is the selling price of job number 252?