Question

Explain the Job Costing process and give a specific example.

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Answer 1

Solution:-

Job Costing:- Job costing is a technique of costing where the amount of work done is in the form of the number of jobs completed. The production is taken with respect to the customer’s orders and not as a bulk for stocking purposes. Moreover, the cost is not taken singularly but as a bulk of objects.

For example: printing 5000 books, assembling 500 cars, delivering 4000 pamphlets and so on.

The elements within job costing procedure consists of direct costs, employment costs and material costs which comprises of prime costs and also overhead charges used for the departmental costs and shipping and handling costs which also includes costs taken for stocking and storage.

Job Cost Accounting Procedure:

The cost of the direct materials are taken calculated by the help of the materials requisition form. This is tallied by the accounts department. The employee wages are also calculated by taking the tickets issued by the payroll department. Moreover, if any overhead charges, these are also taken under consideration.

Manufacturing overheads are applied, at their respective departments during manufacturing. Then these are calculated together which constitutes the four main expenses of manufacturing. That is, direct expenses, direct labour, material expenses and manufacturing overheads within each department.

The job cost accounting procedures as a summary are given below:

1. Receiving an enquiry: Before placing the order, the customer usually studies about the manufacturer, what their rates are, what is the quality of the materials that they use, the time usually taken by them to complete the order and so on.

2. Estimation of price of the job: The cost of the job is done by the accountant keeping in mind the needs and taste of the customer. This includes the customer’s preferences and choices. Another factor is that, they also keep in track of the change in the cost of the materials, especially in the recent years and specify the difference in cost. This job cost is then sent to the future customer.

3. Receiving of order: The customer will place the order if he is content with the job costs.

4. Production order: If the job is accepted, then a production order is given by the manufacturer within its subsidiaries. It is a form of authorised order which officially starts the production of the job. It is a set of instructions directed towards the foreman directing when and how the job should be done and how much should be completed in a day. Enough copies are made and passed through out the departments so that each department can parallely keep in track of the jobs done.

5. Recording of costs: The costs are recorded and collected for each kind of job. For each department a certain job card is used, where the costs from different aspects of the jobs are taken into consideration.

Materials:

1. Material requisition: Any document issued by the company stating the manufactures to transport the materials from the storage unit to the production house, so as to start manufacturing.

2. Bill of materials: A list detailing the materials, prices, components, sub components for manufacturing the end product.

3. Materials issue analysis sheet: A form of document which consists of materials, their related details and when it was issued for the manufacturers.

Wages:

1. Operation schedule: It is a form of timetable which is related to the allocation and re issuing of resources in an organization.

2. Job card: A form of card used to detail about the details of the job needed to be done in a production facility. It instructs the foreman what to do as a set of instructions. Helpful for both the parties involved in the business.

3. Wages analysis sheet: It is a derivative of the income statement. It consists of the payroll statements and the wages for both the manufacturing and non-manufacturing employees depending whether if it is a fixed salary or an hourly wage.

Overheads:

Miscellaneous costs: These include hidden costs such as transportation, stocking, storage, food, infrastructure etc.

6. Completion of job: On the completion of the job, a report stating the completion of the job is given to the accounts department where the final cost calculation takes place. The final cost statement is then compared with the estimated cost, to ensure whether it was a profit or loss.

7. Calculating the profit or loss: These costs are calculated when the final expenditure is compared with the estimated expenditure.

Example:-

Manufacturing company ABC uses a job costing system to allocate job order costs at their actual value and track costs accurately to generate a profit. In January 2015, the company’s project manager prepared a yearly plan, estimating approximately $625,000 in overhead costs. Moreover, the carrying balances from 2014 were raw materials $25,000, work in progress $95,000, and finished goods $31,000.

During 2015, the company has recorded a variety of transactions, as follows:

The company’s accountant prepares the job costing sheet taking into account the transactions of the year and the carrying balances, as follows:

He allocates the costs per type of cost by creating three main categories, Raw Materials, Work in Progress and Manufacturing Overhead.

Raw Materials includes the carrying balance of $25,000 for 2014 and $800,000 for 2015. From the total of $825,000, the accountant deducts the cost of raw material used in work in progress A $720,000. The remaining balance is $105,000.

Work in Progress includes the carrying balance of $95,000 for 2014, and the direct and indirect costs for work in progress A and work in progress B. From the total of $1,434,740, the accountant deducts the cost of finished goods. The remaining balance is $77,940.

Manufacturing Overhead includes the costs of work in progress B, the overhead for depreciation, utilities and insurance, and the sales commissions expenses. From the total of $ 952,000, accountant deducts the cost of work in progress A and work in progress B. The remaining balance is $237,000.

Now, he can calculate the net operating income for 2015 by deducting the cost of goods sold for the company’s sales to find the gross profit. Then, he deducts the costs of sales commissions, administrative expenses, advertising expenses, travel expenses, and insurance to arrive at a net operating income of $1,409,000.

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