Job costing – What is job costing?
Job costing – also known as job order costing – is an accounting methodology that tracks the costs that go into creating a unique product.
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By tracking the expenses associated with specific jobs, job costing helps businesses work out whether the costs of individual jobs can be reduced, and whether customers can be billed for excess costs.
Job costing is most commonly used to track the costs assocatied with custom, bespoke, or unique products, and for production processes that generate a small number of units. When it isn't possible to allocate costs to specific units, process costing is used instead.
Allocating costs with job costing
Job costing pools expenses as one of three types of costs: direct materials, direct labour, and overhead. As a general rule, costs are considered work in process until the goods are completed; once the goods are completed, the costs are transferred to cost of goods sold.
Allocating direct materials
Any materials used in the production of goods are held in storage before they are allocated to specific jobs. If the job creates scrap or spoilage, normal spoilage is charged to an overhead cost account and abnormal spoilage is charged to cost of goods sold.
Once a job is completed, the entire cost is transferred from the work in process inventory to finished goods. Once the goods are sold, the cost is then transferred to cost of goods sold.
Allocating direct labour with job costing
If labour can be traced to a specific job, it is known as direct labour. Direct labour should be charged directly to the individual job. Any manufacturing-related labour that cannot be directly traced to a specific job is known as indirect labour, and should be recorded as an overhead.
As with direct materials, the cost of direct labour is transferred to the finished goods account once a job is completed. Once the goods are sold, the cost is shifted to cost of goods sold.
Allocating overhead
Any non-direct costs are pooled as overhead; overhead is then allocated to jobs based upon usage. Usage can be measured in several different ways, but it is important to consistently charge the same kind of costs throughout all reporting periods.
Allocating overhead will always be slightly inaccurate as costs cannot be directly linked to a job; however, the simplest and most accurate approach is to allocate costs based on past usage.
Job costing vs. process costing
Whereas job costing assigned costs to specific units of production, process costing assumes that each product incurs the same cost. The main differences between job costing and process costing include:
- Record keeping: because job costing charges specific costs to individual jobs, it requires much more thorough records than process costing.
- Size of job: whereas process costing is usually used for mass-produced products with large-scale production runs, job costing is most suitable for tracking costs for a small number of units.
- Type of product: process costing is best suited to standardised, mass-produced products, whereas job costing is more commonly used for custom, bespoke, or unique products, such as the cost of designing software or constructing a building.
It is possible to combine some of the features of job costing and process costing with a hybrid costing system. A hybrid costing system is most commonly used when producing identical products that are individually modified at a later stage.
Job costing and Debitoor
With Debitoor invoicing software, it is easy to stay on top of your company finances.
When you register expenses with Debitoor, you can store your receipts in the cloud and categorise your expenses to see how your money is being spent.
With an instant overview of your company’s income and outgoings, you can take charge of your cashflow and make sure that your expenses are under control.
