A PROJECT ON

JOB COSTING
By

ABHISHEK AGGARWAL: 5029/09 (SECTION – A)

SUBMITTED IN PARTIAL FULFILLMENT

FOR AWARD OF THE DEGREE OF

BACHELOR OF COMMERCE (HONOURS)

In

COST ACCOUNTING

KESHAV MAHAVIDYALAYA COLLEGE, PITAMPURA

DELHI
UNIVERSITY OF DELHI
MARCH, 2011
 DECLARATION

We hereby declare that this submission is our own work and that, it contains no material
previously published or written, material which to substantial extent has been accepted for
the award of degree of the university or other institute of higher learning, acknowledgement
for which is made in the text.

Name:

Abhishek Aggarwal : 5029/09

Date: Tuesday, 24th March, 2011

I
ACKNOWLEDGEMENT
The merciful guidance bestowed to me by the Almighty made us stick out this project to a
successful end. I humbly pray with folded hands and sincere hearts for his grace to continue
forever.
With hearts brimming with joy and minds struggling for words it is not easy to thank
someone who is the essence of our inspiration. I am most grateful to Mr. Pradeep Kumar
for the support he gave to us. His precious advices and constructive criticisms improved the
quality of the work. Needless to say, it was a delight for me to work with and learn from
him.

Submitting this project report, I pay my deep regards to our parents, whose blessings made
this task a success.
Finally, I take liberty, by breaking the unwritten rules of acknowledgements, to thank each
other for endless debates, which gave this dissertation not just the content, but the spirit.

Name:

Abhishek Aggarwal : 5029/09

Date: Tuesday, 24th March, 2011

II

TABLE OF CONTENTS
 DECLARATION………………………….........I

ACKNOWLEDGEMENT………………….....II

INTRODUCTION...............................................1

OBJECTIVE & IMPORTANCE.......................3

PRE-REQUISITES & COMPONENTS...........4

MERITS & DEMERITS.....................................6

PROCEDURE......................................................7

SAMPLE COST SHEET....................................8

INTRODUCTION
WHAT IS JOB COSTING?
 Briefly, this method of costing for your jobs records income and expenses against particular
jobs. Since every job done for an individual customer is specific in nature, the costs incurred
for one job is generally not comparable to that of another. The costs for a particular building
job, say constructing a retaining wall in the backyard of a suburban home, would be
 accumulated to that job alone. All labour and material directly attributable to the job will be
cost at their actual values. Every input of direct material such as the bricks and mortar is
tracked individually and included in the job. The wage cost of the mason or bricklayer
would be regarded as a direct cost for the job. The number of hours he worked on
bricklaying for the retaining wall would be multiplied by his hourly wage rate to arrive at
the direct cost of labour.

 Overheads for the job are calculated based on a cost driver such as direct labour hours or
direct machine hours. Where the job is labour intensive, such as that of a building
contractor, then overheads would be charged to the job based on labour hours as the cost
driver. As soon as the overheads are computed, the total cost for the job can then be
determined. From there you will be able to calculate the profit attributable to the job.

 In a job order costing system, costs are traced and accumulated according to the jobs or a
specific work order. It’s employed in the following cases when:

 Jobs are executed for different customers according to their specifications.

 No two jobs are alike, each job requires special treatment.

 Used in a case where Work in Progress (WIP) differs period to period on the basis of
number of jobs in hand e.g. Used in Printing, Furniture, Hardware, Ship Building,
Custom built homes, Battleships, Printing shops, Auto repair.

  Also used in service industries like hospitals, law, and movie studios, advertising
agencies and repair shops to accumulate costs for accounting and billing purposes.

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 Job costing is that form of specific order costing which applies where the work is
undertaken as an identifiable unit such as:

 Manufacture of products to customers’ specific requirements;

 Fabrication of certain materials where raw materials are supplied by the customers;

 Repairs are done within a factory or at customers’ premises;

 Manufacturing goods for stock purposes of orders to be received in future;

 Internal capital expenditure jobs etc.

 FEATURES OF JOB COSTING
 Under this method, costs are collected and accumulated for each job, work order or project
separately.

 Each job can be separately identified and hence it becomes essential to analyze the costs
according to each job.

 The industries, where this method of costing is applied, must possess these features:

 The production is generally against customers’ orders but not for stock.

 Each job has its own characteristics and needs special treatment.

 There is no uniformity in the flow of production from one department to department.

The nature of the job determines the departments through which the job has to be
processed. This production is intermittent and not continuous.

 Each job is treated as a cost unit under this method of costing.

 Each job is distinctively identified by a production order throughout the production

stage.

 The cost of production of every job is ascertained after the completion of the job.

 The job costing method is applicable to printers, machine tools manufacturers, foundries and
general engineering workshops.

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OBJECTIVES OF JOB COSTING

 It helps to find out the cost of production of every job or order and to know the profit or
loss made on its execution. This helps the management to judge the profitability of each
job and decide the future course of action.

 It helps the management to make more accurate estimates for costs of similar jobs to be
executed in future on the basis of past records. The management can easily and
accurately determine and quote prices of jobs of a similar nature which are in prospect.
  It helps the management to control the operational inefficiencies by making a
comparison of actual costs with estimated ones.
 It helps the management to provide a valuation of work-in-progress.

IMPORTANCE OF JOB COSTING

The way job costing tracks expenses incurred on a particular job and matches it against the
income generated by that job is ideal where your business has high value jobs for low volume
customers. This scenario is prevalent in the building contractor sector. It is facilitated with the
use of accounting software that will keep track of every single cost element associated with the
job, charges the cost and ensures that all cost factors have been invoiced to the customer.

With job costing, you’ll be able to see which areas of your business are profitable and which are
the ones that make you losses. You’ll be able to analyze the causes of your loss and make a
decision on whether or not you want to divest certain operations. You may even be able to
implement actions that will make your loss making business area more efficient in order to
become profitable again. You can also focus on your profitable areas to enhance your business
delivery and improve efficiency, thereby enhancing customer relationships

With proper job costing, you’ll be able estimate the costs of a particular job more easily and
give better and more accurate quotes to your new customers. You can manage the progress of
your jobs more efficiently. You can review reports that detail the revenue and costs associated
with jobs to locate your most profitable sectors and customers.

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PRE-REQUISITES FOR JOB COSTING

In order to achieve the purposes of job order costing, a considerable amount of clerical work
will be involved and to ensure effective and workable system, the following factors are
necessary:

 A sound system of production control.

 Comprehensive work documentation. Typically this includes: work order and operation
tickets, bills of materials and/or materials requisitions, jig and tool requisitions etc.
  An appropriate time booking system using either time sheets or piece work tickets.

 A well-organized basis to the costing system with clearly defined cost centres, good
labour analysis, appropriate overhead absorption rates and a relevant pricing system.

COMPONENTS OF JOB COSTING

 QUOTES
Before you can begin a job, you may be asked to provide an estimate of the costs involved in
successfully completing the work. This includes the material and labour costs as well as an
estimated time to completion. Your customer will use this quote as a benchmark to compare
against your final invoice. It will also be used as a tool for negotiating price reductions before
you are awarded the job. Your quotes help you to ensure your costs are kept in check and any
cost overruns can be quickly stemmed before they go out of control.

 TIME AND MATERIALS

On some types of jobs, you may charge the customer for the labour cost incurred and materials
used on the job with an addition for overheads and a margin for profits. These jobs are termed
time and material jobs. If there are sudden contingencies affecting the job, for example a
sudden increase in the price of building material, you can charge this increase to the customer.

PAGE 4 OF 8
 DIRECT COSTS
These costs can be directly allied with a particular job and constitutes part of the finished
product. For example, bricks and mortar are direct material costs for the retaining wall in a
customer’s backyard. The time and cost taken to lay the bricks and prepare the mortar are direct
labour costs for the job.

 INDIRECT COSTS
Overheads which cannot be directly attributed to any job are termed indirect costs. This
includes administrative costs and rental charges, insurance expenses and motor vehicle repairs.
These costs were indirectly incurred in completing the job. An element of overhead costs will
be charged to the customer using suitable charge out rates.

The breadth and depth of the costs involved and the meticulous recording necessary in job
costing requires you to employ accounting services that are professionally trained to prepare
accurate accounts. A competent will be able to correctly record your costs using job costing and
invoice your customer properly. This means taking account of all the cost elements for the job
and not using generic invoicing methods to charge the customer.

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MERITS OF JOB COSTING

 It provides a detailed analysis of cost of materials, wages, and overheads classified by
functions, departments and nature of expenses which enable management to determine the
operating efficiency of the different factors of production, production centres and functional
units.
 It records costs more accurately and facilitates cost control by comparing actual with
estimates.
 It enables the management to ascertain (determine) which of the jobs are more profitable,
which are less profitable and which are incurring losses.
 It provides a basis for estimating the cost of similar jobs taken up in future and thus helps in
future production planning.
 Determination of predetermined overheads in job costing necessitates the application of a
system of budgetary control of overheads with all its advantages.
 The detailed cost records of the past years can be used for statistical purposes in the
determination of the trends of cost of the different types of jobs and their relative
efficiencies.

DEMERITS OF JOB COSTING

 It involves a great deal of clerical work in recording daily the cost of materials issued,
wages spent and overheads chargeable to each job or work order which adds to the cost of
cost accounting.
 The scope of committing mistakes is high as the cost of one job may be wrongly posted to
another job.
 Cost comparison among different jobs becomes difficult especially when drastic changes
take place.
 Job costing is historical costing which ascertains the cost of a job or a product after it has
been manufactured. It does not facilitate control of cost unless it is used with standard or
estimated costing.
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PROCEDURE OF JOB COSTING

The procedure for job order cost system is summarized as follows:

 RECEIVING AN ENQUIRY
The customer will usually enquire about the price, after specifying the quality to be
maintained, the duration within which the job is to be executed and other specifications of
the job before placing an order.

 ESTIMATION OF THE PRICE OF THE JOB

 The cost accountant estimates the cost of the job keeping in mind the specifications of the
customer. While preparing an estimate, the cost of execution of similar jobs in the previous
year and possible changes in various estimates of cost are taken into consideration. The
prospective customer is informed the estimate of the job.

 RECEIVING OF ORDER
If the customer is satisfied with the price quoted, and other terms of execution, he will then
place the order.

 PRODUCTION ORDER
If the job is accepted, a Production Order is made by the Planning Department. It is in the
form of instructions issued to the foreman to proceed with the execution of the job. It forms
an authority for starting the work. It contains all the information regarding production.
Sufficient copies of the production order are prepared so that each of the department
managers and foremen who are required to take part in any part of the production gets a
copy of the same.

 RECORDING OF COSTS
The costs are collected and recorded for each job under separate Production Order Number.
Generally, Job Cost Sheet (or Card) is maintained for each job. This is a document which is
used to record direct material, direct wages and overheads applicable to respective jobs. The
bases of collection of costs are:

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 Materials: Materials Requisition, Bill of Materials or Materials Issue Analysis Sheet.

 Wages: Operation Schedule, Job Card or Wages Analysis Sheet.
 Overheads: Standing Orders Numbers or Cost account Numbers.
All the basic documents will contain cross reference to respective Production Order
Numbers for convenience in collection of costs.

 COMPLETION OF JOB
On completion of a job, a completion report is sent to the costing department. The
expenditure under each element of cost is totaled and the total job cost is ascertained. The
 actual cost is compared with the estimated cost so as to reveal the efficiency or inefficiency
in operation.

 PROFIT OR LOSS ON JOB

The profit or loss on each job is determined by comparing the actual expenditure or cost
with the price obtained.

SAMPLE JOB COST SHEET

PAGE 8 OF 8