Job costing may be defined as a system of costing in which the elements of cost are accumulated separately for each job or work order undertaken by an organization. Industries which manufacture products or render services against specific orders use job costing or job order method of cost accounting. In the job costing system, an order or a unit, lot or batch of product may be taken as a cost unit, i.e. a job. Job costing is a method of costing in which cost units can be separately identified and need to be separately costed. The primary purpose of job costing is to bring together all the costs incurred for completing a job.
Job costing offers the following specific advantages :
- It helps management to detect which jobs are profitable and which are not. Estimates of cost for similar work in the future may be conveniently made on the basis of accurate record of job costs. This assists in the prompt furnishing of price quotations for specific jobs;
- The cost of materials, labour and overhead for every job or product in a department is available regularly and periodically, enabling the management to know the trend of cost and thus by suitable comparison, to control the efficiency of operations, materials and machines;
- The adoption of predetermined overhead rates in job costing necessitates the application of a system of budgetary control of overheads with all the advantages.
- Spoilage and defective work can be easily identified with specific jobs or products so that responsibility may be fixed on departments or individuals.
- Job costing is particularly suitable for cost plus and such other contracts where selling price is determined directly on the basis of costs.
N.B. Job cost information can be used for estimation of future costs only after careful adjustments for variations likely to arise over time as well as for any difference in the size of the order. If major economic changes take place, comparison of cost of a job for one period with that of another becomes meaningless. Distortion of cost also occurs when the batch quantities are different.