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.
The system of job costing can be sub-divided into two categories that is:
- Factory job costing and
- Contract costing.
A variant of job costing system is batch costing in which costs are accumulated for specific batches of products of a similar type ordered for manufacture. Job costing is applicable to engineering concern, construction companies, ship-building, furniture making, machine manufacturing industries, repair shops, automobile garages and such other in factories where jobs or orders can be kept separately.
As production in a job order system is not a continuous process, careful planning and strict control is essential to avoid wastage of materials, man-power, machinery and other resources. On receipt of an order, the production and planning department prepares a suitable design for the product or job. It also prepares a bill of materials and an operation schedule. A production order is issued giving instructions to the shops to proceed with the manufacture of the product. This production order (also known as work order or job order record) constitutes the authority of the work.
The production order usually lays down the quantity of materials required, time allowed for the operations, sale price, customer’s name, shipping instructions, etc. Sometimes the values of materials and labour are also indicated and then it serves the combined purpose of an order for manufacture as well as the cost sheet on which the cost of the order is compiled. Every production order is assigned a number called the job number, job-order number, work order number.