Job Order Costing - Essay Example

Job Order Costing Job Order Costing Your Your Table of Contents: Table of Contents: ..page 2 Introduction:...page 3 Difference between Job order Costing and Process Costing..page 4 Primary Objective in Job order Costing:.page 5 Uses of a Job order Cost Sheet:..page 6 Process of Job order Costing:page 7 Conclusion:page 9 Reference Page:page 10 Introduction: Job order costing can best be defined as a "cost accumulation procedure in which costs is accumulated by job or specific order." This method presupposes the possibility of physically identifying the jobs produced and of charging each job with its own cost. Job order costing is applicable to job order work in factories, workshops, and repair shops, as well as to work by builder, construction, engineers, and printers. It is a highly useful procedure, and allows for these various different occupations to do their work efficiently and at the costs that were predetermined to go hand in hand with each job. In job order costing, the key is that the work is done to the customer's specifications. As a result, each job tends to be different in nature. Even if the job may seem to be exactly the same at first, often a customer will want a worker to do something different than what was originally thought to be done. For example, "job order costing is used for construction projects, government contracts, shipbuilding, automobile repair, job printing, textbooks, toys, wood furniture, office machines, caskets, machine tools, and luggage. Accumulating the cost of professional services (e.g., lawyers, doctors and CPA's), also fall into this category" (MAAW, "What Is a Cost Accounting System"). Job Order Costing is used by companies where products or services are identifiable by individual units or batches-auto repair, tax return preparation, case in an attorney's office, ship construction, etc. The costs attributable to a particular job are assigned directly to it. Difference between Job order Costing and Process Costing: "In Job Order Costing, Unit Cost computed by job. Many jobs are worked during the period. Costs are accumulated by individual jobs. Costs are traced and applied to individual jobs in Job order cost system. In Process Costing, Costs are accumulated by departments. Unit costs are computed by department. A single product is produced for a long period of time Costs are traced and applied to departments in a Process Cost system." (McGraw-Hill/Irwin, Chapter4, "Systems Design: Process Costing") Primary Objective in Job order Costing: When a job produces a specific quantity for inventory, job order costing permits the computation of a unit cost for inventory costing purposes. When jobs are performed on the basis of customer specifications, job order costing permits the computation of a profit or loss on each order. Since costs are revealed as an order goes through production, these costs may be compared with estimates which were made when an order was taken. Job order costing thereby provides opportunities for controlling costs. It allows the person to help try to keep costs as stable as they can, yet still find a way to make a profit. This ability helps keep both the worker and customer happy, and helps promote a better relationship between the contractor or professional and the person who is paying for the work. This can also help keep costs low, because the customer does not need to pay for services they do not need, even if the professional is capable of doing them. This way, the customer only needs to pay for exactly what they need from the professional. When job order or process cost methods are used, costs must be accumulated for control purposes according to the unit in which the product cost is to be stated. For example, Coal is measured by the ton, chemicals by the gallon, and lumber by board feet. Products, such as machines, automobiles and shoes are measured either by the individual unit or by a multiple thereof, such as a dozen or a gross. Keeping this numbers constant just adds another level of control to the whole process, and gives it an added layer of flexibility. Uses of a Job order Cost Sheet: In Job order Costing, the cost of each order produced for a given customer or the cost of the each lot to be placed in stock is recorded on a job order cost sheet. The cost sheets are subsidiary records which are controlled by the work in process account. Although several jobs or orders may be going through a factory at the same time, each cost sheet is designed to collect the cost of materials, labor, and factory overhead charged to a specific job. This way, the cost of each order can stay separate to that order, and not cause confusion between the different orders. Each Cost sheet is assigned a job number, which is placed on each material requisition and labor time ticket used in connection with a job. These forms for material and labor are totaled daily or weekly by job number, for summary journal entries and details are entered on the cost sheet. The factory overhead entered on the cost sheet is preferably computed on the basis of an estimate rather than actual cost incurred. The Sketch of Job order cost sheet is shown as follows: The upper section of each Cost sheet provides space for the job number, the name of the customer, a description of the items to be produced, the quantity the date started, and the date completed. The lower section summaries the production cost, the marketing and administrative expenses, and the profit for the job when it is completed on the basis of customer specifications. The job cost sheet may also provide space for the estimated costs and a comparison of the actual costs to the estimated amounts. In the cost sheet, for a departmentalized operation, the material, labor and factory overhead applied are shown for each department or cost centre. Process of Job order Costing- There are three main ingredients of job order costing as shown in job order cost sheet. These three ingredients are: "Direct Material Direct Labour & Factory Overhead" Sequence of Events in Job order costing system with respect to Material and Labour. 1. 2. Sequence of Events in Job order costing system with respect to Factory Overhead. 3. Sequence of events in Job order costing system with respect to Procedure of job order. (1,2,3 pictures retrieved from McGraw-Hill Ryerson, Chapter 3 "Systems Design: Job - Order Costing", 2004) Conclusion: Job order costing is a fundamental part of managerial accounting. In order to be successful and survive, businesses must employ some type of product costing system. It may be Job order or process costing system. Job order costing is used to determine cost and profit for specific jobs or orders. In job order costing, work is done according to the customer's specifications while process costing involves mass production. Unit cost is computed by job and many jobs are worked during the period, offering much more flexibility and cost efficiency for the workers, factory, and professionals. For a typical job, direct material and direct labour are tracked at their actual values. These are recorded and tracked until a job is completed. Overhead is applied either by using a rate based on direct labour hours or by using Activity based Costing. In conclusion, job order costing is an integral part of accounting, and allows for utmost efficiency, effectiveness, and professionalism within the world of professionals, factories, and any other systems that use job order costing. References: Usry, Hammer, Matz (1984) Cost Accounting: Planning & Control. South-Western Co. Don R. Hansen and Maryanne M. Mowen (2006). Cost Management Accounting and control. Ohio: Thomas South-Western. MAAW, "What Is a Cost Accounting System" http://maaw.info/5partsofcostsystem.htm McGraw-Hill/Irwin, "Systems Design: Process Costing" http://www.smccd.edu/accounts/ambrose/a131/PPt/chap004.ppt McGraw-Hill Ryerson, Chapter 3 "Systems Design: Job - Order Costing", 2004 http://mos.uwo.ca/courses/372/Garrison%206e%20CH03.ppt Read More