Most industries follow a continuous production cycle. Consequently, companies follow a process throughout the year without much modification to their work. Process costing is the primary technique to determine product or service costs in these companies. However, some industries do not follow the same continuous system to serve clients.
Companies in these industries offer specialized services which require modification from one job to another. For these companies, job costing provides a better solution to determining the cost of products or services.
What is Job Costing?
Job costing helps determine product or service costs for a project. As mentioned above, some companies offer specialized items or services that require a different approach to each job. For example, construction companies do not follow the same process for every project. Instead, these companies change their working methods based on every contract.
Job costing allows companies to determine the cost of special projects or contracts. This technique is more applicable when the nature of work differs from one job to another. Usually, it involves tracking all the expenses for that job, which becomes its cost. Companies may also charge the client after adding a margin or markup to that cost. However, some contracts may also have a predefined rate or price.
How does Job Costing work?
Job costing is similar to any other costing technique in that it helps determine the cost of a specific product or service. In this case, however, these items are a project or contract. Therefore, job costing applies to specialized contracts or jobs. This technique involves adding all costs from a product or service produced for a specific customer or project.
Usually, companies add up all direct costs involved in a project to get its prime cost. However, overheads may be an issue for that purpose. In most cases, companies use an applied overhead rate that they can charge the client based on specific criteria. For example, companies may allocate utility expenses based on machine hours.
What is the formula for Job Costing?
There is no specific job costing formula. The total cost of a project may differ from one contract to another. On top of that, companies also discuss the details of a specific contract with the client beforehand. It also involves setting a price for that project. The agreement may also define the expenses that the company can charge for the job.
In most cases, the following formula may apply to determine the cost of a specific job.
Total job cost = Direct materials + Direct labor + Direct expenses + Predetermined overhead rate
What is the importance of Job Costing?
Job costing is critical for companies that offer specialized products or services. This technique often applies to the services industry, where the work offered differs from one client to another. Therefore, job costing applies to these areas where other costing techniques do not provide accurate results. It also establishes the costs for every area per job or contract.
Job costing is also crucial in determining the profits for a specific project. However, it can come with costs as every contract requires a different approach to determining costs. Job costing can also be crucial in planning and maintaining records. Overall, it provides better results for services where other costing techniques offer limited solutions.
Job costing is an accounting technique to determine the cost of a specific contract or project. It applies to industries where the nature of work is highly specialized. However, the technique differs compared from other costing methods. Job costing provides companies with a better solution to the cost of products and services in some industries.
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