TOPIC FOUR

JOB COSTING
Introduction

Job costing is a costing method applied where work is undertaken to customers'

A job is a cost unit which consists of a single order or contract.

The work relating to a job moves through processes and operations as a continuously
identifiable unit. Job costing is most commonly applied in construction industry,
manufacturing companies, within a factory or workshop, but may also be applied to
property repairs and internal capital expenditure.

Procedure for the performance of jobs

The normal procedure jobbing concerns involves:

(a) The prospective customer approaches the supplier and indicates the
requirements of the job.
(b) A representative sees the prospective customer and agrees with him the
precise details of the items to be supplied. For example:
✓ The quantity,
✓ Quality,
✓ Size,
✓ Colour of the goods,
✓ The date of delivery, and
✓ Any special requirements.
(c) The estimating department of the organisation then prepares an estimate for
the job. This will be based on the cost of the materials to be used, the labour
expense expected, the cost overheads, the cost of any additional equipment
needed specially for the job, and finally the supplier's profit margin. The total of
these items will represent the quoted selling price.
(d) If the estimate is accepted, the job can be scheduled. All materials, labour and
equipment required will be 'booked' for the job. In an efficient organisation, the
start of the job will be timed to ensure that while it will be ready for the customer
by the promised date of delivery it will not be loaded too early, otherwise storage
space will have to be found for the product until the date it is required by (and
was promised to) the customer.

Job cost sheets/cards

Costs for each job are collected on a job cost sheet or job card.
With other methods of costing, it is usual to produce for inventory; this means that
management must decide in advance how many units of each type, size, colour,
quality and so on will be produced during the coming year, regardless of the identity
of the customers who will eventually buy the product. In job costing, because
production is usually carried out in accordance with the special requirements of each
customer, it is usual for each job to differ in one or more respects from another job.

A separate record must therefore be maintained to show the details of individual jobs.
Such records are often known as job cost sheets or job cost cards. Either the detail of
relatively small jobs or a summary of direct materials, direct labour and so on for larger
jobs will be shown on a job cost sheet.

An example of a job cost sheet:

Job cost information

Material costs for each job are determined from material requisition notes. Labour
times on each job are recorded on a job ticket, which is then costed and recorded on
the job cost sheet. Some labour costs, such as overtime premium or the cost of
rectifying sub-standard output, might be charged either directly to a job or else as an
overhead cost, depending on the circumstances in which the costs have arisen.
Overhead is absorbed into the cost of jobs using the predetermined overhead
absorption rates.

Information for the direct and indirect costs will be gathered as follows.

Direct material cost

(a) The estimated cost will be calculated by valuing all items on the bill of materials.
Materials that have to be specially purchased for the job in question will need
to be priced by the purchasing department.
(b) The actual cost of materials used will be calculated by valuing materials issues
notes for those issues from store for the job and/or from invoices for materials
specially purchased. All documentation should indicate the job number to which
it relates.

Direct labour cost

(a) The estimated labour time requirement will be calculated from past experience
of similar types of work or work study engineers may prepare estimates
following detailed specifications. Labour rates will need to take account of any
increases, overtime and bonuses.
(b) The actual labour hours will be available from either time sheets or job
tickets/cards, using job numbers where appropriate to indicate the time spent
on each job. The actual labour cost will be calculated using the hours
information and current labour rates (plus bonuses, overtime payments and so
on).

Direct expenses

(a) The estimated cost of any expenses likely to be incurred can be obtained from
a supplier.
(b) The details of actual direct expenses incurred can be taken from invoices.

Production overheads

(a) The estimated production overheads to be included in the job cost will be
calculated from overhead absorption rates in operation and the estimate of the
basis of the absorption rate (for example, direct labour hours).
 (b) The actual production overhead to be included in the job cost will be calculated
from the overhead absorption rate and the actual results (such as labour hours
coded to the job in question). Inaccurate overhead absorption rates can
seriously harm an organisation; if jobs are over priced, customers will go
elsewhere and if jobs are under priced revenue will fail to cover costs.

Administration, selling and distribution overheads

The organisation may absorb non-production overheads using any one of a variety of
methods (percentage on full production cost, for example) and estimates of these
costs and the actual costs should be included in the estimated and actual job cost.

Rectification costs

If the finished output is found to be sub-standard, it may be possible to rectify the fault.
The sub-standard output will then be returned to the department or cost centre where
the fault arose.

Rectification costs can be treated in two ways:

(a) If rectification work is not a frequent occurrence, but arises on occasions with
specific jobs to which it can be traced directly, then the rectification costs should
be charged as a direct cost to the jobs concerned.
(b) If rectification is regarded as a normal part of the work carried out generally in
the department, then the rectification costs should be treated as production
overheads. This means that they would be included in the total of production
overheads for the department and absorbed into the cost of all jobs for the
period, using the overhead absorption rate.

Work in progress

At the year end, the value of work in progress is simply the sum of the costs incurred
on incomplete jobs (provided that the costs are lower than the net realisable value of
the customer order).

Pricing the job

The usual method of fixing prices in a jobbing concern is cost plus pricing.

Cost plus pricing means that a desired profit margin is added to total costs to arrive at
the selling price.

The estimated profit will depend on the particular circumstance of the job and
organisation in question. In competitive situations the profit may be small but if the
organisation is sure of securing the job the margin may be greater. In general terms,
the profit earned on each job should conform to the requirements of the organisation's
overall business plan.

The final price quoted will, of course, be affected by what competitors charge and what
the customer will be willing to pay.

Example 1

Job No. 58 passes through three departments: X, Y, and Z. The following information
is given regarding this job:

Required: Calculate the cost of Job No. 58 from the above figures.

Solution

Note: Calculation of overheads chargeable to Job No. 58 was made as follows: