job cost accounting

job cost accounting

The Importance and Implementation of Job Cost Accounting in Modern Business Operations

1. Introduction to Job Cost Accounting

Job order costing tracks costs for each separate unit or job produced in a manufacturing environment. In accounting terms, to apply job order costing, costs accumulate for individual job orders, as well as in the case of batch manufacturing. Job order costing is commonly used when work is done for specific customers or specific sizes of the job as required by the customers. Businesses adopting job order costing include companies involved in customized products with specific characteristics. Generally, tracking individual costs of the job is useful for managing the business efficiently. The job order cost accounting system tracks the production costs of unique products or businesses in relatively small amounts, for example, the construction of a new building, low volume manufacturing, or printing services.

Job cost accounting is an essential process used by modern businesses to accurately allocate the costs of production and distribution to single produced items or small lots of those items. The ever-increasing need of business managers, supervisors, and other operational control personnel to understand the financial implications resulting from their decision making is driving companies in almost all industries to implement some form of advanced cost accounting model. By including a detailed job cost accounting system as a complement to your corporate inventory management procedures, the business can realize significant operational control enhancement, providing real cost-saving benefits.

2. Key Concepts and Principles of Job Cost Accounting

This basic system provides important cost data and management reports that help businesses keep track of what was spent on the production of the product or service with information and data that allows management to make sound business decisions for the future of the company. Businesses use costing information, many of the same cost items and information that are required for job or project, to price their products and services in order to remain competitive. The sales price charged to a customer includes an allocation of these costs and should give the business a profit. Competitive pricing by a business allows it to attract customers who see the value in the product or service they receive by purchasing it. After material, labor, and supply costs are charged or allocated to the project cost center, additional costs are also added in order to determine the total cost. Additional costs that are added to the business are indirect costs such as labor overhead or factory expense, or G&A expenses that are not directly assignable to the customers’ contract, order, project, or product.

A basic, well-established system of accounting known as job order cost accounting is utilized by many businesses today for the accumulation and assignment of costs related to the production of goods or the rendering of services in any and all types of organizations in both the private and public sectors. There are many types of businesses that utilize job cost accounting. Many construction companies use it to manage expensive projects. Healthcare organizations use it to record costs on patients’ charts. Government organizations use it to keep track of costs for various operations. A business that uses job cost accounting incurs expenses that are specific to that project, customer, or item such as material, labor, and supplies that are charged or allocated to specific cost centers, projects, customers, orders, or contracts involving producing unique goods or services.

3. Methods and Techniques for Job Costing

The principal problems and variations of job order cost accounting relate to cost accumulation and cost assignment. In job order cost accounting, the type of work or product being processed differs widely from job to job. Moreover, the sequence of work and the size of the cost elements in one job may be entirely different from the sequence and size of cost elements in another job. The problems in providing the needed cost data item by item are reduced to a minimum for a number of reasons: Fixed and variable cost elements and the expenses assigned to each are the same item to item in character and dollar amount. The method of handling costs, assigning revenues, and recording expenses is different only in minor detail. The same individual costs, revenues, and expenses are recorded in exactly the same way.

Many of the special problems and variations in job order accounting are avoided or greatly minimized in contract cost accounting by the use of the percentage of completion method. Under this method, the revenues, costs, and gross profit from the uncompleted contract are estimated before the contract is completed. These estimates are used as accruals rather than actual amounts and are reported in the statements. The percentage of completion method is generally considered the most suitable for profit-oriented firms. However, the procedure for applying this method is complex and will be presented in a subsequent section.

4. Benefits and Challenges of Implementing Job Cost Accounting

The cost accumulation approach used in job cost accounting enables the owner/manager to expeditiously review the profitability of a job relative to anticipated costs. In addition, the regular evaluation of both process and each job allows the identification of situations where constructive responses to changes can be initiated as they occur. Regularly updating available job cost information allows for comparisons of process with other efforts. The job cost process used in a small business tests cost estimates, thereby permitting possible modifications of future job estimates.

There are significant advantages of implementing job cost accounting in any business operation. By way of example, an interim balance sheet capturing the costs attributed to a specific job, while still in process, helps the business owner to make decisions. The schedule of completed projects, as well as the inventory of individual project costs, serves to monitor the mix of jobs in process or completed. Further, this schedule is used when criteria are being developed relative to the type of project.

Benefits

5. Case Studies and Real-World Applications

To take a typical example, in the construction industry, there is fierce competition. For jobs that are available, there is typically a maximum market price, which is the very highest price that the client might be willing to pay. Therefore, a main concern is the ability to provide clients with the highest quality product while staying within the budgeted costs, so as not to make a loss on the project. In Stuart, the chosen method to provide costs is a top-down one, which lacks precision. The department has invoked standardization and formalization for the collection of high-level data to provide visibility and make important trade-offs visible.

Activity-based costing is the best system to use in this regard, and the overheads have to be as accurately and carefully calculated as possible so that one can have the most accurate job costs. It is wrong to attempt to use job costs as a means to make decisions and then include some random figure that represents an attempt to budgeted overheads. Traditional pricing is the result of adopting low standards of recording overheads and making the traditional assumption that it does not matter whether the costs are right or wrong, as long as higher contributions are earned.