Job Order Costing: An Overview
The job order costing method involves assigning manufacturing costs to a unit of output. The accounting method is used by businesses that manufacture unique units. The method contrasts with process costing that is used when the manufactured units are identical.
Due to the large variation in produced goods, the job order costing requires creating a separate job cost order for each job or order. The cost order report mentions the direct material and labor associated with each item and the allocation of manufacturing overhead.
The blog post will explain how to calculate job order costs for manufacturing businesses. You should contact an outsourced bookkeeping service provider to streamline the process of job order costing.
Job Order Costing Explained
The job order costing method consists of three main costs that are recorded separately for each job order.
- Direct material
- Direct labor
- Overhead expenses
The above costs are recorded in a separate ledger for each job. The job cost record can show the cost of work in process inventory, cost of goods sold, and cost of finished goods. The cost incurred against the job is used for pricing purposes as well.
Bookkeeping service providers look at the job order cost report to calculate the revenues for each unique job order. The cost of each job is calculated using the following five steps.
- Identify job order costs
- Allocate costs to each job
- Create job order cost report
- Maintain proper documentation
- Adjust and finalize the cost report
1. Identify Job Order Cost
Identifying job orders is the first step to calculate job order costs. Experienced CPAs create an estimated cost of the job based on previous experience. The budgeted cost serves as a benchmark for the job order. In addition, project managers identify the materials required to complete the project and communicate the information to the accountants.
For instance, suppose that your company manufactures boats. Your accountant will determine the material required for manufacturing the boats after coordinating with the project manager. They will determine the amount and cost of material required for the boat, the labor required to build the boat, and the overheads such as administrative and utility costs for completing the project.
The job order cost is divided into direct and indirect costs. The costs that are directly involved in making the product are called direct costs. This cost includes the material costs required for manufacturing a product. In contrast, indirect costs are not directly involved in manufacturing a product. Examples of indirect costs include the cost of CCTV cameras, security personnel, coolant, and other indirect costs.
All the direct and indirect costs associated with manufacturing the job order are added. This will give an estimate of the total cost that will be incurred in the activity.
2. Allocate Costs to Each Job
The next step is to allocate the costs to each job. The costs identified in the previous step are allocated to each job. The initial cost allocated to the job is based on the estimation of the accountant. The costs are adjusted during the later stages as the product is manufactured.
3. Create Job Order Cost Report
The third step is to create a job order cost report. The job order cost report is prepared to record the actual cost incurred in manufacturing the product. The cost report will be analyzed by the accountant to find out the variance in job costs.
In other words, the accountant reviews the job cost report to find out the difference between actual and estimated job costs. In case the difference in the actual and estimated cost is large, the accountant will revise the cost estimation process.
Moreover, the project manager will also determine inefficiencies in the manufacturing process. The goal is to improve the process of manufacturing the product to meet the estimated cost target. The process allows identification of excessive costs and taking remedial actions to correct the deviances.
4. Maintain Proper Documentation
Proper documentation is required to monitor the cost of each job. The material requisition form is used for tracking the items used in producing each product. The form contains information about material taken from the inventory for executing the job order.
The job purchase order form is another important document used in the job order costing. The form is used for purchasing items that are not in the existing inventory.
Lastly, the time ticket is used to record the labor involved in making the project. Employees enter information in the time sheet about the time they start and end working on the project.
5. Adjust and Finalize the Cost Report
The final step in the job order costing process is correcting in the job cost report after the project is complete. The accountant may record additional costs and revise the report to accurately reflect direct and indirect costs associated with the project.
Importance of Maintaining Job Order Costs
Job order costing is important for every business that produces unique products. The process helps in creating a benchmark for the production costs. It allows the management to know the accurate amount of labor, material, and other costs associated with the project.
Companies can also offer a quote to the customer based on the estimated cost of the job. It allows the company to offer quotes that will help it to earn profit on each job.
The job order costing also allows company management to monitor the costs involved in manufacturing each product. The cost report can also help in making data-driven decisions for the C-level executives. The information about each job cost can be analyzed to determine the areas for improvement to minimize the job order costs.
Conclusion
Companies that make custom-made goods that meet the needs of specific customers use job order costing. The accounting method is used to estimate the cost of each job and offer a quote to the customer.
The job order cost is tracked during the production process to ensure that the cost remains within the budgeted cost.
Maxim Liberty Inc offers specialized bookkeeping services. Our experienced CPAs can prepare bookkeeping entries for different industries. Contact us today by dialing (703) 957-6938.
