A job costing system involves the process of accumulating information about the costs associated with a specific production or service job. This information may be required in order to submit the cost information to a customer under a contract where costs are reimbursed. The information is also useful for determining the accuracy of a company’s estimating system, which should be able to quote prices that allow for a reasonable profit. The information can also be used to assign inventoriable costs to manufactured goods.
A job costing system needs to accumulate the following three types of information:
- Direct materials. The job costing system must be able to track the cost of materials that are used or scrapped during the course of the job. Thus, if a business is constructing a custom-made machine, the cost of the sheet metal used in the construction must be accumulated and charged to the job. The system can compile this cost through the manual tracking of materials on costing sheets, or the information can be charged by using on-line terminals in the warehouse and production area. Typically, materials are kitted for a job in the warehouse, and are charged to a specific job at that time. If any remainder materials are later returned to the warehouse, their cost is then subtracted from the job and they are returned to storage.
- Direct labor. The job costing system must track the cost of the labor used on a job. If a job is related to services, direct labor may comprise nearly all of the job cost. Direct labor is typically assigned to a job with a timecard (using a punch clock), timesheet (where hours worked are recorded manually), or with a networked time clock application on a computer. This information can also be recorded on a smart phone or through the Internet. In all cases, the user must identify the job, so that the cost information can be applied to the correct job.
- Overhead. The job costing system assigns overhead costs (such as depreciation on production equipment and building rent) to one or more cost pools. At the end of each accounting period, the total amount in each cost pool is assigned to the various open jobs based on some allocation methodology that is consistently applied.
In practice, a job costing system may have to be tailored to the requirements of the customer. Some customers only allow certain costs to be charged to their jobs. This is most common in cost-reimbursement situations where the customer has contractually agreed to reimburse a company for all costs charged to a specific job. Consequently, a job costing system may contain a large number of specialized rules that are not broadly applicable to all jobs for which it is compiling information.
Once a job has been completed, a flag must be set in the job costing system to close down that job. Otherwise, there is a strong probability that employees will continue to charge time to it, and that it will continue to attract an allocated overhead charge at the end of each successive month.
As long as a job is under construction, the compiled cost is recorded as an inventory asset. Once the job is billed to the customer (or written off), the cost is shifted to the cost of goods sold account. This approach ensures that revenues are associated with expenses in the same time period. A company’s auditors may attempt to verify how well the job costing system operates, to see if they can rely on its ability to compile costs for inventory items, as well as to charge costs to expense within the correct reporting period.
Job Costing Example
ABC Corporation starts up Job 1001. In the first month of operations, the job accumulates $10,000 of direct material costs, $4,500 of direct labor costs, and is allocated $2,000 of overhead expense. Thus, at month-end, the system has compiled a total of $16,500 for Job 1001. This cost is temporarily stored as an inventory asset. ABC then completes the job and bills the customer. At that time, the $16,500 is transferred out of inventory and into the cost of goods sold.