Job Costing is a cost accounting method designed to help companies to track

the cost involved in the production of customized and individual jobs or projects. This
is a suitable approach for the job order industries where the production is done
according to the customer’s requirement.
Production does not take place continuously in job order industries. It only begins
once the customer places a specified and customized order. Therefore, each job is
different from the others. This costing method calculates the cost for each job using
a Job Cost Sheet.


What is Job Costing?
Job Costing, also known as project-based costing, is the method of tracking costs
related to a specific product, project, or job. It is used in construction companies,
ship-building, engineering concerns, furniture making, repair shops, automobile
garages, machine manufacturing industries, and factories where jobs or orders can
be kept separately.
This cost accounting concept allows small business owners to track the cost of an
individual job in detail. It helps them to analyze individual costs and look for cost-
cutting way for similar projects in the future. This method breaks each project cost
into three major heads known as cost elements, i.e., material, labor, and overheads.
Understand how Job costing differs from Process Costing
As a job order costing system does not involve continuous production, it requires
constant planning and strict control to avoid wasting resources such as manpower,
material, machinery, etc. A job may be a contract, product, service, unit, batch, sales
order, project, or specific program. Also, any other cost objective is unique regarding
materials and other services used.
!

Applications of Job Costing

Construction Industry: The construction industry extensively uses this method.
Each construction project is unique and is considered a separate job. Job costing
tracks the costs of materials, labour, and other expenses for each project separately.
Manufacturing Industry: Job costing tracks the costs of producing individual
products or batches. For example, a furniture manufacturer may use this method to
track the costs of producing a specific type of chair or table.
Printing Industry: This method tracks the costs of printing individual jobs such as
books, magazines, and brochures. Each job is considered a separate project and is
used to track the costs of materials, labor, and other expenses incurred for each job.
Consulting Industry: The consulting industry tracks the costs of consulting services
to individual clients. Each consulting project is considered a separate job. It tracks
the labour, travel, and other expenses incurred for each project.
Healthcare Industry: It tracks the costs of medical services to individual patients in
the healthcare industry. Each patient is a separate job. This method tracks the costs
of labor, medical supplies, and other expenses incurred for each patient.
:
Features of Job Costing
It is a cost accounting method that tracks the costs of producing a specific product or
service. The following are its features of job costing:
Customized Production
It is used when the products or services are customized to the customer’s
requirements. Each job is unique and requires different inputs, resources, and
processes.
Specific Cost Identification
This costing method enables the identification and allocation of all the costs
associated with each job, including direct costs such as labor, materials, and
equipment and indirect costs such as overhead.
Cost Control
It helps in cost control by tracking the costs of each job and comparing them with the
estimated costs. This enables managers to identify and rectify any cost overruns or
inefficiencies in the production process.
Accurate Pricing
It provides an accurate basis for pricing the product or service, considering the actual
costs of each job and adding an appropriate profit margin.
Budgeting
This method is also useful for budgeting, as it provides a detailed breakdown of the
costs associated with each job. This enables managers to estimate future costs
more accurately and prepare budgets accordingly.
Detailed Records
This method requires detailed records of all the costs associated with each job,
which helps in financial reporting and analysis.
Analysis of Profitability
It provides a basis for analyzing the profitability of each job or customer, which helps
in making strategic decisions about future business opportunities.

How to Calculate Job Costing?

Accountants must dig deeper to find the accurate cost of producing a particular
product or service. Analyzing performance from financial documents such as
balance sheets and income statements will not solve the purpose. Calculating Job
Costing includes adding material, labour, and overheads (expenses). But to estimate
the accurate job cost, it requires in-depth analyses of these components:
Material Costs
A crucial aspect of job order cost accounting involves the identification and specific
recording of direct materials and their associated costs with individual jobs or work
orders. It involves direct material costs (materials that comprise the finished product)
and indirect material costs (materials required to complete the job but not part of the
final product). A direct cost usually includes raw materials, while an indirect cost
might include tools or machinery used to make a product or office supplies. You can
calculate material cost by adding all direct and indirect costs together.
Labor Costs
All direct labor costs must be analyzed according to individual jobs or work orders. A
timesheet, job card, time ticket, or piece-work card tracks time based on the
operation schedule. Wages paid to direct and indirect labour are classified in the
costing department and categorized into production orders and standing orders.
Accountants prepare labour summaries or wage analysis sheets for each accounting
period, say a week. Amounts for idle time, overtime, shift-differential and fringe
benefits can also be included in the wages analysis sheet.
Labor costs = (Number of working days x daily pay rate x number of workers)
Manufacturing Overheads
A standing order number and a cost center are used to accumulate overhead costs.
As the case may be, each center’s overhead rates are determined or actual. The
Overhead Absorption or Applied Overhead analysis sheet consolidates and posts
the allocated overhead cost for each job order onto the relevant cost sheets.
Generally, we add overheads only when the job is over but at the end of the
accounting period.
Job Costing Example
Scenario: An Indian graphic design studio receives three separate orders: designing
a logo, creating a brochure, and developing a website.
Job Costing Breakdown:
Job 1 - Logo Design:
Material Costs: ₹2,000 (software usage, digital assets)
Labor Costs: 10 hours at ₹500/hour = ₹5,000
Overheads: Proportionate overheads = ₹1,000
Total Job Cost: ₹2,000 + ₹5,000 + ₹1,000 = ₹8,000
Job 2 - Brochure Creation:
Material Costs: ₹1,500 (printing samples, digital assets)
Labor Costs: 15 hours at ₹500/hour = ₹7,500
Overheads: Proportionate overheads = ₹1,500
Total Job Cost: ₹1,500 + ₹7,500 + ₹1,500 = ₹10,500
Job 3 - Website Development:
Material Costs: ₹3,000 (web hosting, digital assets)
Labor Costs: 30 hours at ₹500/hour = ₹15,000
Overheads: Proportionate overheads = ₹2,000
Total Job Cost: ₹3,000 + ₹15,000 + ₹2,000 = ₹20,000
Each job's cost is individually calculated, demonstrating how job costing is applied
when a business handles multiple distinct projects. This method allows the studio to
track and allocate costs for each specific job accurately.

Conclusion
Job costing is a valuable accounting method that can help businesses accurately
price their products or services, control costs, and make informed business
decisions. By identifying all the direct and indirect costs associated with each job,
businesses can ensure that they are making a profit on each job and improve their
overall profitability.