Job Costing – Overview

**Job Costing – Overview**  

**Job Costing** is a cost accounting method used to track expenses for **individual jobs or projects**. It is ideal for businesses that produce **customized, unique, or small-batch products** instead of mass production.  

 Industries Using Job Costing 

✔ **Construction** (buildings, roads, bridges)  

✔ **Manufacturing** (custom furniture, aircraft)  

✔ **Service Providers** (law firms, consultants, film production)  

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 **Key Features of Job Costing**  

 **Each job is tracked separately**  

🔹 Direct costs (materials, labor) are assigned to each job

🔹 Overhead costs are allocated using a predetermined rate  

🔹 Job Cost Sheet is maintained for each project

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 **Steps in Job Costing**  

 **Step 1: Identify Job and Assign Job Number**  

Each project or order is given a unique job number.  

**Step 2: Accumulate Direct Costs**  

🔹 Direct Materials** – Raw materials specifically used for the job.  

🔹 Direct Labor** – Employee wages related to the job.  

**Step 3: Allocate Overhead Costs**  

Overhead (indirect costs like rent, utilities, and depreciation) is applied using a **Predetermined Overhead Rate**:  

\[

\text{Overhead Rate} = \frac{\text{Estimated Overhead Cost}}{\text{Estimated Direct Labor Hours (or Machine Hours)}}

\]  

**Step 4: Calculate Total Job Cost** 

\[

\text{Total Job Cost} = \text{Direct Materials} + \text{Direct Labor} + \text{Applied Overhead}

\]  

 **Step 5: Compare with Actual Costs & Adjust Pricing**  

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 **Example of Job Costing**  

A custom furniture company receives an order for a **wooden table (Job #101)**.  

 **Step 1: Identify Job Details**  

- Job Number: **101**  

- Customer: **XYZ Interiors**  

**Step 2: Accumulate Direct Costs**  

| Cost Type          | Amount ($)  |

|-------------------|-----------|

| Direct Materials (Wood, Glue, Paint) | 500       |

| Direct Labor (10 hours @ $20/hr) | 200       |

**Step 3: Allocate Overhead**  

- **Estimated Overhead Cost:** $50,000  

- **Estimated Direct Labor Hours:** 10,000  

- **Overhead Rate:**  

  \[

  \frac{50,000}{10,000} = 5 \text{ per labor hour}

  \]

- Overhead Applied:  

  \[

  10 \times 5 = 50

  \]

**Step 4: Calculate Total Job Cost**  

\[

\text{Total Job Cost} = 500 + 200 + 50 = 750

\]  

 **Step 5: Adjust Pricing**  

To make a **20% profit margin**:  

\[

\text{Selling Price} = 750 \times 1.20 = 900

\]  

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**Advantages of Job Costing**  

✅ Accurate cost tracking per job

✅ Better pricing decisions  

✅ Helps monitor profitability 

Limitations of Job Costing

❌ Time-consuming record-keeping 

❌ Not suitable for mass production

❌ Requires accurate overhead allocation