What is Job-Order Costing?

The concept of job-order cost might sound foreign to many. Here at Smith & Smith CPAs, we often come across questions related to job-order costing. It is due to this reason that we chose to post a blog that will cover all the information related to this topic. Job-order costing can be defined as a method to determine the price of manufacturing each product. This process is generally needed when a manufacturer produces a wide array of products that are different from each other. You need to know that job costing includes direct materials, direct labor and manufacturing overhead for the particular task.

Need for Job-Order Costing

You might be thinking about the importance of job-order cost. To draw an end to such confusions, we are providing you with the need for job-order costing in the pointers below.

• To regulate the profitability of the job – Job-order costing can be very useful to find out of a job is profitable. This helps the company to figure out the estimate about the labor, overhead, value of labor that needs to be spent in order to execute the particular task or job. It is to be noted that a detailed job-order costing help companies to create quotations that are low enough to be both profitable and competitive in the market.

• To take a few data-driven decisions – The job-order costing helps to be aware of the overall costs and details of doing several jobs in the long run. This in turn can play a pivotal role in determining the company’s efficiency and also cut down on the costs by making a few modifications in the staffing, procedures and methods.

• To monitor the usage of machine – You need to know that job-order costing can be helpful for companies to figure out how they use their fixed assets such as manufacture of equipment. The machine costs can be categorized into a few jobs, therefore knowledge about these costs is needed to find out the total expenditure of the overall job. 

What are the Elements of Cost?

The elements of cost include all the expenses that are spent while producing an item or product. They are:

• Direct labor cost
• Cost of the material
• Factory overhead
• Direct expenses

Keep a track of the above mentioned expenses to be completely aware of job-order costing.

Steps to Calculate Job-Order Costs

Are you wondering about the steps to execute in order to calculate the job-order cost? If yes the  going through the pointers below can be of effective help.

•  Identify the job – The first and foremost step is to figure out the job or the task and its requirements. It can be achieved by analyzing the factors and outcomes that be affected while executing the job. Doing so will help you get an average estimate of the job to be completed.
• Calculating the costs – The next step is to identify the expenses and also calculate the total cost of executing the job. Total expenditure should be broken down into both direct and indirect costs.

• Selecting the allocation base – You should then allocate the incurred indirect costs to the jobs. To be more specific, the total expenditure of the job is assigned on the basis of costs incurred while executing a similar task in the past. 

• Receive the order – Well, after calculating the indirect and direct costs the total expenditure should be submitted to the client. This acts as a quotation for the job and also helps to avoid any last minute problems or confusions. If the customer is okay with the amount of the money to be paid, he/she will place the order and the production can begin.

• Maintain job cost sheets – You are then needed to maintain a job cost sheet to keep a proper track of the labor being used and the actual material. This can be really helpful in knowing if the actual cost of doing the job differs from the estimated amount.

• Revising the cost – After the completion of the job, you are advised to revise the actual cost by summing up all the additional expenditures that might have been incurred during completion of the task. This will help you to be aware of the actual or the final cost.

We hope that going through this blog has helped you to gain information about job-order costing. If you are looking for the best tax preparation, accounting or any other money related services in TX, USA contact Smith & Smith CPA’s. Be it a question related to the importance of CFO or any other query, our experts are here to help you out.