JOB ORDER COSTING

In any company, understanding the cost of the product being sold is critical to the company's continued success. If you do not undertand how much your product costs, you could potentially set a price that is too low which could result in you not making any profit or you could set a price that is too high, resulting in your company pricing its product out of the market. Either one of these scenarios would be devastating to the company. In a manufacturing environment the determination of cost is more challenging(see previous posting) than in a merchandising company, but it must still be done.

Job Order Costing is one of the two methods that are used to account for costs in a manufacturing environment (the other is Process costing which I will cover in another post).
In a job cost environment as costs are incurred for ongoing production, the costs are charged to Work-in-process (WIP) where they are accumulated and aggregated for each 'job' that is worked on. When that job is complete, then the total cost of the job is moved out of WIP and transferred to Finished Goods inventory. Then, when the job is sold (i.e. the customer comes to pick it up), the cost is moved from Finished Goods inventory to Cost of Goods Sold (COGS). [COGS is an expense, subtracted from Sales on the income statement to determine Gross Profit.]

The WIP account in the general ledger becomes a control account (similar to Accounts Receivable). There is a corresponding sub-ledger comprised of job accounts - one account for each job in process. As costs (Labor, Materials, Overhead) are incurred they need to be identified as to which job they belong, so that they can be posted to the appropriate job account in the sub-ledger, allowing the total cost of the job to be accumulated. It should go without saying that total of the balances in each job account in the sub-ledger MUST equal the balance in the WIP control account in the general ledger.

A job cost system is appropriate in the following circumstances;

• There is a definable start and stop to the production process for a unit of production ( i.e. a 'job')
• Each 'job' has identifiable charactersitics that distinguish it from other jobs

These characteristics make it possible to effectively identify the costs that belong specifically to each job - making it easier to accumulate those costs by job.

Reviewing costs after a job is completd can provide valuable insights into the company's production process. Once the job is complete and the accumulated cost of a job has been transferred to Finished Goods inventory, the data about the job's cost can be used in a variety of ways;

• Allow the company to set a price that covers the cost of the job and ensures a fair profit.
• Allow the company to review the costs charged to the job to see if they were correct and to see if there are ways to reduce costs in the future.
• If the price was 'fixed' prior to starting the job, then understanding the cost of the job will allow management to see if the price charged was adequate and to review their pricing for future jobs, if necessary.

A job cost system is not only able to be used in a manufacturing environment. In the motion picture industry each movie is different with a definite start and stop; the costs associated with a movie are easy to identify and accumulate. Similarly, technicians for a company like Geek Squad will maintain time and materials separately for each computer that they work on, so that customer can be billed appropriately. Each of these is an example where a job cost system is being used in a non-manufacturing situation.