Job costing

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Job Costing involves the calculation of costs involved in a construction "job" or the
manufacturing of goods done in discrete batches. These costs are recorded in ledger
accounts throughout the life of the job or batch and are then summarized in the final trial
balance before the preparing of the job cost or batch manufacturing statement.

Contents
[hide]

• 1 Job Costing vs Process Costing

• 2 Using Job Costing
• 3 Using Cost Codes in Budgeting
• 4 Example

• 5 References

[edit] Job Costing vs Process Costing

Job costing (known by some as job order costing) is fundamental to managerial
accounting. It differs from Process costing in that the flow of costs is tracked by job or
batch instead of by process. Process costing is used when the products are more
homogeneous in nature.[1]

[edit] Using Job Costing

In a job costing system, costs may be accumulated either by job or by batch. For a typical
job, direct material, labor, subcontract costs, equipment, and other direct costs are tracked
at their actual values. These are accrued until the job or batch is completed. Overhead or
"burden" may be applied either by using a rate based on direct labor hours or by using
some other Activity Based Costing (ABC) cost driver. In either case, once
overhead/burden is added, the total cost for the job can be determined. If the accountant
is using a general ledger accounting system, which lacks true job costing functionality,
the costs must be manually transferred out of Work in Process to Finished Goods (Cost of
Goods Sold for service industries). Of course, in the days of computerized job costing
software, journaling costs manually is an obsolete process. Such hand-journaling is
mandatory for companies that continue to use general accounting software to do job
costing. Enlightened accountants are moving forward and using job costing software,
thereby improving cost control, reducing risk, and increasing the chance of profitability.
[edit] Using Cost Codes in Budgeting
In a true job cost accounting system, a Budget is set up in advance of the job. As actual
costs are accrued, they are compared to budgeted costs, to determine variances for each
phase of each job. Cost Codes are used for each phase, allowing "mini-budgets" to be
generated and tracked. In the construction industry, the Construction Specifications
Institute (CSI) has established an industry standard Cost Coding system.job costing
system consists of various cost driver that drives job cost, moreover it

[edit] Example
These examples will assume that overhead is allocated on the basis of Direct Labor
Hours. Direct Material is abbreviated DM, Direct Labor as DL, and Overhead as OH.

XYZ corporation manufactures airplanes. 1 order was completed (#110), 2 received

further work (#111, 112), and 1 new order was received (#113). Overhead is allocated at
a rate of $100/DL Hour. All employees earn $20/hour. Beginning Work In Process
Balances are as follows: #110, $25,000; #111, $10,000; #112, $12,000; #113 $0 (New
Order). Below are the amounts of DM and DL used.

• #110 $2,000 DM, 25 DL hours. Therefore, $5,000 in new cost is added ($2,000
DM, $500 DL, $2,500 OH). The job had a total cost of $30,000. this amount is
transferred out of Work in Process to Finished Goods or Cost of Goods Sold.
• #111 $3,000 DM, 30 DL hours. Therefore, $6,600 in new cost is added ($3,000
DM, $600 DL, $3,000 OH). The job has a new total cost of $16,600. This amount
remains in Work in Process until completion.
• #112 $5,000 DM, 100 DL hours. Therefore, $17,000 in new cost is added ($5,000
DM, $2,000 DL, $10,000 OH). The job has a new total cost of $29,000. This
amount remains in Work in Process until completion.
• #113 $1,000 DM, 10 DL hours. Therefore, $2,200 in new cost is added ($1,000
DM, $200 DL, $1000 OH). The job has a new total cost of $2,200. This amount
remains in Work in Process until completion.

Caution: Remember, overhead is allocated on the basis of DL hours. While in this case,
allocating overhead on the basis of DL cost ($5 of overhead for every $1 DL cost) would
produce the same result, this may not always be the case. Since rates are developed based
on a budget, if employees are actually paid a different rate from the budgeted rate,
allocating at a $5 to $1 ratio would produce a different cost from the stated $100/DL hour
allocation. Companies use slightly different overhead allocation methods

BATCH COSTING is the identification and assignment of those costs incurred in

completing the manufacture of a specified batch of components. Having arrived at
the batch cost, the unit cost is simply derived by dividing it by the number of
components in the batch.
operation costing
hybrid of job-order and process cost systems. Companies that manufacture goods that undergo some
similar and some dissimilar processes use this system. Operation costing accumulates total
conversion costs and determines a unit conversion cost for each operation. However, direct material
costs are charged specifically to products as in job-order systems

Operating cost
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be challenged and removed. (October 2006)

Operating costs are the recurring expenses which are related to the operation of a
business, or to the operation of a device, component, piece of equipment or facility.

[edit] Business operating costs

For a commercial enterprise, operating costs fall into two broad categories:

• fixed costs, which are the same whether the operation is closed or running at
100% capacity
• variable costs, which may increase depending on whether more production is
done, and how it is done (producing 100 items of product might require 10 days
of normal time or take 7 days if overtime is used. It may be more or less
expensive to use overtime production depending on whether faster production
means the product can be more profitable).

[edit] Business overhead costs

Overhead costs for a business are the cost of resources used by an organization just to
maintain its existence. Overhead costs are usually measured in monetary terms, but non-
monetary overhead is possible in the form of time required to accomplish tasks.

Examples of overhead costs include:

• payment of rent on the office space a business occupies

• cost of electricity for the office lights
• some office personnel wages
Non-overhead costs are incremental costs, such as the cost of raw materials used in the
goods a business sells.

Operating Cost is calculated by Cost of goods sold + Operating Expenses. Operating

Expenses consist of : . Administrative and office expenses like rent, salaries, to staff,
insurance, directors fees etc. . Selling and distribution expenses like advertisement,
salaries of salesmen.

[edit] Equipment operating costs

In the case of a device, component, piece of equipment or facility (for the rest of this
article, all of these items will be referred to in general as equipment), it is the regular,
usual and customary recurring costs of operating the equipment. This does not include the
capital cost of constructing or purchasing the equipment (depending on whether it is
made by the owner or was purchased as a constructed system).

Operating costs are incurred by all equipment — unless the equipment has no cost to
operate, requires no personnel or space and never wears out (any examples? perhaps
intangibles, though not equpiment, per se). In some cases, equipment may appear to have
low or no operating cost because either the cost is not recognized or is being absorbed in
whole or part by the cost of something else.

Equipment operating costs may include:

• Salaries or Wages of personnel

• Advertising
• Raw materials
• License or equivalent fees (such as Corporation yearly registration fees) imposed
by a government
• Real estate expenses, including
o Rent or Lease payments
o Office space rent
o furniture and equipment
o investment value of the funds used to purchase the land, if it is owned
instead of rented or leased
o property taxes and equivalent assessments
o Operations taxes, such as fees assessed on transportation carriers for use of
highways
• Fuel costs such as power for operations, fuel for production
• Public Utilities such as telephone service, Internet connectivity, etc.
• Maintenance of equipment
• Office supplies and consumables
• Insurance premium
• Depreciation of equipment and eventual replacement costs (unless the facility has
no moving parts it probably will wear out eventually)
 • Damage due to uninsured losses, accident, sabotage, negligence, terrorism and
routine wear and tear.
• Taxes on production or operation (such as subsidence fees imposed on oil wells)
• Income taxes

Some of these are not applicable in all instances. For example,

• A solar panel placed on one's home for use in generating electric power generally
has only capital costs; once it's running there are no personnel costs, utility costs
or depreciation and it uses no extra land (that wasn't already part of the place
where it is located) so it has no real operating costs; however there may need to be
taken into account costs of replacement if damaged.
• An automobile or any other item purchased for personal use has no salary cost
because the owner does not charge themselves for operating the device.
• An item which is leased may have some or all of these costs included as part of
the purchase price.

It might be questionable to assert that the cost of ten extra people on the sales force are an
incremental cost or an overhead cost, since the wages for these people are both overhead
and incremental. The staff needed to keep the shop operational are mostly considered as
overhead