Job costing is a form of specific order costing. It is used where there is a specific customer order which is unique to that customer determines the work to be done. As such orders are specific to the requirement of the customer, production is carried out in accordance with the special requirements of each customer. It is therefore usual for each job to differ in one or more respects from every other job, which means that a separate record (a ‘job card’) must be maintained to show the details of each particular job.
In job costing, the customer’s order is effectively the cost unit and the requirement of the method is to identify the costs incurred in completing that customer’s order.
How this is typically done in a job-costing organisation:
- The customer approaches the supplier and indicates what she requires.
- The supplier discusses the order with the customer and agrees with her the precise details of the items to be supplied. This includes the quantity, quality, size and colour of the goods, the date of delivery and any special requirements.
- The supplier prepares an estimate for the job, based on:
- the number of hours of direct labour and the expected rate;
- the quantity of material to be used and its price;
- any direct expenses;
- an appropriate amount for production, administration and selling and distribution overheads; and
- the supplier’s profit margin.
- Once the customer accepts the quotation, the necessary documentation is sent to the various departments to ensure that the job progresses through the factory without delays and is completed at the due time.
Examples of businesses that would use job costing include:
- Aeroplane manufacturing
- Landscape gardening
- Vehicle repairs
- Bespoke furniture