Monday, December 22, 2014

Job Costing Explained

Job costing is the process of assigning costs to the development of custom products or services. This method of determining costs is utilized when the products or services which are being produced are unique, and it is therefore easier to trace direct labor and direct materials costs to these individual jobs. Job costing is the opposite of process costing, which is implemented when products or services are mass produced and are uniform, and instead of assigning costs to individual jobs they are spread out over the entire project. The information obtained from job costing can be used for various purposes, such as reporting inventory and cost of goods sold values, developing cost estimates, measuring actual costs for the purpose of comparing them to estimated costs, and developing cost estimates.
Job costing is often mentioned in reference to construction projects, but it can be used in any situation where something exclusive is being created. There are three types of expenses which must be accounted for: direct materials, direct labor and overhead. In job costing direct materials and direct labor expenses are assigned directly to the project. Overhead expenses are allocated, as it the case with process costing.
When direct costs are traced back to individual jobs, there is usually little uncertainty regarding these costs. However, not all direct costs should be traced. When direct costs are relatively small, the expenses associated with tracking these costs are often greater than the costs themselves. In these cases it is generally preferable to classify such small costs as overhead.
If you are interested in implementing a job costing system, contact us today. We will review your business model and help you set up the most appropriate accounting system for your firm.

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