Job order costing system is generally used by companies that manufacture a number of different products. It is a widely used costing system in manufacturing as well as service industries.
Manufacturing companies using job order costing system usually receive orders for customized products and services. These customized orders are known as jobs or batches. A clothing factory, for example, may receive an order for men shirts with particular size, color, and design.
When companies accept orders or jobs for different products, the assignment of cost to products becomes a difficult task. In these circumstances, the cost record for each individual job is kept because each job have a different product and, therefore, different cost associated with it.
The per unit cost of a particular job is computed by dividing the total cost allocated to that job by the number of units in the job. The per unit cost formula is given below:
Per unit cost = Total cost applicable to job / Number of units in the job
Job order costing is extensively used by companies all over the world. According to a survey, 51.1% of manufacturing companies in United States use job order costing.
Examples of manufacturing businesses that use job order costing system include clothing factories, food companies, air craft manufacturing companies etc.
Examples of service businesses that use job order costing system include movie producers, accounting firms, law firms, hospitals etc.
To make money consistently in remodeling, you need accurate estimating. In order to have accurate estimating, you need accurate job costing to give you constant feedback on your estimating system. As you prepare a project estimate, you are setting many goals. Your goals are the material cost you hope to meet or beat, the labor cost you hope to achieve, and the subcontractor cost you anticipate.
Once you have sold the job and production begins, you keep records of your expenses for that job in each category of your estimate. How are you doing on meeting these goals? This collection of data is critical to your success because it sets the stage for accuracy in your future estimates. Only by gathering accurate and timely job cost information will you be able to gauge job performance, and keep your estimating information up-to-date.
Job costing has a second important benefit—as a big picture financial control. You are working hard to keep total job costs at the percentage of income you target with your markup. You watch your P & L to see how you are doing overall. You watch each individual job to insure that the job is staying on target. If you need to lower job costs it is much easier, at the individual job level, to investigate the overrun problem and solve it.
Reviewing Profit and Loss statements shows clearly that job costs are usually a remodeler’s single biggest area of expenditure—often running 65-70% (or more) of total company expenditures. If they run out of control, your business is out of control. If your job costs are 79% but were planned for 70%, you will lose 9% from the net profit line. Thus job costs need careful analysis.
In a remodeling company where expenses are out of control, the greatest problem often lies with job costs that are overrunning estimates by a significant margin and bleeding the company of profitability. Accurate job costing data is needed for three reasons:
– to help tighten cost control on ongoing jobs
– to prevent overruns on future jobs
– to build a cost history for estimating
Collecting job cost data helps tighten your current job expenditures. Knowing that an ongoing job is beginning to overrun can help you tighten up on costs on that job. You may be able to recoup some of your costs through better monitored change orders, by using different subs, or by encouraging workers to produce more efficiently. Thus it is helpful to have job cost reports on a weekly or biweekly basis to rein-in overruns on current jobs before they get out-of-hand and you end up losing money on the job. By reviewing cost data with your salespeople and your production manager and lead carpenter, you are sending a clear signal that jobs must generate the gross profit the company needs to operate. Jobs only generate that gross profit by coming in on budget and preventing future overruns.
