Talent Marketplace
Organizations nowadays are becoming employee centric. Employees are asked to or assigned projects that pertain to their skills and abilities and what they are best at. To put it other words, jobs are designed around people now and not vice versa. They is an ever increasing emphasis on developing training and development strategies in organizations. […]
Management of Nonprofit Organizations
Management of Nonprofits By definition, the nonprofit sector operates in the humanitarian goals and objectives space. This means that many nonprofits are loosely structured and are often volunteer driven without formal hierarchies and patterns of management. However, this does not mean that nonprofits need not have formal boards, management structures, and financial control. The point […]
Job Classification – Meaning, its Need and Importance
Job classification is a scheme of classifying a job according to the current responsibilities and duties associated with the job. It is different than job design in that the person assigned to the job is not taken into consideration. Jobs are classified with the purpose of studying jobs in a holistic perspective. Job classifications group’s […]
The Power of Gatekeepers Who Control Data and Information in a Digital World
How Access to Knowledge Has Been Restricted Down the Ages to the Present Times We live in a Digital World where the Virtual has replaced the Physical and where the internet and other technologies rule the world controlling and moderating every aspect of our lives. As the cliche that Data is the New Oil gains […]
Multi-Banking: Meaning and Characteristics
The commercial banking industry is undergoing a rapid transformation. This transformation has been enabled by the increasing use of digital technologies in the commercial banking industry. Open banking has become a game changer when it comes to the field of commercial banking. It has enabled the use of many other modern banking solutions. Multi-banking is […]
In earlier time, prices used to be driven by costs. This meant that the firms would consider the amount of money that they had spent in manufacturing a product. They would add a profit margin to it and then sell it at this “cost plus” price. This system had some issues. Even if the company was inefficient in its production, it could just pass on the costs to the consumer.
However with the advent of competition, pricing became a strategic issue. Companies could no longer charge on “cost-plus” basis. Rather they had to accept the price determined by the marketplace. Thus it became important to control costs and the job order costing system was amongst the first pricing system to be created.
A job order system is used by very specific type of companies. These companies do not manufacture standard products and stock them to sell to customers. Rather they take orders. This means that the product is custom built as per the requirements of the customers. This makes job order costing difficult since in a company that manufactures standard products, the production can be known in advance and overheads can be allocated amongst products. But in case of job order costing, determining what the overheads will be for the next accounting period is extremely subjective and prone to errors.
Companies that follow job order costing cannot determine the exact amount of costs that they will incur. Some of their overheads may be standard and required to run the business while some others may be dependent on the job being performed. Companies that perform these jobs cannot know the exact costs before the job is actually completed.
<!--
-->One of the major problems in job order costing is the mismatch between when the quotation is made and when the costs actually become known. Prices need to be quoted before beginning production. However, the costs are known only after the job is completed.
Labour and material charges can be accurately known. However, overheads are an estimate. Hence the estimation needs to be spot on. If the overheads are not correctly known the company may quote too low and take a loss or the company may quote too high and lose customers to cheaper competitors.
Examples:
Not all types of companies follow job order costing. There are some businesses which are known to follow this technique since it is almost a pre-requisite for their business. Here are a couple of famous examples:
Builders usually do not produce standard units. Even if they do, the location, the logistics and many other factors are different. Thus the costs incurred are different too. Hence, job order costing iis very popular.
Your email address will not be published. Required fields are marked *
