Consequences of Incorrect Job Order Costing

Causes of Failure of Job Order Costing:

The following is the list of the most probable causes that would cause the job order costing system of the company to fail:

  • Adequate System Not In Place: Job order costing requires an elaborate system in place. In earlier times this was done with the help of paperwork i.e. job order sheets, material tickets, labor tickets etc. This paperwork helped control the costs. In the absence of this paperwork, companies will not be able to track the usage of labor and material and therefore the costs associated with them. In modern times, we have information technology to the rescue. Companies can now buy off the shelf products for job order costing and use them to simplify the creation of the elaborate system.
  • Staff Not Well-Trained: The journal entries that need to be passed in a job order costing system are considerably different from the ones that need to be passed otherwise. The bookkeeping staff needs to be trained about the specifics of job order costing. This training is often expensive and takes time. Only after the process has been somewhat established, does a job order costing system give the benefits that it has been touted to provide.
  • Absence of Experts: Job order costing system relies on experts to make certain decisions. For instance the allocation base needs to be selected, predetermined overhead rates need to be created and such other tasks need to be done. These tasks require skill and judgment. Only a person that is thorough with the operations of the firm can do these tasks. Thus the firm must ensure that they have relevant expertise before they begin adopting the technique.

Consequences of Incorrect Job Order Costing:

The causes of incorrect job order costing can be quite grave. They have been listed below:

  • Wrong job orders taken: A wrong system leads to wrong allocation of costs. So the jobs that are unprofitable for the company look profitable. This ends up in the company taking wrong jobs. Over a period of time, this leads to losses.
  • Customers Billed Incorrectly: If customers are billed incorrectly, they are going to be dissatisfied. Dissatisfied customers look for other alternatives. So the company can be sure that they will lose orders going forward. Also, the reputation of the company may be irreversible hampered.

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