Articles on Job Order Costing

What is Job Order Costing ?

With the advent of competition pricing has become a strategic issue. The companies have to accept the price which is determined by the marketplace. It is very important to control the costs and job order costing is one of the most important system to control the costs.

Relationship Between Types of Costs and Inventory

The relationship between the cash spent and when cash is recognized as an expense is fairly complex in job order costing. This relationship and the complexities that arise have been discussed in this article.

Types of Costs to be Allocated in Job Order Costing

Companies incur a variety of costs in their day to day operation. The article lists down the different types of costs that are usually incurred by an organization as well as their implications when it comes to job order costing.

Allocating Overheads in Job Order Costing

One of the challenging tasks in job order costing is allocation of the overheads. The article discusses few systems which are used to allocate the overheads amongst jobs.

Pre-Determined Allocation Rate

Pre-determined overhead costs are a necessary evil in job order costing. They are inaccurate but it is impossible to get by without them.

Paper-Work in Job Order Costing

Large companies usually are process oriented. Since every job is unique and has its own unique costs, there is a chance that the costs may slip out of control too soon. Hence, to avoid these, extensive documentation is required. Earlier these documents used to be filed and present in the office in the physical form. However, of late, they are available electronically. This makes managing them much easier. Here is a list of the common documents that are used in a job order costing assignment.

Job Costing and Service Firms

Job costing has traditionally been used in the manufacturing industry. Many people believe that manufacturing is the only place where job costing can be effectively used. However, as we shall see that is not the case. There is a huge number of service firms today where job costing is the norm. It is essential for a student of job costing to understand where and how it is used in the service industry. Here are a few examples that will shed light on this issue:

Advantages of Job order Costing

Job order costing has been around for decades. The usefulness of this method has been thoroughly debated. There are points on both sides of the argument which make job order costing either a good or a bad option, depending upon the situation. However, since we know that job order costing has survived the test of time, there must be some serious merits to this technique. Here is a list of the commonly mentioned advantages of using a job order costing system.

Disadvantages of Job Order Costing System

The job order costing system has been severely criticized on many grounds. Some of the major criticisms against job order costing have been listed down below:

Procedure of Job Order Costing

Job order costing is an elaborate procedure that requires an elaborate system. Sometime companies find that job order costing is really expensive. It leads to a lot of expenditures in the form of increased overheads by employing more clerical staff to do the job order costing procedure. However, since the costs saved are significant, the increase in overheads in more than compensated for. This article mentions the procedure that is followed in organizations that have job order costing systems in place.

Spoilage and Rework in Job Order Costing System

One of the major benefits of adopting a job order costing system is that helps make the organization lean. Many organizations spend a lot of money in wasteful activities. This amount is then charged to the customer as a cost. But, with job order costing such activities can be traced, managed and therefore eliminated. This is done by following the procedure for rework and spoilage. The details about the same and how they help in cost reduction have been mentioned in this article.

Scrap and Job Order Costing

Manufacturing has improved by leaps and bounds. Process oriented and automated manufacturing ensures that production is done with almost zero errors. New standards have been set for efficient production. These standards are called six sigma, lean manufacturing and are denoted numerous other terms. Removing scrap is a major component of making a manufacturing process efficient. Job order costing can come in handy in this regard. This article explains how job order costing helps.

Contribution Margin

The contribution margin is another concept that is very closely linked to the Profit Equation and the breakeven analysis. This analysis is also widely used by managerial economists. Hence, it is important to understand this concept in details as well. This article gives you the details about contribution margin:

Multiproduct Contribution Margin

The multiproduct contribution margin is an extension of the single product contribution margin. This is more commonly used in real life, because most of the firms usually produce multiple products. Now, in this case, we can contribute the contribution margin of each of the products individually as we have done in the previous article. But when there are too many products comparisons can become confusing. Imagining, knowing the contribution of a 100 different products. Imagine being in a Wal-Mart and trying to know the contribution margin of 60,000 different products that you have stocked. Sounds like a tough task, doesn’t it? The multiproduct contribution margin helps in this regard. It gives one single number to denote the contribution margin of multiple products. Let’s see, how it is computed in this article:

Constraints and Contribution Margin Analysis

Contribution margin analysis can get a little more complicated than we thought. There are some assumptions that we have implicitly made while performing the contribution analysis. We know that many of them are not valid. So, in real life, many times the model does not hold true. It can sometimes lead to decisions which are counterproductive. Hence, we need to learn a little more about this tool before we can use it more effectively.

Consequences of Incorrect Job Order Costing

The job order costing technique is as complex as it is valuable. It requires a lot of clerical staff. The consequences of incorrect costing can be quite grave. So much so, that they can threaten the existence of a company. Hence, due attention must be paid to ensure that the implementation of the system is spot on.

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Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.