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…
Constraints and Contribution Margin Analysis
Hidden Assumption: The cost volume profit analysis has a rogue assumption. This rogue assumption believes that the cost volume profit analysis is completely scalable. We know that this is not the case. We operate in a finite world and have finite resources. We show this in our analysis when we write down the relevant range…
Allocating Overheads in Job Order Costing
Tracking direct labor and materials that have been used in a job can be done with a fair degree of precision. That is not the real problem when it comes to costing. The real problem is with allocation of overheads. Usually, they have very little correlation to any specific activity. They are the result of…
The job begins with a quotation given to a client. For the client, all that matters in the quotation are the costs involved. However, for the contractor, quotation is almost a research document. Giving out quotations requires estimation. Contractors usually have fixed methodologies for estimating these costs. A study of past quotations can tell if the contractor has been making the estimations correctly or have they over or under priced certain jobs.
Sales order is document which signifies that the client has accepted the quotation. Work on a job can only be started only after the sales order has been received by the concerned department. Without the sales order, resources will not be allocated to this job.
A job cost sheet tracks the costs as and when they are incurred throughout the job. The costs are updated regularly as and when they are incurred. Out of these, labor and material costs are actual costs whereas overheads are estimates. The company may have to correct its estimates of overhead allocation later.
Material requisition forms help track where the material is being used. Since the material requisition form specifies the exact job for which material is being used, material costs can be accurately recorded. In the absence of material requisition form there will be immense confusion over which material was used for which job and what was the cost of that material.
Companies also keep a track of the freight charges that they have incurred for a specific job. Each freight ticket needs to be authorized with a job code and the costs must be added to the job cost sheet. In the absence of these tickets allocation of these costs will be a problem.
Labor tickets track the time that different laborers with different skill level have spent on the job. Based on this information, the labor cost can easily be allocated to different jobs.
Invoice is the document which signifies the completion of a job as requested by the client. When the invoice is accepted by the client, the contractor can consider the job complete. It is here that the contractors are legally allowed to recognize the revenues as well as the costs that were incurred in the job. Based on when the customer is paying, the cash account or the accounts receivable amount needs to be debited.
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