Job Costing
Overview
Every business must know what it costs to produce a good or service so that it can set selling prices to get its anticipated profit. If the business is a small provider in a market where selling prices are determined by general supply and demand, it must still know whether the cost of its product or service will be less than the prevailing market price.
Cost accounting systems give management this information. Cost accounting is a specialised form of accounting that accumulates product costs as production takes place or as services are provided. The two main cost accounting systems are job costing and process costing, both of which enable a business to value its work in process and, if it is a manufacturing business, its finished goods inventories. Firms with a continuous production process that makes homogeneous products use process costing . Firms that make products to customer specification use job costing.
Job costing is the more appropriate and common type of costing used in the marine industry, so we focus on this system. The main emphasis is on explaining different ways of classifying costs and how these costs are allocated to a particular job or project. Why this information is important and some of the decisions it affects will become clear as you work through the material.
Job costing, as its name suggests, is concerned with the problem of allocating particular costs to a particular job or jobs. You have come across some of the cost classifications in previous chapters, so they are not all unfamiliar. There are some interesting readings given with very good examples that will help you understand this topic.
Learning objectives
After completing the work for this chapter you should be able to:
Define the different kinds of costs and their relevance
- Understand the difference between costing in a manufacturing business and a service business
- Be able to allocated overheads to particular jobs
- Describe the difference between process costing and product costing
- Describe the flow of costs in a job costing system
- Discuss the issues relating to Full Costing
- Explain the basic principles of Activity Based Costing
- Explain the benefits and limitations of activity based costing
- Explain the new terms and concepts identified in this chapter
