Job costing refers to the accumulation of cost and then assigning the same to the product or service produced. Job costing is used when cost are directly traceable with respect to the specific product or customer project
Difference between job costing in Service firm and Manufacturing firm:
1. Service firm uses the term 'client' or project for the given task whereas, manufacturing concern uses the term 'job' for the task.
2. It is also known as the 'project costing' in certain service firms whereas, manufacturing concern uses the term 'job costing' only.
3. Service industries uses direct labor cost as the main element of job costing whereas, manufacturing concern uses both direct labor and direct material as a main element of job costing.
4. In service industry overheads are generally applied based on direct labor whereas, manufacturing concern can use either direct labor or direct material.
Overhead refers to the indirect expenses which are not directly attributable to the business and hence, need to be allocated on some predetermined basis. Example of overhead cost can be indirect material, depreciation, Administrative expenses etc.
Since overhead are applied on a predetermined basis, it can be over applied or under applied at the end of the period.
Overhead are not applied on the actual basis but instead these are applied on the estimated amount of overhead. Hence, at the end of period organization is required to calculate any excess or deficit amount of overhead.
Under applied overhead:
When Actual applied factory overhead is less than the actual factory overhead it is known as the under applied overhead.
Over applied overhead:
When Actual applied factory overhead is more than the actual factory overhead it is known as the over applied overhead.
Disposition of Over or under applied overhead:
1. Through cost of goods sold:
Over applied and under applied overhead is disposed of through cost of goods sold.
If overhead is under applied than Cost of Goods sold should be credited and if overhead is over applied than cost of goods sold should be debited.
2. Through adjustment in production cost:
If difference between actual overhead and applied overhead is significant than it should be adjusted through production cost like finished goods inventory, WIP inventory and cost of goods sold.
Costing plays a strategic role in an organization. The success of a firm depends on effective decision making which requires timely and accurate information which is provided by costing. To get the accurate and timely information the firm has to decide the cost system that is required to be employed. In some firms activity based costing may provide timely and accurate information while in others actual costing is easier, hence the firms need to decide on the basis of the nature of their operation the cost method required to be employed. In both strategies whether it is cost leadership or differentiator the requirement of timely and accurate information exists for strategic making decisions. In some companies the strategic environment of the firms keep changing hence the cost system needs to change with the changing environment to ensure timely and accurate information is provided.
Some strategic decisions and analysis made on information provided by costing are as follows-
a. Product Pricing
b. Profitability of Product
c. Profit Analysis
d. Evaluation of Management performance
e. Refinement of strategic goals.