Job costing is a system for assigning manufacturing costs to an individual product or batches of products. In general, the job costing system is used only when the products manufactured vary from one another, as is the case with our customised products. When lines of the same, or very similar, products are produced the process costing system is usually used.
As there is a considerable difference in the products we manufacture, the system will create a job cost record for each item ordered. This record will report the direct materials and direct labour used plus the manufacturing overhead assigned to the particular job.
Manufacturing overhead consists of indirect production costs, such as electricity, that are incurred by a business and must be assigned to individual units prepared. This is usually done on a proportionate basis using an actual or estimated allocation rate. Dividing the overhead cost by an allocation base, such as labour cost, labour hours and machine hours, typically creates this rate. Adjustments must be made for under or over applied overhead costs that occur if an estimated allocation rate is used.
The job cost records also perform as the subsidiary ledger and documentation for the cost of the work-in-process inventory, the finished goods inventory and the cost of goods sold.
In the system we use, cost flows throughout the manufacturing process can be easily established. Direct materials and labour are traced to specific jobs using source…