Job and Contract Costing
It is the form of specific order costing which applies when work is undertaken to customers’ special requirements and each order is of comparatively short duration (compared to those to which contract costing applies). The work is usually carried out within a factory or workshop and moved through processes and operations as a continuously identifiable unit. The term may also be applied to work such as property repairs and the method may be used in the costing of internal capital expenditure jobs.”
A job is a specific order for work usually carried out within a factory or workshop and moves through activities and operations as a continuously identifiable unit. Job costing is used in engineering jobs, construction companies, printing jobs, automobile servicing, ship building, furniture making, fabrication jobs etc.
A job is a cost unit which consists of a single order or contract. Job costing is a system in which the elements of cost incurred are specifically identifiable with the item being made to a customer’s specific requirements.
The costs of each job are recorded in Job Account. The unit of cost in job costing is the cost of the job itself. The cost of completed job will be the materials used for the job, the direct labour employed and the production overheads charged to it.
Features of job costing:
(a) It is a Specific Order Costing.
(b) The job is carried out or a product is produced to meet the specific requirements of the order. It may be related to single unit or a batch of similar units.
(c) It is concerned with the cost of an individual job or batch regardless of the time taken to produce it, but normally short duration jobs.
(d) Costs are collected to each job at the end of its completion.
(e) The costs of each job is ascertained by adding materials, labour and overheads.
(f) Only prime cost elements are traceable and the overheads are apportioned to each job on some appropriate basis and sometimes it is difficult to select a suitable method of absorption of overheads to individual jobs.
(g) Standardization of controls is comparatively difficult as each job differs and more detailed supervision and control is necessary.
(h) Work-in-progress may or may not exist at the end of the accounting period.
Advantages of Job Costing:
The advantages of Job Costing are as follows:-
(a) The profit or loss made on each job can be measured if cost is set against the price tendered for the job.
(b) It generates the cost data useful for the analysis and control by the management.
(c) It highlights whether or not a job is likely to be profitable or not.
(d) It readily fits into the double entry system, and lends itself to performance evaluation and review of costs.
(e) Job costing enables a comparison to be made with performance on other jobs so that inefficiencies are identified and rectified.
(f) Some jobs are negotiated on a ‘cost plus’ basis, if there is difficulty in estimating a price for a certain job and the customer agrees to pay the cost of the job plus an agreed percentage as a profit margin. In cost plus jobs it is essential to maintain reliable costing records.
(g) The cost incurred to date on the job are known before the job is completed, and any mistakes or excessive costs show up at an early stage.
The major disadvantage of Job costing is that it is too expensive, time consuming in maintenance of cost records for each job undertaken.
Contract costing is the tracking of costs associated with a specific contract with a customer. For example, a company bids for a large construction project with a prospective customer, and the two parties agree in a contract for a certain type of reimbursement to the company. This reimbursement is based, at least in part, on the costs incurred by the company in order to fulfill the terms of the contract. The company must then track the costs associated with that contract so that it can justify its billings to the customer.
Contract costing can involve a considerable amount of overhead allocation work. Customer contracts typically specify exactly which overhead costs can be allocated to their projects, and this calculation may vary by contract.
Features of Contract Costing:
The contracts for which Contract Costing is applied will have the following features:
(a) Contracts are undertaken to special requirements of the customers.
(b) Duration of contracts are relatively for a long period.
(c) Contract work is done on the sites unlike manufacturing under a roof.
(d) Contract work mainly consists of construction activities.
Accounting Treatment of Contract Costs:
Accounting of each item of cost in contract accounts is discussed below:
(a) All the materials purchased for the contract or any material sent to site is charged to contract.
(b) If any material is returned to stores or lying at site unused or materials transfers to another contract site is credited to the Contract Account.
(c) If materials are not required immediately, the materials may be stored and its cost is debited to Stock Account.
All the labour employed or worked at site is treated as direct labour and all costs relating to them is charged to the Contract Account. The salaries and incentives of the administrative and supervisory staff of a specific contract is also charged to that specific contract.
(a) When the plant is taken on hire, the hire charges are charged to Contract Account.
(b) If the plant is specifically purchased for the contract or plant was sent to site, the value of the plant is debited to Contract Account. The value of plant returned or remaining at site is credited to Contract Account. The balance between amounts debited and credited to contract represents the value of plant used at site.
(c) Sometimes the value of depreciation provided on the plant is debited to Contract Account instead of showing the value of plant issued to site and remaining at site.
- Sub-Contract Charges:
Sometimes part of the contract work is given on subcontract basis and payments made on subcontract work is debited to Contract Account.
The general overheads and head office expenses are apportioned to different contracts on equitable basis, and the portion of overheads are charged to the Contract Account.
- Difficulties in Cost Control:
Generally, contracts are big in size and the contract work is to be carried out at sites. Due to this some problems will arise concerning usage of material, labour utilization, supervision of labour, damage to plant and work, pilferage of materials and tools etc. This site based work makes it difficult to control the costs of the contract.
- Surveyor’s Certificate and Retention Money:
In contract works, a surveyor or an architect or civil engineer is appointed to periodically visit the site for inspection of the work completed. He will issue a certificate mentioning the stage of completion of work and the value of the work completed to the date of issue of certificate. The payments will be released to the contractor by the contractee based on the said certificate.
Normally the payments will be released only to the certain percentage, say 80% of the work certified. The balance amount of work certified is retained by the contractee till the completion of the entire contract satisfactorily.
The amount so retained is called ‘retention money’. The contractee so retains to safeguard himself from the risks that may arise from the contractor. Usually the percentage of retention money is up to 20% of the amount of work certified.
The amount of work-in-progress includes the value of work certified and uncertified appearing in the Contract Account.
The work-in-progress is shown as Current Asset in the Balance Sheet as follows:
Materials at site, Plant at site are shown separately in the Assets side of the Balance sheet.
- Costing of Running Contracts:
The long-term nature of contracts has necessitated to determine profit to be attributed to each accounting period. In the long-term contracts it is considered that their outcome can be assessed with reasonable certainty before their conclusion, the attributable profit should be calculated on a prudent basis and included in the accounts for the period under review.
The profit taken up should be based on Standard Cost Accounting principles. In case of Completed Contracts, all the profit that arise from the contract can be transferred to Profit and Loss Account.
But in case of Incomplete Contracts, only a portion of the profit is taken to the Profit and Loss Account depending on the extent of work completed on the contract because some provision is to be made for meeting contingencies and unforeseen loss. There are no hard and fast rules in calculation of profit to be taken to profit and loss account.