Concept And Meaning Of Service Costing And Types Of Services

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Services or activities, having public utilities, need to determine cost of the services or activities offered. A public utility undertaking, offering services to a community rather than manufacturing a tangible product, uses service costing.

The service or function, having public utilities, covers water supply service, electricity supply service, transport service, hospital service, library service, canteen service, park service, hostel service etc. Each service is unique and needs a different accounting treatment. An intelligent selection of unit cost is required to obtain a meaningful cost comparison. A correct choice of unit cost provides correct cost analysis for decision making destined for effective cost control and reduction.
Unit cost expression for a transport undertaking may be the cost per running kilometer, cost per effective kilometer, cost per tonne kilometer, or the cost per passenger kilometer. The cost per kilowatt or unit is the expression appropriate for a hydro power generating undertaking. The cost per patient, cost per patient day, cost per out-door patient, cost per minor or major operation, cost per room may be the potential latitude of an expression of cost for medical institute.

Types Of Services
The diverse nature of services offered to the public poses a difficulty to make a sharp division of services. However, services are categorised into the following four major categories on the basis of their common features.

* Transport services
* Supply services
* Welfare services
* Municipal services

Meaning Of Defective Unit And Its Control

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Meaning Of Defective Units
The faulty or substandard finished goods or spoilage are called defective units. Defective goods arise due to sub-standard materials, bad supervision, bad planning of production, poor workmanship, inadequate equipment, careless inspection etc.
Defective units can be rectified and turned out as good unit by re-processing. Such re-processing work may need the use of additional material, labor and expenses.

Control Of Defective Units
On noticing some defective units, a supervision work is carried out and a defective work report needs to be prepared on completion of the supervision work.The defective work report should draw details relating to department, process, defective units quantity, normal and abnormal defects, the cost of rectification etc.
Decision to rectify or dispose without rectification is made after analyzing the cost of rectification. Defective units are sold at a lower price if the cost of rectification makes the cost of finished goods larger.

Related Topics
Meaning, Types And Accounting Treatment Of Waste
Meaning Of Scrap And Its Accounting Treatment
Meaning Of Spoilage And Its Accounting Treatment

Meaning Of Spoilage And Its Accounting Treatment

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Meaning Of Spoilage
Badly damaged material in a manufacturing operation is spoilage. The spoil /damaged material during processing is called spoilage. Spoilage material is not possible to be rectified economically and put for further processing. Thus, such a spoilage material is taken out of the process and disposed off in the same form as it exists.
Two types of spoilage are normal and abnormal ones. Normal spoilage is estimated and is inherent. Abnormal spoilage is unexpected and does not occur always.

Accounting Treatment Of Spoilage
Material damaged or destroyed in the course of a manufacturing process is spoilage. Manufactured goods of a low or inferior quality produced are also called spoilage.
Normal spoilage is included in the cost of the output in a single product line. In a multi-product context, spoilage is charged to the production overhead to record out of all the products. This means production overhead is made larger to spread spoilage over all products since the production overhead rate becomes greater. The abnormal spoilage cost is charged to the Profit and Loss account.
The spoilage arising on account of improper workmanship or malfunctioning of equipment is absorbed by good production treating it as charged to production overhead.

Related Topics
Meaning, Types And Accounting Treatment Of Waste
Meaning Of Scrap And Its Accounting Treatment
Meaning Of Defective Unit And Its Control

Meaning Of Scrap And Its Accounting Treatment

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Meaning Of Scrap
Scrap is a left over or residue after a product has been manufactured. The remnant of material resulting after producing the product is scrap. Thus, the residue of raw material incidentally realized in course of manufacturing goods is called scrap. Low quality raw material or abnormal size of raw material gives scrap material. Faulty or wrong product designing, substandard or unsuitable raw material, abnormal machine operation etc are the main causes of scraps. Thus a correct product design helps check scrap.

The leftovers of the coconut hair oil are fibres and the outer shield. Therefore, the fibres and the outer shield of a coconut are scrap since they have to be sold at a nominal value. A hard and thin outer cover of a tree known as bark, end pieces of timber, sawdust, curly pieces of the surface of timber called shavings are scrap of a timber mill.

Accounting Treatment Of Scrap

Option 1
Nominal sales price realized out of negligible scrap is treated as other income in cost account.

Option 2
A scrap account is opened with the full amount of the scrap of the process or job if such a scrap value is significant. Process account or job account is given credit by the value of scrap. The scrap account is closed by the balance either of profit or loss to the profit or loss account.

Option 3
Net sales value of scrap after deduction of selling and distribution costs is deducted either from the overhead amount or from the material cost. Deduction out of overheads is made to adjust the overhead ratio if scrap is not possible to identify in relation to a process or a job.

Related Topics
Meaning, Types And Accounting Treatment Of Waste
Meaning Of Spoilage And Its Accounting Treatment
Meaning Of Defective Units And Its Control

Meaning, Types And Accounting Treatment Of Waste

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Meaning Of Waste
The loss of raw materials in processing is waste. Waste has no receivable value. It is a quantity loss of material in the process of producing goods.
Waste is brought into record by comparing the input quantity with the output quantity. Waste may occur due to shrinkage, smoke, weight loss and evaporation causing the material to become waste. They are material losses causing a quantity loss. Waste may occur in terms of a by-product which does not produce any realizable value.
For example, 20kg of potato does not give 20kg of potato chips. Thus, the fact that 15 kg of chips is produced out of 20kg potato means that 5 kg of potato is wasted in the course of making chips. 5kg of waste does not produce any sales value and so is treated as waste.

Types Of Waste
Waste is divided into two types, normal and abnormal waste. Normal waste is estimated before production and is inherent in the nature of the raw material. Abnormal waste occurs because of a low quality/substandard of input material, bad process work, carelessness etc.

Accounting Treatment Of Waste
Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.
Abnormal waste is undesirable waste exceeding the normal loss set aside. The value of an abnormal loss is calculated as in the process account by using the formula for transferring to Profit and Loss account.

Related Topics
Meaning Of Scrap And Its Accounting Treatment
Meaning Of Spoilage And Its Accounting Treatment
Meaning Of Defective Units And Its Control

Accounting Of By-Product

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By-product accounting depends on the circumstances under which it is realized The following could be the possible circumstances of a by-product realization.
* At the separation point
* After further processing
Based on the possible circumstances for the by-product realization, the following are the main types of by-product accounting.

1. Non-cost or sales value method
Existence of sales value method focuses more on sharing joint costs by by-products realized determining cost of by-product.These methods are the followings:
* Other income or miscellaneous income method
* By-product sales added to the main product sales
* By-product sales value deducted from total cost.
* Credit of by-product sales value less selling and distribution expenses.
* Credit of by-product sales value less selling and distribution expenses as well as cost incurred after split off.
* Credit of by-product sales value less selling and distribution expenses costs incurred after split off and estimated profit or reverse cost method.

2. Costs Methods
The existence of a cost method provides opportunities to ascertain the cost of by-products. It takes a closer look on the cost front and seeks to allocate joint cost to the by-product realized incidentally in the process of producing the main product. The types of the techniques available under cost method are following:
* Opportunity or replacement cost method
* Standard cost method
* Apportionment on suitable basis.

Related Topics
Concept And Meaning Of By-Product
Joint Products Analysis And Essentials Of Joint Cost
Methods of Apportioning Joint Costs To Joint Products

Concept And Meaning Of By-Product

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Salable or usable products having a relatively low value incidentally realized in the course of manufacturing the main product is called by-product. In many instances, there may be several joint products and several by-products depending upon the nature of the input raw materials being processed. A by-product is an outcome that does not make tangible contribution to the sales revenue. The economic value of by-product, comparing it with the main product, is comparatively low.

By-product in the course of sugar production are Bagasse of solid waste and molasses of sweet semi-liquid product. Poultry farm in delivering chicken meat to the market gets poultry leftover parts such as poultry fathers, bones, beaks, feet and poultry fat as by-product. The fibers and outer shell of coconut are the by-products residue of coconut oil and product.

Related Topics
Accounting Of By-Product
Joint Products Analysis And Essentials Of Joint Cost
Methods Of Apportioning Joint Costs To Joint Products

Methods Of Apportioning Joint Costs To Joint Products

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Following methods are used for apportioning joint costs to joint products:

1. Average Unit Cost Method
This method is highly effective where the output of individual products can be expressed in some common unit. Under average unit cost method, each unit of output shares a proportionate amount of joint cost. This method is simple since the joint cost is separated into an average joint cost per unit of output realized during the relevant period.

Average unit joint cost= Total joint cost/Number of units of joint product produced.

2. Physical Unit Method
Proportion of raw material contain in each joint product is the basis for the allocation of joint costs under physical unit method. Physical coefficient of raw material contained in the joint products is taken as proportion to distribute joint cost.

3.Survey Method
The weight of an individual product is determined in terms of result tabulated out of survey in the survey method. The extensive survey is made to identify the factors like selling price, volume of sales, marketing activities, technical value of production ratio of intake raw materials etc.

4. Contribution Margin Method
Marginal contribution of joint products forms ground with which marginal cost is distributed in contribution margin method. Contribution margin is the margin of sales revenue available after separation of variable cost. Margin of sales revenue or contribution margin so derived is used for the absorption of fixed cost.

5. Market Value Method
Market value of a product is the focal point for the segregation of pre-separation costs into joint products. Market value method is valid on the ground that cost has a bearing on the fixation of selling price of joint products. Thus selling price or market value is the reference value to transform joint costs to joint products.

Related Topics
Joint Products Analysis And Essentials Of Joint Cost
Concept And Meaning Of By-Product
Accounting Of By-Product

Joint Products Analysis And Essentials Of Joint Cost

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Two or more consumable or usable products having a similar economic value separated in the course of a manufacturing process are called joint products. Some joint products need further manufacturing operations to realize the final products. It is , therefore, essential to determine the cost 0f individual products. End or final products like gas, crude oil, raw LPG arising out of petroleum extracting industry is an instance of realization of joint products. Crude oil is further processed to obtain petroleum of different usable products like kerosene, petrol, diesel, lubricating oil and so on.

Analysis Of Joint Cost
The nature of raw material decides the types of joint products. A proper analysis of joint costs is essential. Effective control and allocation of joint costs to joint products need an analysis of joint costs.
Joint cost control is required for:

* Recording, classifying and allocating
* Ascertainment of profit or loss on each line of operation
* Identification of most the profitable products' mix
* Ascertainment of selling price of joint products.

Related Topics
Methods Of Apportioning Joint Costs To Joint Products
Concept And Meaning Of By-product
Accounting Of By-Product

Meaning Of Inter-Process Profit And Its Objectives

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Inter-Process Profit

The profit associated with the transfer of goods from one process to another process is called inter-process profit. Normally, finished goods are transferred to the immediate next process at the cost of production basis. In some process industries, finished goods are transfer to the immediate next process by including a nominal amount of profit. The profit so incorporated is called inter-process profit. The price fixed by adding the nominal amount of profit for the transfer of finished goods to the next process is known as transfer price. Adding profit on the goods transferred is termed as mark-up price.

Transfer Price = Cost of output+ Profit

Objectives Of Inter-Process Profit

The output of a particular process is transfer to the next process by adding a nominal amount of profit for the following objectives:

* To assess the performance of the process operation.

* To examine whether the output can compete with the market or not.

* To decide whether the output should be sold without further processing or putting for further processing

Related Topics
Concept Of Process Loss, Normal Loss And Abnormal Loss
Meaning Of Abnormal Gain And Its Determination

Meaning Of Abnormal Gain And Its Determination

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Meaning Of Abnormal Gain

More output over the expected or normal output realized is called an abnormal gain. Abnormal gain arises because of an abnormal effective in the use of raw material or efficiency in performance so it is known as abnormal effective. Abnormal gain reduces the normal loss quantity so it comes in the form of profit to the industry. The value of an abnormal gain is assessed on the basis of production cost.

Method of determining the value of abnormal gain:

Value of abnormal gain = (Normal cost of normal output/Normal output) Abnormal gain qty.

Related Topics
Concept Of Process Loss, Normal Loss And Abnormal Loss
Meaning Of Inter-process Profit And Its Objectives

Concept Of Process Loss, Normal Loss And Abnormal Loss

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The loss that occurs in the course of converting an input raw material into finished products is known as process loss. Such a loss may occur because of the nature of the raw materials. This type of loss occurs in terms of the difference between the input quantity and the output quantity.
The difference between the input quantity and the output quantity arising on account of production operation is called process loss.

Process Loss = Normal process loss + Abnormal process loss

Normal process loss:
The loss expected or anticipated prior to production is a normal process loss. It is thus called a standard loss. A provision for such a loss is made before starting production. Weight losses, shrinkage, evaporation, rusting etc. are the examples of normal loss. Normal loss increases the cost of production of the usable goods realized.

Abnormal process loss
The loss realized over the normal loss is called an abnormal loss. Abnormal loss arises because of abnormal working conditions, bad working condition, carelessness, rough handling, lack of proper knowledge, low quality raw material, machine breakdown, accident etc. Therefore an abnormal loss is an unanticipated loss. Abnormal loss is a controllable loss and thus can be avoided if corrective measures are taken. Therefore, abnormal loss is also called an avoidable loss.
The value of an abnormal loss is assessed on the basis of the production cost with which the profit and loss account is charged.

Value of abnormal loss = (Normal cost of normal output/Normal output) X Abnormal loss qty.

Related Topics
Meaning Of Abnormal Gain And Its Determination
Meaning Of Inter-process Profit And Its Objectives

Process Account And Its Related Items

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A separate account is prepared for each stage of a manufacturing process or operation. The cost incurred at each manufacturing stage, process or operation are charged separately. A separate process account prepared for each process is debited by the costs incurred in that process.
Cost of materials, direct labor, direct expenses and overheads constitute the cost of each process. These are the main items used in process account.

* Materials:
Materials are used for producing products. Required materials are issued to the first process. The output of the first process is passed on to the next process. Subsequent process may need additional materials. This process continues till finished products are realized from the final process. The process account concerned is debited by the value of the materials consumed.

* Labor
Payments made to the manpower involved in process work is called labor cost. Thus, wage paid to workmen and supervisors engaged in a process are debited to the particular process account.

* Direct Expenses
Cost of electricity, hire charge of machinery, depreciation of machinery are the costs that are directly attributable to a particular process. The process account is debited by such costs.

* Overheads
The overhead expenses incurred for regulating the central office, logistic support service like store services, cafeteria services, security services etc. are allocated on the basis of the absorption rate.

Differences Between Process Costing And Job Costing

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Following are the main differences between process costing and job costing:

1. Applicability
Process costing is applied to ascertain the cost of standardized products produced in mass. So, naturally, materials, labor and other facilities remain indifferent. Job costing is applied to ascertain the cost of a specific order received. The quality and quantity of materials and labor and other facilities between jobs vary.

2. Cost Collection
Process costing accumulates manufacturing costs for departments or processes. Job costing uses cost sheet and accumulates manufacturing costs for each job or batch separately.

3. Time Period
Process costing has a time frame of certain months or years for which costs are accumulated. Job costing has no time frame. It ends after the completion of a particular job so that costs are accumulated for each job.

4. Unit Cost Ascertainment
Process costing divides total departmental process costs by the departmental process output to derive the unit cost. Job costing obtains unit cost by dividing the total cost of the job by the job order units.

Related Topics
Concept And Meaning Of Process Costing
Users Of Process Costing
Features Of Process Costing

Features Of Process Costing

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Following are the main features of process costing:

* In process costing, each factory/department work , plant or division is considered as separate cost center.

* Processing work is carried on continuously by means of one or more process.

* The output of one process is passed on to the next process as an input till the finished goods are realized.

* The finished goods are normally of a common size of mass volume.

* The output is not possible to be differentiated from the input lot or batch as in edible oil with the lot of oil seed fed for crushing.

* Production of finished goods incidentally may give by-products lie oil cake in oil mills and bagasse of solid waste product and molasses of semi-liquid sweet product in a sugar industry.

Related Topics
Concept And Meaning Of Process Costing
Users Of Process Costing
Difference Between Process Costing And Job Costing

Users Of Process Costing

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Following are the main users of process costing:

* Manufacturing industries such as flour mills, iron and steel, paper, rubber, textile,soap, food products etc. including assembly type industries lie typewriters, automobiles, household electrical appliances such as washing machines, refrigerators, electric irons, radios, televisions etc.

* Mining industries such as fuel, oil, coal, iron, sand pits etc.

* Chemical industries such as medicine, herbals products etc.

* Public utility services such as electricity generation, water supply, gas supply etc.

Related Topics
Concept And Meaning Of Process Costing
Features Of Process Costing
Difference Between Process Costing And Job Costing

Concept And Meaning Of Process Costing

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The method of cost accounting used by processing firms is called process costing system. For each process function, product costs lie direct materials, direct labor and factory overheads are accumulated under process costing method. For instance, the processing of a herbal medicine includes herbs processing, herbs mixing, herbs medicine making and packing.

Ascertainment of process costs facilitates to control costs, evaluate performance and efficiency of each process. The cost of production ascertained is compared with the prevailing market price of similar products to assess performance. A constant reference of costs by elements is needed to assess efficiency and performance of each process. The purpose of assessing efficiency and performance of each process can be achieved if a separate process account is maintained for each process. The process account so maintained provides necessary cost information essential for controlling the costs and evaluating performance and efficiency of each process.

Process accounting helps a manufacturing firm to ascertain the cost of production and the cost per unit of output at each stage of process. The output of one process forms an input to the next process. Transferring the output to the next process continues until the final process produces finished products.

Related Topics
Users Of Process Costing
Features Of Process Costing
Difference Between Process Costing And Job Costing

Concept Of Work-in-Progress Value In Contract Account

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Work-in-progress value = Work certified value + Work uncertified value

The volume of the work done by the contractor under the terms of a contract to date is called work-in-progress. Work-in-progress value makes it possible for the contractor to check the time schedule to complete the contract work. The work progress expressed in monetary value is appropriately termed work in progress value. The contract account is credited by giving debit to work-in-progress account showing distinctly the work certified and the work uncertified values. Working-in-progress may be categorized into:

* Certified work-in-progress value or work certified value
The value of complete contract work contained in a certificate issued by the contractee's architect is known as work certified value.
% of work-in-progress = (work certified/contract price) X 100

* Uncertified work-in-progress value or work uncertified value
Uncertified work-in-progress value is the summation of material, labor, expenses and indirect cost incurred for the contract work waiting for the architect's certificate after verification.

Related Topics
Concept And Meaning Of Contract Costing
Features Of Contract Costing
Concept Of Contract Account
Concept Of Work Cost Or Contract Cost

Concept Of Work Cost Or Contract Cost

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A contract account obviously maintains utility to report the total work cost to date. The unique nature of contract account is that it reports costs taking individual contracts as cost centers or units and costs are determined similarly. This type of unique nature provides an opportunity to ascertain the total work cost and to evaluate performance in terms of the profit earned on contract. The credit difference in a contract account after the entire expenses are reported properly represents the total contract cost to date.

Work Cost/Contract Cost= Expenses incurred for the contract work- Value of unused material.

Concept Of Contract Account

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The need of a contract account is obvious as the financial accounting does not report distinctly the cost of a contract and the profit earned from the contract work. Under contract costing, a separate contract account is prepared for each contract work undertaken. A contract account so prepared separately provides an opportunity to check the performance of each individual contract. The contract account maintained annually by a contractor determines the annual contract cost and consequently profit for each contract separately. For this purpose, costs incurred in the form of material, labor and expenses for contract work are debited to a contract account. It is credited by the work-in-progress value of an incomplete contract or a contractee's account with a contract price on the completion of the contract work. The difference between debit and credit represents a profit or loss. Such a profit or loss is transferred to the profit and loss account of the year after making necessary adjustments as per the established norms of profit recognition.

Features Of Contract Costing

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Following are the distinctive features of contract costing:

1. A separate contract account is maintained for each contract.

2. Each contract is considered as a cost unit.

3. A major portion of contract work is done at the contract site.

4. Expenses incurred at the contract site are considered to be direct expenses.

5. Establishment expenses like head office, central store department are treated as overhead expenses. These overheads are recovered either based on the material consumption ratio, labor cost ratio, labor hour ratio or the value of material or labor consumption ratio.

6. Number of contract works with a contractor may not be very large.

Related Topics
Concept And Meaning Of Contract Costing
Concept Of Contract Account
Concept Of Work Cost Or Contract Cost
Concept Of Work-in-Progress Value In Contract Account

Concept And Meaning Of Contract Costing

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Contract Costing

Some firms such as builders, construction contractors, civil engineering firms, construction and mechanical engineering firms are engaged in construction works such as construction of buildings, bridges, roads and so on. A firm engaged in the construction works requires to know the total cost of the construction work done. The total costs of the work help to find out the profit earned from these works. The cost information about construction works helps to monitor and evaluate the performance of contract work and to determine the total contract cost. Such information is provided by a costing method known as contract costing.

Contract costing is the costing method applied to determine the cost of construction work performed as per a customer's specification. Contract costing is also called terminal costing as it terminates with the discharge of contract work. The construction work is undertaken at the site allotted by the client. The contract sites vary and are always outside the premises belonging to the clients. A separate code number is allotted to each site where a number of contract works are undertaken. A contract account is maintained for each contract work to record the contract costs under contract costing. Maintaining a contract account helps to find out the amount of profit earned during a particular period since financial books do not report it separately. Normally, a contract account is prepared at every year-end to determine the profit for the specified period.

Related Topics
Difference Between Job And Contract Costing
Features Of Contract Costing
Concept Of Contract Account
Concept Of Work Cost Or Contract Cost
Concept Of Work-in-Progress Value In Contract Account

Differences Between Job And Contract Costing

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Following are the main differences between job and contract costing:

* A job is normally carried out inside a factory. A contract work is done at a site away from the factory.

* Number of jobs at any time may be more. Comparatively, the number of the pieces of contract work may be fewer.

* Direct charging of expenses is difficult in job costing. Therefore, it needs to be absorbed. In contract costing, on the other hand, all expenses incurred at the site are charged directly to the contract.

* Jobs require comparatively shorter terms. Therefore, profit is computed and credited after a job's completion. Contract work requires a larger period. This requires the crediting of the profit of incomplete contracts at the end of each accounting period.

Related Topics
Concept And Meaning Of Job Order Costing
Advantages And Disadvantages Of Job Order Costing
Concept And Meaning Of Contract Costing

Advantages And Disadvantages Of Job Order Costing

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Advantages Of Job Order Costing

* Job order costing offers a detailed analysis of the costs of materials, labor cost and overheads by functions and nature.

* Job order costing makes it possible to appraise the profitability of a job.

* Job order costing facilitates the estimation of the cost of a similar job.

* Job order costing allocates overheads on the basis of a predetermined rate.

* Job order costing makes easy to identify spoilage and defects to take corrective actions.

* Job order costing evaluates efficiency of different types of jobs with cost records by using statistical techniques.

Disadvantages Of Job Order Costing

* Job order costing needs a great deal of clerical work in recording material issue, wage computation and payment and overhead charges.

* Ascertainment of overhead rate needs allocation and apportionment of the overheads from service department to production department by using reasonable parameters like selecting a suitable basis.

* Strict control of costs associated with a job is difficult since overheads are allocated on estimation.

Related Topics
Concept And Meaning Of Job Order Costing
Difference Between Job And Contract Costing
Concept And Meaning Of Contract Costing


Concept And Meaning Of Job Order Costing

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A manufacturing firm generally produces goods based on demand forecasting. However,it sometimes produces them also on receipt of order from its customers. Goods produced and works done as per customers' order are called job. Therefore, the costing method designed to determine the cost of a job is very essential. Job order costing is the costing system that determines the cost of the jobs received from the client.. Thus, job order costing system estimates the costs of manufacturing products as per customers' orders.

Individual job need different quantities of raw materials, labor, and expenses depending upon the quality of the jobs to be performed. The size and quality of products requested may differ. Thus, such a job may not demand a normal manufacturing process. No two jobs are exactly alike. The end product may not be homogeneous. obviously, the cost of each job may differ with the uniqueness of the work order received from customers.

In the job order costing method, each job is treated as separate cost center. Overheads to a job are allocated on the basis of either processing hours or DLH or labor cost or machine hours.

Related Topics
Advantages And Disadvantages Of Job Order Costing
Difference Between Job And Contract Costing
Concept And Meaning Of Contract Costing