Aveneu Park, Starling, Australia

Contract Costing Essay

Contract closing a method of costing large projects, where the contracted work will run over several accounting periods Every organisation will have its own costing system with characteristics which are unique to that particular system. However, although each system might be different, the basic costing method used by the organisation is likely to depend on the type of activity that the organisation is engaged in. The costing system would have the same basic characteristics as the systems of other organisations which are engaged in similar activities.

Specific order costing methods are appropriate for organisations which produce cost units which are separately identifiable from one another. Job costing, batch costing and contract costing are all types of specific order costing that you will learn about in this chapter. In organisations which use these costing methods, each cost unit is different from all others and each has its own unique characteristics. 8. 2 Job costing Job costing applies where work is undertaken according to specific orders from customers to meet their own special requirements. Each order is of relatively short duration.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

For example, a customer may request the manufacture of a single machine to the customer’s own specification. Other examples, this time from service organisations, might be the repair of a vehicle or the preparation of a set of accounts for a client. The job costing method can also be applied to monitor the costs of internal work done for the organisation’s own benefit. For example, job cost sheets can be used to collect the costs of property repairs carried out by the organisation’s own employees, or they may be used in the costing of internal capital expenditure jobs. 8. 2. Job cost sheets and databases The main feature of a job costing system is the use of a job cost sheet or job card which is a detailed record used to collect the costs of each job. In practice this would probably be a file in a computerised system but the essential feature is that each job would be given a specific job number which identifies it from all other jobs. Costs would be allocated to this number as they are incurred on behalf of the job. Since the sales value of each job can also be separately identified, it is then possible to determine the profit or loss on each job.

The job cost sheet would record details of the job as it proceeds. The items recorded would include: _ job number; _ description of the job; specifications, etc. ; _ customer details; _ estimated cost, analysed by cost element; _ selling price, and hence estimated profit; _ delivery date promised; _ actual costs to date, analysed by cost element; _ actual delivery date, once the job is completed; _ sales details, for example, delivery note no. , invoice no. An example of a job cost sheet prepared for a plumbing job is shown in Figure 8. 1.

This job would have been carried out on the customer’s own premises. The sheet has a separate section to record the details of each cost element. There is also a summary section where the actual costs incurred are compared with the original estimate. This helps managers to control costs and to refine their estimating process. 8. 2. 2 Collecting the direct costs of each job (a) Direct labour The correct analysis of labour costs and their attribution to specific jobs depends on the existence of an efficient time recording and analysis system.

For example, timesheets may be used to record how each employee’s time is spent, using job numbers where appropriate to indicate the time spent on each job. The wages cost can then be charged to specific job numbers (or to overhead costs, if the employee was engaged on indirect tasks). Figure 8. 1 shows that a total of nine direct labour hours were worked by two different employees on job number 472. (b) Direct material All documentation used to record movements of material within the organisation should indicate the job number to which it relates.

For example a material requisition note, which is a formal request for items to be issued from stores, should have a space to record the number of the job for which the material is being requisitioned. If any of this material is returned to stores, then the material returned note should indicate the original job number which is to be credited with the cost of the returned material. Figure 8. 1 shows that two separate material requisitions were raised for material used on job number 472 Order-specific costing technique, used in situations where each job is different and is performed to the customer’s specifications.

Job costing involves keeping an account of direct costs (labor, machine time, raw materials) and indirect costs (overheads). Since both types of costs are usually closely related (a job requiring high input of labor and material is likely to consume more power, machine time, supervision time, inspection time, etc. ) indirect costs may be applied as an estimated fraction of direct costs. Job costing methods are similar to contract costing and batch costing methods, and are used in construction, motion picture, and shipping industries, in fabrication, repair, and maintenance works, and in services such as auditing.


I'm Simon!

Would you like to get a custom essay? How about receiving a customized one?

Check it out