A note on job costing – for advanced management accounting students

A note on job costing – for advanced management accounting students

 

Describe what is job costing and provide a simple example for illustration of how it is calculation in cost accounting practice and interpreted (e.g. to accept or reject a job offer to a company).

Job costing is a cost-accounting method that accumulates the direct materials, direct labour, and applied overhead for one identifiable job, order, or project. It is used when each customer order is distinct—such as a custom renovation, a consultancy assignment, or a made-to-order machine—so management can determine the cost and profitability of that specific job.

Basic calculation

The usual formula is:

Total job cost = Direct materials + Direct labour + Applied overhead 

Overhead is normally applied using a predetermined overhead rate, for example:

Predetermined overhead rate = Budgeted overhead /  Budgeted direct labour hours

Job costing therefore traces costs to the job rather than averaging them across all production, which distinguishes it from process costing.

Simple example

A Hong Kong furniture workshop receives an order from a hotel to make 10 custom wooden reception desks. The workshop uses direct labour hours as its overhead allocation base.

Cost item	Calculation	Amount
Direct materials	Timber, hardware, paint, and fittings	HK$40,000
Direct labour	200 hours × HK$150 per hour	HK$30,000
Applied overhead	200 hours × HK$80 per labour hour	HK$16,000
Total job cost		HK$86,000

The job cost card would show:

Total job cost = 40,000+30,000+16,000 = HK$86,000

Thus, the cost per desk is:

86,000 / 10 = HK$8,600 per desk

This follows the standard job-costing structure of direct materials, direct labour, and overhead applied through an allocation base.

Using it to accept or reject an offer

Suppose the hotel offers HK$90,000 for the whole order.

• Full-cost view: Revenue of HK$90,000 exceeds the full job cost of HK$86,000, giving an estimated profit of HK$4,000, or about 4.7% of sales. On this basis, the job appears acceptable, but the margin is thin.
• Relevant-cost view: If the workshop has spare capacity and fixed overhead will continue regardless of the decision, the incremental cost may be only HK$70,000—materials plus labour. The offer would then generate HK$20,000 of contribution toward fixed costs and profit, making it financially attractive.
• Capacity and opportunity cost: If accepting the hotel order prevents the workshop from completing another job with a higher contribution, the forgone profit becomes an opportunity cost and may make the HK$90,000 offer unattractive.
• Risk and quality considerations: Management should also assess material-price changes, labour overtime, rework risk, payment terms, and whether the quoted overhead rate fairly reflects the resources consumed. Job costing helps identify cost overruns early and supports pricing decisions for future jobs.

Interpretation

The company should accept the HK$90,000 offer if it has unused capacity, the HK$70,000 incremental cost estimate is reliable, and no better alternative use of the labour and facilities exists. If capacity is fully occupied, however, the relevant comparison is not simply HK$90,000 versus HK$86,000; it is the hotel job’s contribution versus the contribution from the next-best job. Job costing provides the cost baseline for this decision, while relevant costing and capacity constraints determine the final accept-or-reject choice.

 

Briefly describe process costing and indicate two features of it that are different from that of job costing.

Process costing is a cost-accounting method used when a company mass-produces large quantities of identical or very similar units through a continuous sequence of departments or processes. Costs for direct materials, direct labour, and overhead are accumulated by department and then averaged across the units produced, giving an average unit cost.

Two key differences from job costing

Feature	Process costing	Job costing
Cost accumulation	Costs are accumulated by process or department, then averaged over all equivalent units produced.	Costs are accumulated separately for each individual job or customer order.
Nature of output	Suitable for homogeneous, mass-produced products, such as bottled drinks, cement, or refined oil.	Suitable for distinct, customised jobs, such as a building renovation, custom furniture order, or consultancy assignment.

For example, a soft-drink bottling plant would use process costing because every bottle passes through the same production stages; a furniture workshop making a hotel’s custom reception desks would use job costing because each order has different materials, labour, and specifications.