What are the pros and cons of job order costing?
Answers
I found job costing invaluable in contruction
I am a proponent of direct costing, which comes close to traditional job order costing in some construction environments. Direct costing assigns operating and administrative direct costs base on the quantity used, but avoids "overhead" and other allocations for the most part. The trick is to target direct cost margins, via pricing, sufficient to cover unallocated costs, and manage those costs by controlleing their drivers.
I think a twist on Barrett direct costing works best. The twist is using the tracking of time as a comparative between jobs of the like items or against estimates made in the pricing algorithm.
This way you can find as Karoline stated discrepancies and make corrections.
Pros - Job costing tracks costs against a specific job or project. Job costs can then be controlled by comparing actual results with estimates for that job or other similar jobs.
Pros - When revenues can be segregated by job, you can determine profit contribution by job, by customer, by product line.
Pros - Job costing can be very accurate as they typically only using costs directly related to the project.
Pros - Job costing can help provide activity based costing (ABC) when non-manufacturing costs are considered.
Pros- Job costing can be used to enhance responsibility accounting.
Pros - Job costing enables bench-marking and other cost control best practices
Cons - Requires more processing at the bookkeeping level. This work can be minimized by choosing the right job costing system.
Cons - Creates little value for an enterprise that provides standardized products or services.
Cons - Implementing an job costing system within a company can require substantial resources
Cons - Another disadvantage of using a job order system is that its costs can be misinterpreted by some users.
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Accounting