Key Difference – Job Costing vs Contract Costing
Job costing and contract costing are two popular methods of specific order costing that are important for businesses that provide a customized product. However, there are a number of differences between the two that should be clearly understood in order to distinguish them from one another. The key difference between job costing and contract costing is that job costing is a system used for completion of specific customer orders where each unit produced is considered a job whereas contract costing is referred to as a costing system applied where work is undertaken according to special requirements of customers in a location specified by the customer.
CONTENTS
1. Overview and Key Difference
2. What is Job Costing
3. What is Contract Costing
4. Side by Side Comparison – Job Costing vs Contract Costing
5. Summary
What is Job Costing?
Job costing is a system used for completion of specific customer orders where each unit produced is considered a job. When the products are unique in nature, the cost of producing two different products cannot be compared effectively since the amounts of materials, labor and overheads vary from one job to another. Each job will be assigned a unique identifier and a ‘job cost sheet’ will be used to record all job-related information.
Job costing helps to identify costs and profit earned for individual jobs; thus it is very convenient to identify each job’s contribution to firm’s profit. Based on the cost to serve a particular customer, the company can decide whether it is lucrative to continue business relationships with such customers. A job is usually completed within a short period of time and within the premises of the company.
However, job costing can also result in information overload since the company has to keep track of all the usage of cost components such as materials and labor due to no standardization. Since all costs for individual jobs has to be calculated from scratch, job costing is expensive and time-consuming. For overall management decisions, these individual job information is of limited use.
What is Contract Costing?
Contract costing is referred to as a costing system applied where work is undertaken according to special requirements of customers in a location specified by the customer. Contracts are undertaken by both private and public companies. Similar to job costing, costs and revenues are recorded separately and each contract is identified by a unique contract number. As a result, it becomes convenient for companies to calculate profit from each contract. Generally, companies find suitable suppliers for a contract through competitive bidding.
The period of completion for a contract spans over a long time, or usually for more than one year; the work is completed in stages. The construction work occurs in a place according to the choice of the customer, called as a ‘site’. In contract costing, most of the costs are direct in nature in the form of direct materials, direct labor and subcontract charges. Contract costing is widely used by construction companies and in the engineering industry.
For contracts that last longer than a period of one year, it is important to ascertain the amount of work completed for the respective financial year since the costs and revenues should be recorded for accounting purposes. This is done by determining what percentage of the contract is completed for the year, and costs and revenues are recorded proportionately.
Figure 01: Construction Site
What is the difference between Job Costing and Contract Costing?
Job Costing vs Contract Costing |
|
| Job costing is a system used for completion of specific customer orders where each unit produced is considered a job. | Contract costing is a costing system where work is undertaken according to special requirements of customers in a location specified by the customer. |
| Area of Work | |
| Job costing generally calculate the cost for a single or a few products. | Contract costing is used to calculate the cost for significant scale projects. |
| Time Period | |
| A job usually spans over a small period of time, thus job costing can be completed within a short period of time. | The work of a contract progresses for a long period time, thus contract costing is conducted within an extended time period. |
| Place of Work | |
| The product is completed within the premises of the company in a job. | Production or construction takes place in construction site selected by the customer. |
| Transfer of Profit | |
| When a job is done and finished goods are sold to the customer, the entire profit will be transferred to profit and loss account. | In contract costing, costs and revenues are recorded in proportion to the degree of completion and the resulting profit is transferred to profit and loss account. |
Summary – Job Costing vs Contract Costing
The difference between job costing and contract costing depends on a number of factors such as the time period taken to complete the job/ construction, area of work and the place of work. These differences help to distinguish between the two methods effectively. However, despite the differences, the objectives of both systems are similar, where they attempt to allocate the cost of production in an efficient manner.
Reference:
1. Kumar, Vinod. “4 Points of Difference Between Job Costing and Contract Costing.” Accounting Education. N.p., 02 Nov. 2010. Web. 24 May 2017. <http://www.svtuition.org/2010/11/difference-between-job-costing-and.html>.
2. “Online Account Reading.” What is contract costing?Types of contracts. N.p., n.d. Web. 24 May 2017. <http://onlineaccountreading.blogspot.com/2015/04/what-is-contract-costingtypes-of.html#.WSZAZGiGPIU>.
3. “Job Costing • The Strategic CFO.” Creating Success Through Financial Leadership. N.p., 29 Aug. 2013. Web. 24 May 2017. <https://strategiccfo.com/job-costing/>.
Image Courtesy:
1.”Savannah River Site Contractor Achieves a Tank Waste Milestone (7609931514)”By ENERGY.GOV – Savannah River Site Contractor Achieves a Tank Waste Milestone (Public Domain) via Commons Wikimedia