Specific order costing is necessary when it comes to businesses. To understand profitability, losses, investments, expenditure, etc., costing becomes a necessary tool. There are different kinds of businesses and hence, the costing method also differs. Two such costing methods are Job Costing and Contract Costing
Job Costing vs Contract Costing
The difference between job costing and contract costing is that job costing is a method used for small-scale manufacturing jobs and for a very short time whereas contract costing is a method used for large-scale projects and an extended period.
Job costing is defined as the accumulation of the costs of materials, labor, and overhead for a specific job. This method is mostly used for small-scale jobs in manufacturing sectors such as printing press, garages, repair workshops, and foundry, etc. Job costing can be done in very little time.
Contract costing is defined as the accumulation of the fixed costs including project completion, production process, percentage margin, time, materials, and a profit margin. This method is mostly used for large-scale projects in the construction sector such as dams, houses, buildings, etc. Contract costing is done in a planned manner and requires an extended period.
Comparison Table Between Job Costing and Contract Costing
|Parameters of Comparison||Job Costing||Contract Costing|
|Purpose||Costing system of specific customer orders.||Costing system where a big project is undertaken.|
|Costing Industry||Manufacturing of products.||Construction works.|
|Work Location||Company’s premises.||Customer’s chosen work site.|
|The Scale of Work||Involves only a small amount of work.||Involves large-scale construction projects.|
|Time||Work can be completed in a short time.||Work is completed in an extended period.|
What is Job Costing?
Job costing is defined as the total cost of materials including all the resources, labor work, and overhead requirements for a small-scale project. It is also known as Job Order Costing. Job costing identifies the profits and losses earned for mainly manufacturing jobs. Hence, it becomes convenient to identify the contribution of all individual jobs and their profit for the company. Based on these results, the company decides if the customer is worthy enough to continue business relationships with. Job costing is usually completed within a very short time and within the company’s premises.
Job costing involves accounting for three activities including materials, labor, and overhead. The accounting is usually done by the Cost Accountant of the company. This method is generally preferred by manufacturers, marketing agencies, advertising agencies, consulting firms, and health care organizations, etc.
In today’s world, technology plays a huge role and therefore, there are software accounting methods available for job costing. Some of the benefits of using such software are time estimations, precise calculations, less customer conflict, and full-proof data, etc. The company’s expenditure of finances and resources for job costing is also less, making this costing method suitable for small organizations and product manufacturing companies.
What is Contract Costing?
Contract Costing is defined as a type of costing method which used in large-scale constructional activities such as projects including buildings, roads, bridges, etc. The person who takes the contract is called the Contractor and the person from whom the contract is taken is called the Contractee. Contract Costing is also known as Terminal Costing. It is a variant of the original job costing method. There are two types of contracts in contract costing namely cost-plus contract and fixed-price contract.
The contractee usually makes special demands according to the needs, and the contractor has to work following such demands. These demands also include the work location. The agreement of the contract spans over a long time, usually more than a year. Contract costing involves accounting for many activities including project completion, production process, percentage margin, time, materials, and profit margin.
There are namely five features of contract costing including materials, wages, direct charges, bill of sub-contractors, and certificate of completion. The work experience gained by an individual in contract costing is considered extremely valuable in this field. Big companies and firms are willing to pay handsome salaries for people with such skillset and jobs including Cost Accountant Officer and Section Officer.
Main Differences Between Job Costing and Contract Costing
- The value of work is less in Job Coasting whereas work experience is valuable in Contract Costing
- In job costing, a certain customer order can be completed in less time whereas construction in contract costing requires a longer period.
- In job costing, the work location is decided by the company whereas, in contract costing, the work location is decided by the customer.
- The work cannot be divided into different parties in job costing while in contract costing, work can be split into other sub-contractors.
- Less expenditure is required in job costing whereas, a large amount of investment is needed in contract costing.
Costing is a necessary tool when it comes to businesses. However, the costing methods differ for each business. The overall purpose of all costing methods is similar that is, to calculate the expenditure, measuring profits and losses, etc., to avoid any future complications, and to have a smooth-running system.
Job costing and contract costing also serve the same purpose in the end. However, each of them is meant to be used by different organizations. When it comes to temporary use for a small-scale job, job costing is the method we use. On the other hand, if the work is a major project that includes a large amount of investment and employees, contract costing is the method commonly used. In contract costing, the total expenditure can change depending on the situation including the condition of the project after a period, the market rates, etc. This is not the case in job costing. The total amount is paid upfront as there are little to no complications.
These costing methods play a significant role in the overall growth of the job or project. With the technology at its all-time-best, accounting software is used by various organizations as it is convenient and accurate since there are no risks of incorrect calculations.