A very valid question strikes our mind if job costing is only used by Manufacturing industries; Answer is No! Many Service industries use job costing as well. Courier Service Companies, Accountants, Electricians are some of the examples of service providers which use job costing. Electricians track costs by project (i. e. a new building) accountants track costs by client (i. e. an individual or a corporation), courier companies track cost by new order they received (i. e. a gift box to be delivered from one country to another country).
Question: How does job costing work in a service company?
Job costing in service organizations is the same as in manufacturing organizations, except that service organizations tend to use fewer materials. There are also minor differences in the accounts that these types of organizations use.
Refer the following table to understand Accounts used in Service Organizations and Manufacturing Organizations;
There are few of the important queries in reference of tracking Direct Material, Direct Labour and Overhead by Service companies.
Query: How do service organizations track direct materials using job costing?
Ans: Many service companies do not track direct materials for each job because the cost of the materials is negligible. For example, accountants use low-cost materials, such as binders and paper. These materials, often called supplies, are included in overhead rather than tracked by job.
Some service organizations track direct materials for each job because the cost of the materials is significant. Consider auto mechanics, who track the parts needed to perform repairs for each job, or electricians, who track the materials needed to wire a new building.
Query: How do service organizations track direct labour using job costing?
Ans: Direct labour tends to be the most significant cost for service organizations. The process of tracking labour using a timesheet and recording labour costs in the journal and job cost sheet is exactly the same as for a manufacturing company.
Query: How do service organizations track Overhead using job costing?
Ans: Like manufacturing companies, service organizations often use a predetermined overhead rate to apply overhead. These predetermined overhead rates are decided based on predetermined allocation rules e.g. Direct Labour Hours, Direct Labour Cost, Sales etc.