Difference Between Job Costing and Contract Costing

Edited by Diffzy | Updated on: September 17, 2022

       

Difference Between Job Costing and Contract Costing Difference Between Job Costing and Contract Costing

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Introduction

Job costing is a costing procedure used to ascertain the cost of specific jobs, which are carried out based upon the customer’s specifications. Contract costing is the procedure of costing implemented in a business where individual contracts of an unrepeatable nature are tackled. Contracts are carried out at a contract site away from the executor’s or the contractor’s premises. The difference between these two terms has been discussed in this article.

Job Costing vs. Contract Costing

Job costing is entitled to the accomplishment of specified customer orders. Conversely, Contract costing is entitled to the pledging of a work based on the customer’s exceptional requirement. Job costing is computed for individual or few products. Contract costing enumerates the costs for a notable scale of projects. In the case of Job costing, Time taken to accomplish a job is less. Whereas, in the case of Contract costing, the time taken to accomplish a job is long as compared to Job costing. In the case of Job costing, the location is the company premises. Whereas, in the case of Contract costing, the Location is at the customer site. In the event of Job costing, profit is moved to the Profit and Loss (P&L) account. While, in the case of Contract costing, Profit is transferred into the P&L account. In the case of job costing, job size is small or compact. While in the case of Contract costing Job size is big or complex. Job costing needs less expenditure. Whereas, Contract costing needs more expenditure. In the case of Job costing, payments are made instantly. Whereas, in the case of Contract costing, Payments are made based on installment plans. In the case of Job costing, Jobs can’t be transferred. While, in the cases of Contract costing, Jobs can be transferable (some part of work can be handed over to sub-contracts or third parties). Job costing is appropriate for constructing products (customer’s specifications). Whereas, Contract costing is appropriate for erection work. In the case of Job costing, there is less value to the work. On the other hand, there is more value to working in Contract costing. In the case of Job costing, accounts are demonstrated for numerous consumptions paid for accomplishing a job. Conversely, in the case of Contract costing, accounts for every outlay are demonstrated in the contract account (work in progress, work certified and work uncertified). Net profit or loss is demonstrated in notional profit or loss

Difference between Job Costing and Contract Costing in Tabular Form

Table: Job Costing vs. Contract Costing
Basis of comparisons
Job costing
Contract costing
Definition
Job costing is entitled to the accomplishment of specified customer orders.
Contract costing is entitled to the pledging of a work based on the customer’s exceptional requirement.
Computation
It is computed for individual or few products.
Contract costing enumerates the costs for a notable scale of projects.
Time is taken to accomplish a job
Time taken to accomplish a job is less.
Time taken to accomplish a job is long as compared to Job costing.
Location
In the case of Job costing, the location is the company premises.
In the case of Contract costing, the Location is at the customer site.
Job size
job size is small or compact
Job size is big or complex
Expenditure
Job costing needs less expenditure.
Contract costing needs more expenditure.
Nature of jobs
In the case of Job costing, Jobs can’t be transferred.
Jobs can be transferable (some parts of work can be handed over to sub-contracts or third parties).
Appropriation
Job costing is appropriate for constructing products (customer’s specifications).
Contract costing is appropriate for erection work.
Value
There is less value to the work in job costing
 There is more value to working in Contract costing
Demonstration of accounts
Accounts are demonstrated for numerous consumptions paid for accomplishing a job.
Accounts for every outlay are demonstrated in the contract account (work in progress, work certified and work uncertified).
Nature of payments
payments are made instantly.
Payments are made based on installment plans.

What is Job Costing?

Job costing is a costing procedure used to ascertain the cost of specific jobs, which are carried out based upon the customer’s specifications. It is a common costing technique that is pertinent where work comprises different projects or contract jobs.

Features of Job Costing

  • With the help of job costing, the cost of each job is determined individually. This, in turn, assists in observing the profit or loss of each job.
  • It allows management to identify those jobs which are more lucrative and unprofitable.
  • Job costing offers the base for ascertaining the cost of similar jobs to be tackled in the future as a part of foresight.
  • Assists in conducting and regulating costs, by contrasting the real costs with the anticipated cost. Briefly, it is the computation of variances.

Types of businesses that use job costing system

The application of the job costing procedure is pursued in industries like the printing press, automobile garage, repair workshops, shipbuilding, foundry, and other similar manufacturing units, which produce according to customers’ specified requirements. A business that brings to bear the cost method generally has the following features:

  • Production is performed according to the customer's specification
  • Products are produced in recognizable lots
  • Products manufactured are of no uniform nature
  • It is pragmatic to keep a different record of each lot from the time production is set about until it is finished.

Advantages of Job Costing

  • Profitability for each job can be ascertained separately
  • Offers an informative cost resolution of materials, labor, and overheads for each job as and when needed.
  • The efficacy of the plant can be regulated by enclosing attention to costs relating to separate jobs.
  • Aids in the arrangement of estimates
  • The contrast of real cost with guesstimated cost and computation of variances.
  • Aids in detecting profitless jobs
  • Aids in offering a summarized quotation for a product

Documents used in Job Costing

  • Manufacturing or production order: This document permits the producing or production department to generate a specific quantity of a product that inaugurates the job.
  • Cost sheet: In job costing, a cost sheet is frequently used to account for costs spent in stages of production. The cost sheet and job order work may also be amalgamated, when costs are set down on the production order document.
  • Other documents: The other documents like time tickets, material requisition slips, tools and spares orders, inspection orders, etc., are utilized by the dispatching department as a control mechanism to perform the dispatching functions.

The importance of Accurate Job Costing

One of the most effective resolutions a business takes is what to charge for a project, product, or service. In service sectors, where the payroll costs are frequently the largest line item, it can be especially significant to include job costing. It’s one of the most significant accounting practices for compact businesses to achieve gross profit margin targets. Accurate job costing can enhance profitability, assist you in better direct employee scheduling, and be a key factor in bringing about financial reporting. Proper job costing embarks on better profitability, management decisions, project guesstimating, and routine financial reporting.

Accurate job costing aids businesses strike a stability between revenue and costs on any given project by meticulously examining each step of the job and using archival data to better notify future projects. Careful job costing diminishes the probability of unanticipated costs throughout the project life cycle, which can rapidly eat into profit margins and lead to controversies with customers.

What is Contract Costing?

Contract costing is the procedure of costing implemented in a business where individual contracts of an unrepeatable nature are tackled. A contract is a job of a giant size that may expand further in one accounting period. The person accomplishing the contract is known as a contractor, and the person for whom it is accomplished is known as the contractee.

Explanation of Contract Costing

Contract costing is a type of job costing containing big jobs that need a substantial amount of time to accomplish and consist of various activities. A discrete account is unfastened for each contract in the contract ledger. The account is credited with the contract price on termination and debited with all direct and indirect expenses. The balance of this account is moved to a profit and loss account. Although, if the contract is not finished before the end of the accounting time, a fair amount of profit (or logs) is moved to a profit and loss account.

Materials

For materials, three specified types of accounting may require to be carried out. In case materials are bought for the contract and directly supplied to the site of the contract, there appears no specified accounting system. Although, if the materials bought are first supplied to the store’s section, the contract account will be debited and the store control account will be deposited.

Materials that are sold at the contract site are deposited into the contract account. Although, if a sale is created, the outcoming profit or loss is deposited into the profit and loss account. In the event of a sale of contract assets and property for profit or loss, the profit and loss account is credited as well as deposited.

Sometimes, the contractor may provide the materials to the contractee. Here, the value of such materials should not be imposed on the contract account. The unutilized materials are to be given back to the contractor.

Labor

All labor that is used to accomplish the contract is called direct labor and it is tackled as such. The wages abstract is put together to keep a precise account and withhold control over the labor consumption.

Plant and Machinery

If a plant or machinery is particularly bought for a specified contract and will be tired out at the site, it will instantly be debited in the contract account and any amount of depreciation shall be imposed to the credit side of the contract account.

Although, if it is obtained for a short period, the amount is only debited with the habitual depreciation of the assets.

Cost-plus Contract

The cost-plus contract includes the contractee concurring to pay the contractor the cost price of the work performed on the contract plus a concurred amount or percentage thereof by way of separate overheads and profit.

Extras

Accordance may be in place to impose additional money for any alterations or additions to working indigenously concurred to be performed under a specific contract. In such cases, the additional money becomes owed to the contractor by the contractee for all ensuing additions and alterations.

Sub-contracts

The contractor (if permitted to do so by the accordance entered into) may charge a part of the work to one or more than one sub-contractor(s). The cost in this interrelation is the direct charge on the contract and is tackled as such in the contract costing.

Escalation Clause

Contract accordance normally makes a purvey for the rapid increase clause: the contractor is focused on being protected against any entrust in the price level. The accordance defines the method for the computation of adjustment to keep away from all controversies.

Features of Contract Costing

The major features of contract costing may be summed up as follows:

  • Contracts are carried out at a contract site away from the executor’s or the contractor’s premises.
  • Contracts are jobs of a giant sea and may pursue over more than one accounting period.
  • Each contract is tackled as a discrete unit of cost for cost determination.
  • The contracts are carried out per the specifications supplied by the contractee.
  • As long as the work is accomplished at the contract site, most of the items of cost to be spent are direct.
  • The contract is carried out by the contractor for a considerable amount known as the contract price.
  • The payments by the contractee are made to the contractor in installment plans based on the amount of the work accomplished and attested as complete by the contractee’s engineer or architect.

Contract costing is most appropriate for ship-building, road erection, building erection, civil engineering works, and other works like these.

Main difference between Job Costing and Contract Costing in Points

  • Job costing is entitled to the accomplishment of specified customer orders. Conversely, Contract costing is entitled to the pledging of a work based on the customer’s exceptional requirement.
  • Job costing is computed for individual or few products. Contract costing enumerates the costs for a notable scale of projects.
  • In the case of Job costing, Time taken to accomplish a job is less. Whereas, in the case of Contract costing, the time taken to accomplish a job is long as compared to Job costing.
  • In the case of Job costing, the location is the company premises. Whereas, in the case of Contract costing, the Location is at the customer site.
  • In the event of Job costing, profit is moved to the Profit and Loss (P&L) account. While, in the case of Contract costing, Profit is transferred into the P&L account.
  • In the case of Job costing, job size is small or compact. While in the case of Contract costing Job size is big or complex.
  • Job costing needs less expenditure. Whereas, Contract costing needs more expenditure.
  • In the case of Job costing, payments are made instantly. Whereas, in the case of Contract costing, Payments are made based on installment plans.
  •  In the case of Job costing, Jobs can’t be transferred. While, in the cases of Contract costing, Jobs can be transferable (some part of work can be handed over to sub-contracts or third parties).
  • Job costing is appropriate for constructing products (customer’s specifications). Whereas, Contract costing is appropriate for erection works.
  • In the case of Job costing, there is less value to the work. On the other hand, there is more value to working in Contract costing.
  • In the case of Job costing, accounts are demonstrated for numerous consumptions paid for accomplishing a job. Conversely, in the case of Contract costing, accounts for every outlay are demonstrated in the contract account (work in progress, work certified and work uncertified). Net profit or loss is demonstrated in notional profit or loss.

Conclusion

Well, we have discussed the main topic which is the “Difference between Job costing and Contract costing” in detail. Hope you got a clear understanding of the dissimilarities between the terms Job costing and Contract to cost. In a conclusion, we can say that this content will be effective for you for a better understanding of the differences between Job costing and Contract costing. For further information, tell us by commenting down below.


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"Difference Between Job Costing and Contract Costing." Diffzy.com, 2022. Sun. 02 Oct. 2022. <https://www.diffzy.com/article/difference-between-job-costing-and-contract-costing-1033>.



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