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What are the differences between job costing and contract costing?
Costing is important to determine the exact cost, profit margins, to detect wastage and for the cost reduction. Companies follow different techniques to determine the cost based on their products, quality and quantity they produced.
Some of them are job costing and contract costing.
Job costing
This method is used when the company wants to produce a specific product according to customer needs. This method involves material cost, labour costs and overheads costs.
This method also determines profit or loss accumulated in each job.
Contract costing
Contract costing is used when a company wants to produce a specific product as per the contract with the customer. This method is used in commercial construction etc.
The costs involved in contract costing are as follows−
- Fixed cost − It is a lump sum amount paid or in payments to the company for completion of project.
- Cost plus − Percentage margin is paid additional to production cost.
- Time & materials − Profit margin plus bills the time & material cost. Differences
The major differences between job costing and contract costing are as follows−
| Sr.No | Job costing | Contract costing |
|---|---|---|
| 1 | It is termed as the completion of specific customer orders. | It is termed as an undertaking of a work according to the customer’s special requirement. |
| 2 | It is calculated for single/few products. | It calculates the costs for a significant scale of projects |
| 3 | Time taken to complete a job is short/less. | Time taken to complete is more/long. |
| 4 | Location is the company premises. | Location is as per the customer’s preference/at customer site. |
| 5 | Profit is transferred to Profit and Loss (P&L) account. | Profit is transferred into P&L account. |
| 6 | Job size is small. | Job size is big/complex. |
| 7 | Requires less expenditure. | Requires more expenditure. |
| 8 | Payments are made immediately. | Payments are made on installment basis. |
| 9 | Jobs can’t be transferred. | Jobs can be transferable (some part of work can be given to sub-contracts/third parties). |
| 10 | Suitable for manufacturing of products (customer’s specifications). | Suitable for construction works |
| 11 | Value of work is less. | More value to work. |
| 12 | Accounts are shown for various expenses paid for completing a job. | Accounts for every expense are shown in the contract account (work in progress, work certified and work uncertified). Net profit/loss is shown in notional profit or loss. |
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