Job costing and contract costing are the terms used in the context of accounting. Job costing is a method of accounting that is used to track the costs associated with individual jobs or projects, while contract costing is a method of accounting used to track the costs associated with long-term contracts or projects. In order to get a better idea about this concept one should look at some of the differences between job costing and contract costing –
Job Costing VS Contract Costing
Rationale
The rationale behind job costing is to track the costs associated with individual jobs or projects done by the company, while the rationale behind contract costing is to track the costs associated with long-term contracts or projects done by the company.
Timeframe of Projects
Job costing is typically used in those projects which are undertaken by the company for a short period of time while contract costing is typically used in those projects which are undertaken by the company for a long period of time.
Accounting
The accounting of job costing is done according to the cost of the specific job which varies from one job to another while accounting of contract costing is done based on the terms of the contract. In simple words when it comes to job costing cost of each job is different as each job is different while in the case of contract costing the terms of the contract remain the same throughout the period of the contract which lasts longer due to the long period of time involved.
Manufacturing Industry Exclusion
While job costing is used for unique one-off projects in manufacturing, construction, and service-based industries whereas contract costing is typically used in construction and service-based industries as there is less scope for contract costing in the case of the manufacturing industry.
Use of Variance Analysis
In the case of job costing variance analysis is used to analyze the variances between actual and budgeted costs for an individual job, while in the case of contract costing variance analysis is used to analyze variances between actual and budgeted costs for a long-term contract.
Example
An example of job costing will be a construction company that builds custom homes would track the direct costs of materials and labour for each home they build while allocating indirect costs such as equipment rental, insurance, and office expenses to each job based on the number of labour hours or the value of materials used for each home. An example of contract costing is when a construction company undertakes a contract with the government to build a 50-kilometre railway track and the company would estimate the costs of materials, labour, equipment, and overhead required to complete the contract and as the work progresses, the company would track the actual costs incurred and compare them to the estimated costs which the company has given while signing the contract. If the actual costs exceed the estimated costs, the company would incur a loss on the contract. If the actual costs are less than the estimated costs, the company would earn a profit on the contract.
Ease of Estimation
In the case of job costing it is easy to estimate the pricing of the individual job or project due to the shorter duration of the job or contract while in the case of contract costing it is very difficult to estimate the pricing of the contract as contract costing is long term in nature and there is a risk that price of raw materials, as well as labour, may rise resulting in a loss for a company.
As one can see from the above that while both methods are used to measure the cost of the production process, they are used in different contexts and for different purposes hence there are many differences between job costing and contract costing and that is the reason why any company thinking of using either of the two methods should carefully read above differences as both types of costing method has its own unique characteristic and use.