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Job-order, Batch and Job-order, Batch and Service CostingService Costing


Job-order Job-order CostingCosting

Such a system can be appropriately applied to accumulate costs in the following situations:

Auto-repair shops, where each repair job requires varying amounts of material and labour. The mechanic will charge the cost of any replaced parts and the number of labour-hours spent in repairing.

Automobile assembly, where each car includes a variety of different options. Printing shops, where each print order requires a different type of paper, ink,

design and so on. Foundries, where special parts are to be manufactured as per order. Hospitals, where the costs of services provided to each patient are billed

separately. Contractors, shipbuilders and motion picture companies. Machine shops, tool shops and design engineers. Public accounting firms and other similar professions, where each audit, tax

return, or management services engagement needs varying amounts of professional time and attention.

Furniture making firms, where they may produce a batch of similar chairs, tables, sofas, and so on. Each batch may be treated as a job.

Job-order costing is the procedure to accumulate cost when work is performed pursuant to an order to meet individual customer’s specifications.


Job Cost SheetJob Cost Sheet

On receipt of an order by a firm employing job costing, a job cost sheet is prepared. Every job order is given a specific number. For identification, a job cost sheet bearing the allotted number is maintained for each job put into production. General information in respect of the job order is recorded at the top of the job sheet. As regards specific information, the job cost sheet enumerates the appropriate inputs required in three basic categories: direct material, direct labour and overhead to carry out the order.


Exhibit 1: Job Cost Sheet

Customer name________________________and address ________________________Description ________________________ Quantity ________________________

Job No.Date started __________________Date promised __________________Date finished __________________Special remarks, if any __________________

Materials Labour Overheads

Quantity Rate Amount Hours Rate Amount Hours Rate Amount

Department 1

Department 2

Department 3

Cost Summary

Materials Laobur Overheads Total

Actual Estimate

Department 1Department 2Department 3Job order priceProfit (Loss)Discrepancies between actual and estimated costs are explained below:1.2.3.


Recording Job Costs in Recording Job Costs in AccountsAccounts

The accounting system of recording job costs will depend on whether the general ledger records all cost transactions

or a special ledger called factory ledger is separately maintained for the purpose.

Modus operandi is that a factory ledger account is opened in the general ledger to substitute for the accounts, which have been

recorded in the factory ledger. Likewise, a general ledger account is provided in the factory ledger. The balances

in these accounts are kept equal at all times.


Accounting procedure if both the factory and general ledgers are maintained

1) Accounting for Materials1) Accounting for Materials

2) Accounting for Labour2) Accounting for Labour

3) Accounting for Overheads3) Accounting for Overheads

4) Accounting for Completed Jobs4) Accounting for Completed Jobs


Accounting for MaterialsAccounting for MaterialsThe relevant accounting entries in the factory and general ledgers to

record the (i) purchase, (ii) issue, and (iii) return of materials would be as follows

Factory ledger:

1. Debit materials inventory/materials and supplies A/c, and Credit general ledger.

2. Debit work-in-process A/c, and Credit materials inventory/materials and supplies A/c.

3. Reversal of entry (2).

General ledger:

1. Debit factory ledger, and Credit accounts payable/cash or bank.

2. No entry.

3. No entry.


Accounting for LabourAccounting for Labour

The following journal entries would be recorded in respect of the labour cost:

Factory ledger:

Debit work-in-process A/c (for direct labour) and Debit factory overhead control (A/c (for indirect labour) and Credit general ledger.

General ledger:

Debit factory ledger A/c, and Credit wages payable A/c /cash or bank.


Accounting for Manufacturing OverheadsAccounting for Manufacturing Overheads

Manufacturing overheads can be charged to various jobs either at the actual overhead rate or a predetermined overhead rate.

Predetermined Overhead Rate

Predetermined overhead rate is budgeted manufacturing overheads divided by budgeted activity. The merits of a predetermined overhead rate are:

(a) It is useful in ‘bidding’ cases to determine the tender/quotation price;

(b) It enables individual jobs to be costed as soon as they are completed and, thus, helps in providing more rapid product cost information to the management; and

(c) Such a rate levels out the fluctuations which may be caused by variations in actual overhead costs and actual activity.

Predetermined overhead rate = Budgeted manufacturing overheads/ Budgeted activity.

Budgeted manufacturing overheads = [Total budgeted fixed overheads + Budgeted variable overhead rate] × Budgeted activity.


Example 1: Determining Predetermined Overheads Rate

Hypothetical Ltd employs job-order costing. It uses an annual predetermined rate for applying manufacturing overheads to jobs. The company furnishes you with the following information regarding its overheads for the coming year at normal activity: Fixed overheads, Rs 4,00,000; and Variable overheads, Rs 3,00,000.

The estimates of the direct labour cost, direct labour hours and machine-hours at normal activity along with a set of correlation coefficients between overheads and various measures of activity, as compiled from past records, are also given:

Normal level of activity Correlation coefficient with overheads

Direct labour cost

Direct labour hours

Machine hours

Rs 10,00,000

2,00,000

1,00,000

0.7

0.8

0.6

Determine the predetermined (i) fixed, (ii) variable, and (iii) total overhead rates.


Further assume that Hypothetical Ltd during the first quarter received an invitation from a regular customer to bid on a job. The job was estimated to require Rs 1,00,000 of direct materials and the following: Direct labour cost, Rs 50,000; Direct labour-hours, 15,000; and Machine-hours, 5,000

Determine the bid price the company should quote assuming its normal practice of charging 20 per cent on factory cost to cover other administrative overheads and profit. Assume further that the company uses a predetermined factory overhead rate to assign factory overheads to jobs.

Solution

Predetermined overhead rates should be based on direct labour-hours (DLH)

(i) Predetermined fixed overhead rate = Rs 4,00,000 ÷ 2,00,000 = Rs 2

(ii) Predetermined variable overhead rate = Rs 3,00,000 ÷ 2,00,000 = Rs 1.50

(iii) Total predetermined overhead rate = Rs 7,00,000 ÷ 2,00,000 = Rs 3.50


Solution: Job Cost Sheet to Determine the Bid Price

Particulars Amount

Direct materials Rs 1,00,000

Direct labour cost 50,000

Prime cost 1,50,000

Add factory overheads (15,000 direct labour-hours @ Rs 3.5 per hour) 52,500

Factory cost 2,02,500

Add 20 per cent for administrative overheads and profit 40,500

Bid price 2,43,000


Disposition of VarianceDisposition of Variance

Disposition of Variance Overhead variances may be disposed of by following either of the two methods: (i) They may be assigned to the income statement of the current period by charging the entire amount to the cost of goods sold account; or (ii) They may be considered as the cost of production of the current period and accordingly may be pro-rated to work-in-process, finished goods and cost of goods sold. The treatment would depend on the nature of such variance.


If the variance has been an outcome of unusual events of the current period, it should be charged to the cost of goods sold. But if such a variance has been caused by errors in estimation or fundamental changes in cost structure, it should be pro-rated over work-in-process, finished goods and cost of goods sold. For the firm in Example 1, consider the following additional information:

Job No.

Direct costs Overheads charged In

quarter

Status of job at the end of the quarter

50 Rs 2,20,000 Rs 72,000 Cost of goods sold

51 1,80,000 45,000 Finished goods in inventory

52 1,30,000 40,500 Work-in-process inventory

5,30,000 1,57,500

Show the process of adjusting under-applied overheads.


Solution: Manufacturing/Factory Overhead Adjustment

Account Over-charged in

quarter

Percentage of overhead applied in

quarter

Under-applied

overheads (Rs 22,500)

× (percentage)

Total costs assigned to jobs after

adjustment

Cost of goods sold Rs 72,000 45.7 Rs 10,282.50 Rs 82,282.50

Finished goods inventory 45,000 28.6 6,435.00 51,435.00

Work-in-process inventory 40,500 25.7 5,782.50 46,282.50

1,57,500 100.00 22,500.00 1,80,000.00


The following journal entries would be required to give effect to manufacturing overheads.

Factory ledger

1. Debit Factory Overhead Control A/c, and Credit General Ledger(For indirect manufacturing costs incurred).

2. Debit Work-in-Process/Individual Jobs A/c, and Credit Factory Overhead Control A/c(For charging indirect overheads to jobs).

3. Debit Cost of Goods Sold A/c, and Credit Factory Overhead Control A/c(For charging under-applied overheads to cost of goods sold account under first method).Entry number (3) would be reversed in the case of over-applied overheads.

4. Debit Work-in-Process/Individual JobsDebit Finished Goods inventoryDebit Cost of Goods Sold, and

Credit Factory Overhead Control A/c(For charging under-applied overheads under pro-rating method).

Entries (3) and (4) would be reversed in the case of over-applied overheads.

General ledger

1. Debit Factory Ledger A/c, and Credit Various Credits (Accounts Payable), Credit Accumulated Depreciation, and so on.(For indirect manufacturing costs incurred).


Accounting for Completed Jobs

1. Production is as per order

Debit Cost of Goods Sold A/c, and

Credit Work-in-process A/c

(Transfer of cost on completion of the job)

2. Production is for future sale

(a) Debit Finished Goods Inventory A/c, and

Credit Work-in-process A/c

(b) At the time of sale

Debit Costs of Goods Sold A/c, and

Credit finished goods inventory

Accounting for Non-Manufacturing Costs

Costs such as sales commissions, freight and delivery charges, can sometimes be related directly to particular jobs. Since these costs are incurred subsequent to the completion of the job, they cannot be classified as the cost of production. They should be separately shown as the direct costs of selling, distributing, and servicing particular jobs in job cost sheets which can be modified to add non-manufacturing costs. This information is useful in estimating future job costs and in bidding on prices.


Example 2: (Job Costing System: Factory Ledger and General Ledger Method)

Jay Engineering Company Ltd uses a job-order cost system. The following is a summary of its operations during January:

1. Purchases of raw materials and supplies, Rs 37,500.

2. Materials and supplies were requisitioned and issued as follows:

Direct materials:Job No. 101 Rs 6,000

102 9,000103 1,400 Rs 16,400

Indirect materials 400

3.Factory payroll sent to the general office for payment was distributed as follows:

Direct labour:Job No. 101 Rs 5,400

102 6,000103 600

Rs 12,000Indirect labour 4,000


4. Indirect miscellaneous manufacturing costs incurred, Rs 5,200.

5. Indirect manufacturing costs were applied using a rate of 70 per cent of direct labour cost.

6. Job No. 101 (100 units) and Job No. 102 (50 units) were completed and transferred to finished goods.

7. Goods despatched to customers were as follows: From Job No. 101, 50 units; From Job No. 102, 100 units.

Prepare the required ledger accounts to record the above transactions in the factory ledger.

Solution: Job Ledger

Particulars Job No. 101 Job No. 102 Job No. 103

Raw materials and supplies Rs 6,000 Rs 9,000 Rs 1,400

Direct labour 5,400 6,000 600

Indirect manufacturing costs applied 3,780 4,200 420

15,180 19,200 2,420


Factory Ledger Accounts

Raw Materials and Supplies A/c

To general ledger (purchase of inventory) Rs 37,500

By work-in-process

By factory overhead control A/c

Rs 16,400

400

Work-in-Process A/c

To raw materials and supplies Rs 16,400

By finished goods (cost of Job Nos. 101 and 102 Rs 34,380

To general ledger (direct labour payment) 12,000

To factory overhead control (applied A/c) 8,400


Finished Goods Inventory A/c

To work-in-process Rs 34,380 By cost of goods sold (Rs 7,590 + Rs 12,800) Rs 20,390

Cost of Goods Sold A/c

To finished goods inventory Rs 20,390

Factory Overhead Control A/c

To raw materials and supplies Rs 400

To general ledger (indirect labour payment) 4,000

To general ledger (miscellaneous expenses) 5,200

Factory Overhead Control Applied A/c

By work-in-process Rs 8,400

General Ledger Accounts

By raw materials and supplies Rs 37,500

By work-in-process 12,000

By factory overhead control A/c 4,000

By factory overhead control A/c 5,200

Note: Ledger accounts are not balanced as the transactions pertain to only a month’s period.


General Ledger Accounts

Factory Ledger (A/c)

To accounts payable Rs 37,500

To wages payable 16,000

To miscellaneous credits 5,200

Accounts Payable* A/c

By factory ledger A/c Rs 37,500

Wages Payable* A/c


Miscellaneous Credits* A/c


*Debits in these accounts would be made when payments are made.


EvaluationEvaluationJob order costing is useful in the following ways: Job costing data can be utilised for estimating the production costs

of specific jobs or lots of production. Estimates of future job costs serve not only as a basis for bidding and

price setting but also as a standard for measuring efficiency and evaluating the performance through comparisons with the actual costs incurred. From the point of view of accounting also, the system is easy to operate as the costs are recorded order or job-wise.

From the point of view of accounting also, the system is easy to operate as the costs are recorded order or job-wise.

Finally, job cost sheets which are the focal point of job order system can be utilised by the management to segregate jobs on the basis of contributions/profits made by them. This information, in turn, will help the management in deciding which types of jobs should be accorded priority.


Batch CostingBatch Costing

Batch costing is a variant of job costing. It is a natural type of system to be utliised in situations when a firm manufactures

products in readily identifiable batches or definite lots

For identification purposes, each batch is required to be numbered in batch costing as each job is numbered

in the job costing system.

The unique feature which distinguishes job costing from batch costing is that, while in the former production is tailored

to meet the customers’ specifications, in the latter, in general, goods are produced to inventory them

for future sale to customers.


Determination of Batch CostingDetermination of Batch Costing

Example 4

The following details are available in respect of a small tool manufacturing firm:

Annual estimated demand per year (units)

Cost of production per unit

Carrying costs per unit for one year

Setting up cost per batch

1,600

Rs 5

1

50

Determine EBQ.

Solution

EBQ =2 × 1,600 × Rs 50

= 400 unitsRs 1

EBQ = 2 AS/C

WhereA = annual requirements of the product

S = setting-up costs per batch

C = carrying cost per unit of inventory per annum

√

√


Service CostingService Costing

Service costing is applied to unit costing of services as opposed to that of products. It is applicable where standardised services

are provided, either by an undertaking or by a service cost centre within an undertaking. It is suitable for public companies,

electricity undertakings, hospitals and theaters.

The cost per unit in service costing is based on average cost such as passenger- km, tonne-km and killowatt-hours. The major

elements of cost are standing charges (fixed costs) and running cost (variable costs).

© Job-order, Batch and Service Costing.

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