Advanced Cost Accounting-III

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ADVANCED COST ACCOUNTING - III

CAG 201

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITYDnyangangotri, Near Gangapur Dam, Nashik 422 222, Msharashtra


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Copyright © Yashwantrao Chavan Maharashtra Open

University, Nashik.

All rights reserved. No part of this publication which is materialprotected by this copyright notice may be reproduced or transmittedor utilized or stored in any form or by any means now known orhereinafter invented, electronic, digital or mechanical, includingphotocopying, scanning, recording or by any information storage orretrieval system, without prior written permission from the Publisher.

The information contained in this book has been obtained byauthors from sources believed to be reliable and are correct to the bestof their knowledge. However, the publisher and its authors shall in noevent be liable for any errors, omissions or damagearising out of use of this information and specially disclaim any im-plied warranties or merchantability or fitness for anyparticular use.


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YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY

Vice-Chancellor : Dr. M. M. Salunkhe

Director (I/C), School of Commerce & Management : Dr. Prakash Deshmukh

State Level Advisory Committee

Dr. Pandit Palande Dr. Suhas Mahajan Dr. V. V. Morajkar

Hon. Vice Chancellor Ex-Professor Ex-Professor

Dr. B. R. Ambedkar University Ness Wadia College of Commerce B.Y.K. College, Nashik Muaaffarpur, Bihar Pune

Dr. Mahesh Kulkarni Dr. J. F. Patil Dr. Ashutosh Raravikar

Ex-Professor Economist Kolhapur Director, EDMU,

B.Y.K. College, Nashik Ministry of Finance

New Delhi

Dr. A. G. Gosavi Dr. Madhuri Sunil Deshpande Dr. Prakash Deshmukh

Professor Professor Director (I/C)

Modern College, Shivaji Nagar, Pune Swami Ramanand Teerth Marathwada School of Commerce & Management

University, Nanded Y.C.M.O.U., Nashik

Dr. Parag Saraf Dr. S. V. Kuvalekar Dr. Surendra PatoleChartered Accountant Sangamner Associate Professor and Assistant Professor

Dist. AhmedNagar Associate Dean (Training)(Finance ) School of Commerce & Management

National Institute of Bank Management , Y.C.M.O.U., Nashik

Pune

Dr. Latika Ajitkumar Ajbani

Assistant Professor

School of Commerce & Management

Y.C.M.O.U., Nashik

Author Editor Instructional Technology Editing &Programme Co-ordinator

1) Prof. V. V. Morajkar Dr. Mahesh A. Kulkarni Dr. Latika Ajitkumar Ajbani

10, Vidya Society, Shikhare Wadi, Research Guide, Assistant Professor

Nashik Road - 422 101. BYK College of Commerce, School of Commerce & Management

2) Dr. Suhas Mahajan Nashik - 422 005. Y.C.M.O.U., Nashik

Research Guide,

Ness Wadia College of Commerce,

Pune - 411 001.

Production

Shri. Anand Yadav

Manager, Print Production Centre

Y.C.M. Open University, Nashik - 422 222.

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.

(First edition developed under DEC development grant)

First Publication : September 2015

Type Setting : Omkar Computers and Printers, Nashik Road.

Cover Print :

Printed by : Publisher : Dr. Prakash Atkare, Registrar, Y.C.M.Open University, Nashik - 422 222.


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CONTENTS

Topic 1 Methods of Costing

Unit 1 Introduction and Job Costing 1-30

1.0 Introduction 1.1 Unit objectives 1.2 Introduction of methods of Costing 1.2.1 Installation of Costing

system 1.2.2 Overview of costing methods 1.3 Job Costing - Meaning and Definition 1.4 Features of Job

Costing 1.5 Advantages of Job Costing 1.6 Limitations of Job Costing 1.7 Procedure followed in JobCosting 1.8 Preparation of Job Cost Sheet 1.9 Forms used in Job Costing 1.10 Industries which use Job

Costing 1.11 Illustrations 1.12 Summary 1.13 Key Terms 1.14 Questions and Exercises 1.15 Further

Reading

Unit 2 Batch Costing (Theory) 31-38

2.0 Introduction 2.1 Unit objectives 2.2 Meaning of batch costing 2.3 Features of batch costing 2.4

Advantages of batch costing 2.5 Disadvantages of batch costing 2.6 Industries which use batch costing 2.7

Accounting recording for batch costing 2.8 Economic Batch Quantity (EBQ) 2.9 Summary 2.10 Key

Terms 2.11 Questions 2.12 Further Reading

Unit 3 Batch Costing (Practical Problems) 39-50

3.0 Introduction 3.1 Unit objectives 3.2 Illustrations 3.3 Summary 3.4 Exercises 3.5 Further Reading

Unit 4 Contract Costing (Theory) 51-66

4.0 Introduction 4.1 Units objectives 4.2 Meaning of Contract Costing 4.3 Difference between Job

Costing and Contract Costing 4.4 Features of Contract Costing 4.5 Industries which use Contract Costing

4.6 Accounting recording in Contract Costing 4.7 Calculation of profit to be transferred to Profit & Loss.

Account in respect of contracts in different stages of completion 4.8 Summary 4.9 Key Terms 4.10

Theory Questions 4.11 Further Reading

Unit 5 Contract Costing (Practical Problems) 67-80

5.0 Introduction 5.1 Unit objectives 5.2 Illustrations on Contract Costing 5.3 Summary 5.4 Exercises

Unit 6 Process Costing (Theory) 81-96

6.0 Introduction 6.1 Units objectives 6.2 Meaning of Process Costing 6.3 Features of Process Costing

6.4 Difference between Job Costing and Process Costing 6.5 Advantages of Process Costing 6.6

Disadvantages of Process Costing 6.7 Collection of costs and procedure followed 6.8 Normal and Abnormal

Loss or gain 6.9 Inter- process profit 6.10 Summary 6.11 Key Terms 6.12 Questions 6.13 Further

Reading

Unit 7 Process Costing (Practical Problems) 97-118

7.0 Introduction 7.1 Unit Objectives 7.2 Illustrations on process costing 7.3 Summary 7.4 Exercises 7.5

Further Reading


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Unit 8 Operating or Service Costing 119-134

8.0 Introduction 8.1 Unit Objectives 8.2 Meaning of Operating Costing 8.3 Features of Operating Costing

8.4 Industries which use Operating Costing 8.5 Operating Cost Units 8.6 Formats of Operating Cost

Sheets 8.7 Summary 8.8 Key Terms 8.9 Questions 8.10 Further Reading

Unit 9 Operating Costing (Practical) 135-162

9.0 Introduction 9.1 Unit Objectives 9.2 Preparation of Operating Cost Sheets 9.2.1 Operating Cost Sheet

in Transport Organisations (Illustrations 1 To 7) 9.2.2 Operating Cost Sheet in Power Generating Organisations

(Illustrations 8 To 9) 9.2.3 Operating Cost Sheet in Canteens (Illustration 10) 9.3 Summary 9.4 Exercises

Topic 3 Cost Books

Unit 10 Cost Journal and Ledger 163-181

10.0 Introduction 10.1 Unit Objectives 10.2 Cost Accounting Record and Processes 10.3 Cost Accounting

Records Rules 10.4 Companies ( Cost Accounting Records) Rules, 2011 10.5 Cost Ledger and Control of

Cost 10.5.1 Cost Ledgers 10.2.2 Control Accounts 10.5.3 Accounting Treatment of Journal Entries 10.6

Summary 10.7 Key Terms 10.8 Questions 10.9 Further Reading

Unit 11 Integral and Non-integral Accounting System 182-236

11.0 Introduction 11.1 Unit Objectives 11.2 Integral and Non-integral accounting systems 11.2.1 Integral

System 11.2.2 Non-integral system 11.2.3 Accounting Treatment of Journal Entries 11.3 Reconciliation

and integration between Financial Account and Cost Account 11.3.1 Reasons for differences 11.3.2

Reconciliation of Cost and Financial Accounts 11.3.3 Methods of Reconciliation of Cost and Financial

Accounts : (I) Preparation of Reconciliation Statement (II) Preparation of Memorandum Reconciliation

Account 11.3.4 Illustrations 11.4 Key Terms 11.5 Questions and Exercises 11.6 Further Reading


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INTRODUCTION

This book of self - instructional material is based on the syllabus for the

subject Advanced Cost Accounting (M.Com : CAG 201). It is written by taking

into consideration the revised syllabus prescribed for the M.Com students of

Yashwantrao Chavan Maharashtra Open University, Nashik from June, 2015.

This book contents 11 Units and these Units deal with mainly methods of

costing and also cost books and Integral and Non-integral Accounting system.

The authors have provided theoratical information related to the particular method

of costing which is followed by illustrations providing practical knowledge in the

subsequent Unit. It is hoped that this arrangement will help the students in

understanding the theory as well as the practical related to each method of costing

in an easy way. The students who register for the M.Com course are distant -

education students and are able to contact the teachers only few times and keeping

this point in mind, the authors have included a large number of practical illustrations

and sufficient exercises in each Unit.

Any valuable suggestions made by the teachers as well as the students will

definitely be welcomed by the authors.

The authors and editors are sincerely thank the authorities of YCMOU for

the guidance and co-operation given by them.

Editor Authors


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Unit 1 Introduction and Job Costing

Unit 2 Batch Costing (Theory)

Unit 3 Batch Costing (Practical

Problems)

Unit 4 Contract Costing (Theory)

Unit 5 Contract Costing

(Practical Problems)

Unit 6 Process Costing (Theory)

Unit 7 Process Costing (Practical

Problems)


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Unit 1 Introduction and Job Costing

Structure

1.0 Introduction

1.1 Unit objectives

1.2 Introduction of methods of Costing

1.2.1 Installation of Costing system

1.2.2 Overview of costing methods

1.3 Job Costing - Meaning and Definition

1.4 Features of Job Costing

1.5 Advantages of Job Costing

1.6 Limitations of Job Costing

1.7 Procedure followed in Job Costing

1.8 Preparation of Job Cost Sheet

1.9 Forms used in Job Costing

1.10 Industries which use Job Costing

1.11 Illustrations

1.12 Summary

1.13 Key Terms

1.14 Questions and Exercises

1.15 Further Reading

1.0 Introduction :

The method of cost accumulation and identifying them to products and

services depends upon the nature of operations in an enterprise. Therefore, cost

accounting procedure varies from one enterprise to another. For example, a non -

manufacturing enterprise may not follow the procedure of accumulating costs

which may be followed by a specific customer orders enterprise. Similarly, a hospital

may prefer to accumulate costs in a manner as to provide cost of outpatient treatment

or a specific medical treatment; a concern organising exhibitions and fairs may be

interested in knowing the cost of an exhibition to be organised in a particular

season. On the contrary, a contractor accumulates costs for each separate contract.

Although the procedure of accumulating costs may differ for different types of

Introduction & Job Costing

Advanced Cost Accounting - III

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1


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organisations, the basic principles underlying cost accumulating procedures are

applicable to all types of organisations. Each cost accounting procedure or system

aims to provide information that is needed by the management of an enterprise.

1.1 Unit Objectives

After studying the information provided in this Unit you should be able to

understand :-

• Methods of costing ;

• Meaning of job costing ;

• Features of job costing ;

• Advantages and limitations of job costing; and,

• Documents which are prepared and used in job costing.

1.2 Introduction of methods of costing

According to the type of work preformed and the manner in which it is

preformed, for different types of industries different arrangements become

necessary for accumulation of cost data and accordingly different methods of

costing have come into existence. A brief information about the costing methods

is provided in this Unit.

1.2.1 Installation of Costing System

Cost Accounting is the process of accounting for cost, from the point at

which expenditure is incurred or to be incurred to the point of charging to the cost

centres and cost units. It has many uses which includes the preparation of statistical

data, the application of cost control methods and the ascertainment of the

profitability of activities carried out or planned. It is the means which consists of

concepts, methods and procedures used to measure, analyse or estimate the cost,

profitability and performance of individual products, departments and other sectors

of a company’s operations. It has internal and external use or both and it answers

to all the questions to the concerned parties. Thus, Cost Accounting is the process

and technique of determination of a product costs. It is a system of cost accumulation,

ascertainment and classification for product costing and managerial planning,

control and decision-making process. In short, Cost Accounting is a dynamic and

diverse field of activity.

Need of Costing Methods :

Methods of costing indicates a systematic procedure established for

ascertaining cost of a product, job, process or services by using the principles of

costing. A cost Accounting method is merely the process of ‘collecting and

presenting costs’. The nature of industries differs. Some are very simple and



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and general engineering workshops, interior decorator, painters, repair shops

etc.

2) Batch Costing :

The terminology of ICMA defines Batch Costing as “that form of specific

order costing which applies where similar articles are manufactured

in batches either for sale or use within the undertaking ”. This method

is a variation of Job Costing. In this method, the cost of a batch or group of identical products is ascertained and, therefore, each batch of products is a

unit of cost for which costs are accumulated. This method is used in biscuit

factories, bakeries, ready-made garments, hardwares like nuts, bolts, screws,

shoes, toys, drugs and pharmaceuticals etc.

Methods of costing

The following figure indicates different methods of Cost Ascertainment



NOTES

4

Fig. 1.1 Methods of Costing

1.

Process

Costing

2.

Operating

or

Service

Costing

3.

Unit or

Single or

output

Costing

4.

Departm-

ental

Costing

5.

Operation

Costing

Methods of Costing

Specific Order Costing

i.e. Job Costing

B

Operation Costing

i.e. Process Costing

A

Job Costing1.

BatchCosting

2.

ContractCosting

3.

Multiple Or

Composite

Costing

4.

Class CostMethod

5.


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3) Contract Costing :

The terminology of ICMA defines Contract Costing as “ that form of

specific order costing which applies where work is undertaken to

customers’ special requirements and each order is of long duration”.

The cost unit here is a contract which is of a long duration and may continue

over more than one financial year. A separate account is kept for each

contract. This method is used by builders, civil engineering contractors,

constructional and mechanical engineering firms etc.

4) Multiple or Composite Costing :

It is an application of more than one method of cost ascertainment in respect

of the same product. This method is used in industries where a number of

components are separately manufactured and then assembled into a final

product. In such industries each component differs from the others as to

price, material used and process of manufacture undergone. So it will be

necessary to ascertain the cost of each component for this purpose, process

costing may be applied. To ascertain the cost of the final product, batch

costing may be applied. This method is used in factories manufacturing

cycles, automobiles, engines, radios, TVs, typewriters, aeroplanes, etc. This

method has been completely dropped from the latest ICMA Terminology.

5) Class Cost Method :

It is the method of Job Costing where the costing of goods is done by

classes instead of the unit or piece. Instead of the cost being separately

accumulated for each article or piece, the cost will cover a group of orders

of the same class of product.

B) Operation Costing :

The terminology of ICMA defines Operation Costing as

“The category of basic costing methods applicable where standardised goods

or services result from a sequence of repetitive and more or less continuous

operations or process to which costs are charged before being averaged

over the units produced during the period ”. The following are the different

method of costing which fall under this category.

1) Process Costing :

The terminology of IMCA defines Process Costing as “that form of operation costing which applies where the standardised good are produced”.

It is a method of costing where cost is ascertained at the stage of every

process and also after completing the finished production. It is used in

concerns where production follows a series or sequential process. Process

type of industries do not manufacture individual item to the specific

requirements of customers. As such, production is not intermittent but

continuous. Each process represents a distinct stage of manufacture and

the output of one process becomes the input of the following process. The

unit cost is arrived at by averaging the cost over the units produced, and



NOTES

5

Check Your Progress

i ) Why di fferent cost ing

methods are required in

different industries

i i) What is meant by

‘specific order costing’ ?

Which methods are

included under SpecificOrder Costing?

iii) What is meant by

‘process costing’ ? Which

costing methods are

included under process

costing ?


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cost per unit of each process is ascertained. Process Costing is used in a

variety of industries such as chemicals, oil refining, paper making, flour

milling, cement manufacturing, sugar, rubber, textiles, soap, glass, food

processing etc.

2) Operating or Service Costing :

The terminology of ICMA defines Service Costing as “that form of

Operation Costing which applies where - standardised services are provided either by an undertaking or by a service cost centre within

an undertaking ”. This method of costing is used by those undertakings

which render service as against manufacturing and supply of tangible

products. It is an essential method of costing where only the services are

rendered. It ascertains the cost of one unit of service rendered. This method

is applicable to transport undertakings, electricity supply undertakings,

hospitals, hotels, canteen, water works, gas companies, educational

institutions, etc. The cost unit depends upon the service provided. Usually,

a composite cost unit is used. For example tonne km. passenger km, patient

day or bed day, KWH, meal served, student hours etc.

3) Unit or Single or Output Costing :

It is a method of costing by the unit of production where manufacturing is

continuous and the units are identical. In some cases the units may differ in

terms of size, shape, quality, etc. This method is also called as Single Costing

because only one type of product alone is manufactured. Examples of

industries where this method is applicable are : Collieries, quarries, flour-

mills, paper mills, textile mills, brick-making, radio, cameras, pencils, slates,

dairy products etc. No separate set of books is generally required and

costing information is presented in the form of a statement known as CostSheet.

4) Departmental Costing :

A factory may be divided into a number of departments and sometimes

good results are obtained by allocating expenditure first to different

departments and then to different products manufactured in that department.

Under this method, the cost incurred in maintaining a particular department

is ascertained. There are two objectives for using this method viz. to control

the cost of department and to charge the cost of a department to the finished

product.

5) Operation Costing :

It is a special type of Process Costing. It refers to the determination of cost

of operations, the cost unit is the ‘operation’ instead of the process. The

per unit cost is arrived at by dividing the cost of an operation by the number

of units completed in the operation centre. For large undertakings it is

frequently necessary to ascertain the cost of various operations. Cost control

can be exercised more effectively with operation costing.



NOTES

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1.3 Job Costing

Meaning and definition :

The industries which manufacture articles or products or render services

against specific orders, use the Job Costing method for ascertaining the cost per

job or service. e.g. specific requirement of a customer, fabrication, repairs etc.

Each job has a separate identity. Under this method, individual jobs are identifiableand each job become a separate cost centre. ICMA London defines Job Costing

as, “ It is that category of basic costing method which is applicable where is

the work consists of separate contract, job or batches each of which is

authourised by specific order or contract .’’ Examples of Job order industries

are printing press, construction of buildings, bridges, ship-building, furniture making,

machine tool manufacturing, repair shops, painting works etc.

1.4 Features of Job Costing

i) Production is made or services are rendered against specific orders.

ii) A Job is clearly identifiable throughout the production process.

iii) Each job has its own characteristics and requires special attention.

iv) A distinguishing number is allotted to each Job order undertaken.

v) Each of the job becomes a separate cost centre.

vi) Costs are charged directly to individual job orders.

vii) The manufacturing cost of a Job order can be found out only after the Job

order is completed irrespective of the time taken for the same.

viii) Production is not made in anticipation of demand and for storing purpose.

1.5 Advantages

i) Cost of each job as per order is ascertained separately. This helps in finding

out the profit or loss on each individual job.

ii) It enables management to detect those jobs which are more profitable and

those which are not profitable.

iii) It provides a basis for determining the cost of similar jobs undertaken in

future. It thus helps in future production planning.

iv) It enables the management to know the trends in costs.

v) Profitability ratio of different jobs can be found out.

vi) It helps the managements to fix selling price of specific job on the basis of



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costs.

vii) It enables the management to provide quotations for similar type of jobs.

viii) Spoilage and defective work can be easily identified with specified jobs or

products.

ix) It enables the management to take corrective steps for improving the

efficiency in future.

x) It is essential for cost plus contracts.

1.6 Limitations

i) Calculations are more and hence there is possibility of errors which may

cause a serious loss.

ii) A system of budgetary control may not be used effectively.

iii) The system does not indicate any standard of performance efficiency.

iv) Comparison of cost of a job over any period of time cannot be made if

certain economic changes takes place in between.

v) It is expensive to operate as there is increase in clerial works.

vi) Job costing is a historical costing which ascertains the cost of job or product

after it has been manufactured.

1.7 Procedure followed in Job Costing

Job Costing is designed to show in detail their cost components of the total

cost executing a job. A Job Cost sheet is prepared for every job which is undertaken.

Material cost is accounted for in the job cost sheet on the basis of material requisition

concerned. Labour cost on the basis of time clocked in respect of the job with the

help of time tickets and factory overheads are added to those cost components

according to some reasonable methods of overhead absorption. Thus, the total

cost of the job consists of partly of direct costs and partly of costs arrived at by

assignments, allocation, apportionment and finally by absorption. Thus, the

procedure for Job Order Cost System may be summarised as follows:

1) Receiving an Enquiry :

Before placing an order with the manufacturer, usually the customer will

enquire about the price, quality to be maintained, the duration within which the

order is to be executed and other specifications of the job.

2) Estimation of the price of the job :

The cost accountant estimates the cost of Job after considering the various

elements of cost and keeping in mind the specification of customers. This is based



NOTES

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on the cost of execution of similar Job in the previous year and considering the

possible changes in the various element of cost. The estimated cost of the job is

then communicated to the prospective customer.

3) Receiving of Order :

If the prospective customer accepts the quotation, the intention of

acceptance is forwarded to the respective departments so that preparation work

may begin even before the issue of the formal Production Order. The productioncontrol department receives the order.

4) Job Number :

When an order has been accepted, an individual work order number must

be assigned to each such Job so that separate orders are capable of being identified

at all stages of production. Assignment of Job numbers also facilitates reference

for costing purposes in the ledger and convenient for use in various forms and

documents.

5) Production Order :

Once the job is accepted the Planning department prepares Production

Order. The Production Order is nothing but a form of instructions issued to the

foreman to proceed with the manufacture of the articles. Several copies of

Production Order are prepared and passed on to the following:

i) All departmental foremen connected with the job.

ii) Store-keeper for issuance of materials.

iii) Tool room - an advance notification of tools required.

A Production Order contains all the information that is relevant to the job

or products or service. It gives information about the following :

i) Particulars of job, product or service.

ii) Quantity to be produced.

iii) Date of starting and required date of completion of the job.

iv) Particulars of materials required.

v) Particulars of various operations involved in the perfomance and execution

of the job.

A specimen form of Production Order for a job is as follows :



NOTES

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7) Profit or Loss on Job : It is determined by comparing the actual expenditure

of cost with the price obtained.

The Figure below is a diagram showing Job Order Execution Procedure. :

Fig 1.3 Diagram showing Job Order execution procedure

1.8 Preparation of Job Cost Sheet

A Job Cost Sheet is a cost statement prepared to analyse and ascertain the

actual cost incurred with respect to the individual jobs. Thus, a card for each Job

is maintained where in the total cost of the job is accumulated. A separate Job

Enquiry by a Customer

Preparation of Estimate by

the Estimating Department

Submission of Tender or

Quotation to the customer

Receipt of Order by the Sales

Department if Quotation is

accepted by the customer

Copies of Work Order to

shop foreman, store-

keeper, cost office and

Production Control de-

partment

Preparation of Work

Order by the Production

Control Department on

information from the

Sales Department

Copies of Invoice to

Customner, Cost Office

and Financial Account-

ing Department

Preparation of Invoice by

the Sales Department

Flow of information to

Cost Office regardingmaterial usage, labour

and machine time

Execution of the Job andInspection

Completion of the Job

and Despatch

Completion Report

to Cost Office



NOTES

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Cost Sheet is prepared to find out profit or loss on each job. It records with the

actual costs incurred on direct material, direct labour, direct expenses and overheads

on the Job as it passes through the factory. The total constitutes the cost of the

Job Order or operation. Cost of Material Consumed is collected from invoices

and material requisition note. The Direct Labour Cost is found out by operating

each workmen’s wages according to the time he spends on each job, as recorded

on job sheets. Overheads may be allocated as a simple percentage of material

cost or by some such other method as is appropriate and practicable for theorganisation concerned. On completion of a job the various elements of costs are

summed together and the total cost is ascertained. The total cost is then divided

by the number of jobs completed or units produced to ascertain the cost per job or

unit.

A specimen of Job Cost Sheet is as follows :

JOB COST SHEET

Customer ........ Job No. ............

Date of Commencement ....... Date of Completion .......

Material Cost Labour Cost Factory Overheads

Date Material Amount Date Hour Rate Amount Date Hours Rate Amount

Req. No. ` ` ̀ ` ̀

Total Total Total

Profit or Loss Cost Summary

` `

Price Quoted ........ Material

Less: Cost ......... Add : Labour (+)

......... Add : Factory Overhead (+)

Profit or Loss ........ Add : Administration Overhead (+)

......... Add : Selling Overhead (+)

Total Cost

Fig. 1.4 : Job Cost Sheet



NOTES

12

(Absorbed)


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1.9 Forms used in Job Costing (Documents

prepared for recording job costing)

Following are the various forms used in Job Costing method :

i) Production Order : It is a written authority to factory foreman to proceed

with a job.

ii) Bill of Materials : It is a complete schedule of materials, parts etc. required

for a particular Job or Production order.

iii) Operation Schedule : There are various operations of a job, e.g. turning,

drilling, milling, assembling, etc. It contains name of Job, Name of operation,

Description of operation, starting time and Completion time, etc.

iv) Tool List : It is a list of all types of tools required for a particular job. It is

given alongwith schedule and instruction cards.

v) Planning Board : It is nothing but a time-table of a particular job to be

done. It sets the time for processing the various jobs.

vi) Move Tickets : There are various steps in completion of the job. There is

a progress of each job which is checked off on the operations schedule.

The move tickets are sent alongwith each lot at the time of transfer to the

next department.

1.10 Industries which use job costing

Job costing method is generally applied in following industries :-

i) Construction Industries.

ii) Engineering Industries.

iii) Ship Building Industries.

iv) Fertilizer Making Industries.

v) Automobile Service industries.

vi) Repair shops Industries.

vii) Machine Manufacturing Industries

viii) Tool Manufacturing Industries.



NOTES

13

Check Your Progress

i ) Explain the meaning of

‘Job Costing’ and give

definition of Job Costing.

ii) What are the features of

Job Costing ? Mention

advantages and

limitations of Job

Costing.

iii) Briefly mention the

procedure followed under

Job Costing.

iv) Which documents are

prepared and used in Job

Costing ? Give the

formats of ‘ProductionOrder’ and ‘Job Cost

Sheet’.

v) In which industries use of

‘job costing’ is made ?


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1.11 Illustrations

ILLUSTRATION 1

Denso India Ltd. Dombivali provides the following information in respect

of Job No. 346, you are required to prepare a Job Cost Sheet for the period ended

31st March, 2012 showing the cost of job and selling price to give a profit of 20%

on sales.

`

Productive Wages 90,000

Materials used directly for job 90,000

Sundry Work Expenses 3,400

Selling Commission 1,200

Machinery Repairs 5,700

Advertising 2,500

Coal and Coke 3,000

Consumable stores 12,800

Directors Fees 3,000

Factory Insurance 1,400

Carriage Outward 9,200-

Unproductive Wages 24,200

Chargeable Expense 4,500

Depreciation on Office Furniture 3,700

Selling on Cost 10,000

Motive Power 10,100

Packing Charges 7,500

Technical Directors Fees 1,700

Salary to works Manager 5,400

Heating and Lighting 700

Office Rent 9,500

Direct Expenses Payable 500



NOTES

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SOLUTION

Working Notes :

1. Calculation of Profit i.e.20% on Sales

SP = CP + P

100 = 80 + 20

If 80 CP = 20P

` 3,00,000 = ?

= ` 3,00,000 x 20

80

= ` 75,000

In the books of Denso India Ltd., Dombivali

Job Cost Sheet for Job No. 346 for the period ended 31st March, 2012

Particulars Amount Amount

Materials used directly 90,000

Add : Productive Wages 90,000

Add : Direct Expenses :

(i) Chargeable expenses 4,500

(ii) Direct expenses payable (+) 500

PRIME COST 1,85,000 1,85,000

Add : Factory Overheads :

(i) Sundry Works Expenses 3,400

(ii) Machine Repairs 5,700

(iii) Coal and Coke 3,000

(iv) Consumable Stores 12,800

(v) Factory Insurance 1,400

(vi) Unproductive Wages 24,200

(vii) Motive power 10,100

(viii) Technical Directors Fees 1,700

(ix) Salary to works Manager 5,400

(x) Heating and Lighting (+) 700

WORKS COST 2,53,400 2,53,400

Add : Administration Overheads :

(i) Directors Fees 3,000

(ii) Depreciation on office Furniture 3,700

(iii) Office Rent (+) 9,500

COST OF PRODUCTION 2,69,600 2,69,600



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Add : Selling and Distribution Overheads :

(i) Selling Commission 1,200

(ii) Advertising 2,500

(iii) Carriage Outward 9,200

(iv) Selling on Cost 10,000

(v) Packing charges (+) 7,500

COST OF JOB (1) 3,00,000 3,00,000

Add : Profit (20% Sales) + (+) 75,000

SELLING PRICE (2) 3,75,000 3,75,000

ILLUSTRATION 2

Following information relates to two different jobs of a manufacturing

concern Hikal Engineering Co. Ltd., Himmatpur for the month of March 2012 :

Job. No. 367 Job No. 376

Chargeable Expenses Payable 250 400

Process Materials 6,200 7,500

Cost of Special Designs 700 650

Direct Labour 4,800 1,700

Other Direct Expenses 2,050 3,950

Operating Labour 1,300 5,200

Prime Cost Materials 3,800 10,500

Productive Wages Outstanding 900 100

Additional Information :

(i) Distribution on Cost - 3% on Office Cost

(ii) Management Expenses - 20% on Works Cost

(iii) Works Overheads - 50% on Basic Cost

(iv) Selling Expenses - 7% on Cost of Production

Find out the Cost of Sales and Value of Sales to get a profit of 25% onValue of turnover.



NOTES

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SOLUTION

Working Notes :

1. Calculation of Profits i.e. 25% on Value of turnover

SP = CP + P

(i.e. value of turnover)

100 = 75 + 25

(a) Job No. 367 :

If 75 CP = 25P

` 39, 600 C.P. = ?

= ` 39,600 x 25

= ` 13,200 75

(b) Job No. 376 :

If 75 CP = 25P

` 59,400 CP = ?

= ` 59,400 x 25

= ` 19,800 75



NOTES

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In the books of Hikal Engineering Co., Ltd. Himmatpur

Job Cost Sheet for the month of 31st March, 2012.

Job No. 367 Job No. 376

Particulars Amount Amount Amount Amount

Direct Materials : 10,000 18,000

(i) Process Materials 6,200 7,500

(ii) Prime Cost Materials (+) 3,800 (+) 10,500

7,000 7,000

Add :Direct Wages 4,800 1,700

(ii) Operating Labour 1,300 5,200

(iii) Productive Wages

Outstanding (+) 900 (+) 100

Add :Direct Expenses : 3,000 5,000

(i) Chargeable Expenses Payable 250 400

(ii) Cost of Special Designs 700 650

(iii) Other Direct Expenses (+) 2,050 (+) 3,950

PRIME COST / BASIC COST 20,000 30,000

Add :Works Overheads

(50% on Basic Cost) (+) 10,000 (+) 15,000

WORKS COST/FACTORY COST 30,000 45,000

Add :Management Expenses

(20% on Works Cost) (+) 6,000 (+) 9,000

COST OF PRODUCTION/

OFFICE COST 36,000 54,000

Add :Selling Expenses

(7% on Cost of production) (+) 2,520 (+) 3,780

Add :Distribution on Cost

(3% on Office Cost) (+) 1,080 (+) 1,620

COST OF SALES (1) 39,600 59,400

Add :Profits

(25% on value of turnover) (+) 13,200 (+) 19,800

VALUE OF SALES (2) 52,800 79,200



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ILLUSTRATION 3

Globle Paper Mills Ltd., Gulbarga provides the following information relating

to a special job undertaken in the month of March 2012 from which you are

required to prepare a Job Cost Sheet showing separately the cost of the job and

value of the job. Also calculate the selling price per ton of the special paper

manufactured.

Direct Materials -

• Paper pulp - 500 tons @ ` 50 per ton.

• Other materials - 100 tons @ ` 30. per ton

• Raw paper - 75 tons @ ` 20 per ton

Direct Wages -

• Skilled workers- 100 workers @ ` 10 per day - worked for 5 days.

• Semi-skilled workers - 75 workers @ ` 8 per day - worked for 6 days

• Unskilled workers - 50 workers @ ` 5 per day - worked for 4 days.

• Administrative Overheads - 40% on Factory Cost.

Works on Cost -

• Fixed - 30% on Prime Cost Wages

• Variable - 15% on Basic Wages

• Semi - variable - 5% on Operating Wages

Selling on the Cost - 7% on Works Cost

Distribution Overheads - 3% on Manufacturing Cost

Operating Wages due but not paid ` 400

Defective Materials Returned - Direct Materials ` 1,500

Chargeable Expenses Payable ` 300

Special Paper Manufactured Tone 1,250

Prime Cost Expenses ` 6,700

Profits - 25% on value of sales



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SOLUTION

Working Notes :

1. Calculation of profits i.e. 25% on value of sales

SP = CP + P

(i.e. value of sales)

100 = 75 + 25

If 75 CP = 25 P

` 75,000 CP = ?

= ` 75,000 x 25

75

= ` 25.000

2. Calculation of Selling price per ton of special paper manufactured -

If 1,250 Tons = ` 1,00,000

1 Ton = ?

=1 x ` 1,00,000

1,250

= ` 80 per ton

In the books of Global paper Mills Ltd., Gulbarga

Job Cost-Sheet for the month of March 2012

Units Produced - 1,250 Tons

Units Sold - 1,250 Tons

Particulars Amount Amount Amount

Direct Materials : 28,000

(a) Paper Pulp - 500 x ` 50 25,000

(b) Other Materials - 100 tons x ` 30 3,000

(c) Raw Paper - 75 tons x ` 20 (+) 1,500

29,500

Less: Defective materials returned -

Direct Materials (-) 1,500



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ILLUSTRATION 4

Ceekay Engineering Ltd., Churuchgate undertake jobs as per customer’s

requirements. In March. 2012 they have received an order from Kunal Enterprises,

Kandivali for a job order No. 243. The management expects 30% profit on value

of sales. The cost estimates for the Job No. 243 shows the following information.

`

Direct Materials 1,35,000

Direct Wages 35,000

Chargeable Expenses 10,000

Factory Overheads : 50% of Direct Cost

Administration oncost : 50% of Works Oncost

Selling and Distribution Expenses : 10% of cost of sales

Prepare a Cost Sheet for Job No. 243 showing clearly the cost built - up ateach stage and advise the management about the price to be quoted for the job.

SOLUTION

Working Notes :

1. Calculation of Selling and Distribution Expenses i.e. 10% of cost of

Sales.

Cost of production + Selling and Distribution Expenses = Cost of sales.

90 + 10 = 100

If 90 C. of P. = 10 S & D. E.

` 3,15,000 C. of P. = ?

= ` 3,15,000 x 10

90

= ` 35,000

2. Calculation of Profit i.e. 30% on Value of Sales

SP = CP + P

(i.e. value of sales) (i.e. cost of sales)

100 = 70 + 30

If 70 CP = 30 P

` 3,50,000 C.P. = ` 3,50,000 x 30

70

= ` 1,50,000



NOTES

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In the books of Ceekey Engineering Ltd., Churchgate

Estimated Job Cost-Sheet for Job No. 243 for the month of

March 2012

Particulars Amount


Add : Direct Wages 35,000Add : Chargeable Expenses (+) 10,000

DIRECT COST/PRIME COST 1,80,000

Add : Factory Overheads (50% of D.C. i.e. ` 1,80,000) (+) 90,000

WORKS COST (+) 2,70,000

Add : Administration Oncost

(50% of Works Oncost i.e. ` 90,000) (+) 45,000

COST OF PRODUCTION 3,15,000

Add : Selling and Distribution Expenses

(10% of Cost of sales) (+) 35,000

COST OF SALES 3,50,000

Add : Profit (30% of value of sales) (+) 1,50,000

PRICE TO BE QUOTED FOR THE JOB (1) 5,00,000

1.12 Summary

The nature of work to be performed differs from industry to industry and so

it becomes necessary to follow separate methods of costing for accumulation of

costs and for presenting the information as needed by the management. The methods

of costing are divided in two groups - specific order costing and operating costing.

In the group of Specific Order Costing the methods included are job costing, batch

costing, contract costing, multiple or composite costing and class cost method. In

the second group of operation costing the methods included are process costing,

operating or service costing, unit or single or output costing, departmental costing

and operation costing.

Job costing is that form of specific order costing which applies where work

is undertaken to customers’ special requirements. Job costing method is adopted

where the job, order or a project is undertaken and completed as per therequirements of the customer and so cost data is accumulated and recorded for

each job, order or a project separately. Since costs are recorded for each job

separately it becomes possible to ascertain profit or loss for each job. A customer

makes enquiry with the concern to find out whether a certain work will be

undertaken by the concern as per the specifications mentioned by the customer

and how much price the concern will charge for doing that work. When the price

quoted by the concern is acceptable to the customer, he places an order for the

job. The work is completed by the concern as per the specification and is handed

over to the customer on receiving the quoted price. For each job a separate Job



NOTES

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Cost Sheet is prepared in which costs incurred on account of materials used,

labour employed and overheads of the job are recorded separately and by comparing

total cost of the job with the price quoted for the job profit earned or loss suffered

is calculated.

1.13 Key Terms

i) Production Order : It is a document prepared by Planning Department

after receiving order from the customer and contains instructions and orders

to the foremen of sections to start production of articles for which order is

received from the customer.

ii) Job Cost Sheet : It is a sheet or card prepared for each job separately to

accumulate and analyse actual costs incurred for the specific job.

1.14 Questions and Exercises

I - Theory Questions

(1) What is meant by ‘job costing’ ? Explain the features of job costing.

(2) What is ‘job costing’ ? Explain its advantages and limitations.

(3) What are the main features of job costing. Describe briefly the procedure

of recording costs under job costing.

(4) What is a job cost sheet ? What data is generally recorded in a job cost

sheet?

(5) Explain the documents which are prepared in job costing.

II - Multiple Choice Questions

(1) Which of the following is not ‘Process Costing’ -

(a) Service Costing

(b) Departmental Costing

(c) Operating Costing

(d) Contract Costing

(2) Special Order Costing is not related to -

(a) Job Costing

(b) Batch Costing



NOTES

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(c) Service Costing

(d) Composite Costing

(3) In biscuit factories bakeries -------- method is used.

(a) Job Costing

(b) Batch Costing

(c) Multiple Costing

(d) Contract Costing

(4) Match the pairs.

Group I Group II

(i) Process Costing (a) quarries

(ii) Service Costing (b) automobiles

(iii) Batch Costing (c) bakeries

(iv) Composite Costing (d) hospitals

(e) paper making

Ans. : (i) - (e), (ii) - (d), (iii) - (c), (iv) - (b).

Ans. : (1 - d), (2 - c), (3 - b).

III - Exercises :

(1) Shreyas Engineering Works has received an enquiry for performing an

engineering job. The costing department has estimated that materials cost of the

job will amount to ` 6,000 and direct wages for the job will be ` 7,500. Factory

overheads are absorbed at 60% of direct wages and office and administration

overheads are absorbed at 20% of the prime cost. Assuming that the basis for

absorption of factory overheads and office and administration overheads remain

unchanged calculate the price to be quoted the job if a profit of 30% is to earned

on the cost of production of the proposed job.

(2) A factory uses job costing. The following data are available from the book

for the year ended 31st Dec. 2014.

`


Direct wages 7,50,000

Profit 6,09,000



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Selling and Distribution Overheads 5,25,000

Administration Overheads 4,20,000

Factory Overheads 4,50,000

Prepare a cost sheet showing Prime Cost, Factory Cost, Cost of Production,

Cost of Sales and Sales Value for the year ended 31 st December, 2014.

The factory has received an order for a job to be completed in January,

2015. It is estimated that direct materials costing ` 1,20,000 and direct wages of

` 75,000 would be required for the job. The factory absorbs factory overheads as

a percentage of direct wages and administration overheads and selling and

distribution overheads as a percentage of factory cost and the same basis will be

used in the year 2015-2016. In the year 2015-2016, selling and distribution overheads

are expected to go up by 15% Assuming that the factory desires to earn profit at

the same rate on sales, how much price the factory should quote for the job to be

performed in January, 2015.

(3) X Ltd. has to quote a price for Job No. 338. The costing department has provided following information about estimated costs for Job No. 338.

Direct Materials : 34 units at ` 15 per unit.

Direct Labour : Department A - 12 hours at ` 15 per hour

Department B - 10 hours at ` 8 per hour

The following additional information is available from the books of X Ltd.

Department A - Variable Overheads ` 1,80,000

Hours worked 36,000

Department B - Variable overheads Rs.80,000

Hours worked 20,000

Fixed overheads for the company ` 4,20,000

Total Hours worked 70,000

Profit desired from Job No. 338 is at 25% on the price quoted.

You are required to calculated price to be quoted for Job No. 338.

(4) From the following particular prepare Cost-Sheet for Job No. 55 and find

out the selling price of the job.

`

Materials directly issued for the job 21,400

Direct Expenses 5,000

Productive Wages 8,000



NOTES

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UNIT 2 Batch Costing (Theory)

Structure

2.0 Introduction

2.1 Unit objectives

2.2 Meaning of batch costing

2.3 Features of batch costing

2.4 Advantages of batch costing

2.5 Disadvantages of batch costing

2.6 Industries which use batch costing

2.7 Accounting recording for batch costing

2.8 Economic Batch Quantity (EBQ)

2.9 Summary

2.10 Key Terms

2.11 Questions


2.0 Introduction

A batch is a cost unit consisting of a group of identical items which maintain

their identity through out one or more stages of production. When production is

done in batches accumulation of costs is done by following ‘batch costing method’.

Like job costing method, batch costing method is also a specific order costing.

Quantity produced in a batch is known as a lot and costs incurred for producing

the quantity in a lot are accumulated and recorded as cost of a batch. Theoritical

information related to the batch costing method is provided in this Unit.

2.1 Unit Objectives

After studying the information provided in this Unit you should be able to :

• Know the meaning of batch costing;

• Understand features, advantages and disadvantages of batch costing;

• Know the industries which use batch costing;

• Know how costs are recorded in batch costing;

Batch Costing (Theory)


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• Understand meaning and formula used for calculation of Economic Batch

Quantity.

2.2 Meaning of Batch Costing

Batch costing is that form of specific order costing under which each batch

is treated as a cost unit and costs are accumulated and ascertained separately for each batch. Each batch consists of a number of like units.

Batch costing is a method of costing used by the concerns which produce

an identical product or a component in a very large number at a time. All units

produced at one time are collectively known as a batch and the cost of production

is calculated for a batch because a batch is regarded as a unit. When the batch

production becomes complete, production of the next batch is started. On the

basis of batch cost calculated, the cost of single unit of the product is decided and

selling price of that single unit of product is fixed by adding expected margin of

profit to the cost of production of the single unit of the product. In order to distinguish

a unit produced in one batch from the units produced in other batches, each batch

is given a separate number and that batch number is recorded on all the units of

the product belonging to that batch.

2.3 Features of Batch Costing

Batch costing which is also known as ‘lot costing’ has following important

features :

1. Batch costing is a variation of job costing. In job costing work of production

is carried out according to the specifications and instructions given by a

customer whereas in batch costing a large number of units of an identical

product are produced as ordered by a customer or for storage and sale in

the market.

2. Batch is a unit for cost calculation. In a batch the units of identical product

may be in hundreds or in thousands but each batch is regarded as an

independent unit and its total cost is equally divided by the number of units

produced in that batch in order to decide the cost of production of a single

unit of the product.

3. Each batch is given a separate number and the output of a batch is identified

by the number of the batch recorded on each unit of output of the batch.

Therefore a unit of the product is output of which batch can be easily found

out by referring to the batch number recorded on the unit, e.g. the number

of the batch in which bottle of medicine has been produced is recorded on

the bottle of medicine. If the contents of bottles of a batch are found harmful

to the patients, all bottles of that batch can be taken out of market for

investigation and if necessary for destruction, on the basis of the batch

number recorded on the bottles.



NOTES

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4. Unit cost of a product varies with the size of the batch. If quantity produced

in a batch is small, the unit cost of the product is more and if the quantity

produced in a batch is large, the unit cost of the product of that batch is

less. Therefore, it is necessary to find out the economic batch quantity by

producing which the cost of production of a unit of the product can be kept

to the minimum.

2.4 Advantages of Batch Costing

Use of batch costing provides following advantages :

i) The accounting work is considerably reduced as a group of homogeneous

jobs constitute a batch.

ii) The variations in the costs arising under job costing is smoothened by means

of averaging such costs and spreading over the batch of articles. This

gives a consistent cost of production of every article in the batch.

iii) It takes the benefit of reduced cost of production arising out of EBQ.

iv) Supervision becomes very easy and effective. So idle time is eliminated.

v) The loss of time due to inter job transfer of materials, labourers and tools is

minimised under batch costing.

2.5 Disadvantages of Batch Costing

i) Determination of a batch from various jobs often poses problem. It is difficult

to come across absolute homogenity of jobs.

ii) When quantity of goods to be manufactured differs from customer to

customer, it becomes difficult to determine the batch.

iii) If the production of a batch is wrongly undertaken due to sub-standard of

materials or defective operation, the whole batch of articles are required to

be discarded which causes a great loss to the manufacturing concern.

2.6 Industries which use Batch CostingAll those industries which are engaged in the production of identical type

of product or component a large quanity at one time use a method of batch costing.

Such industries are pharmaceutical industry, industries engaged in production of

components used in radio sets, television sets, watches, manufacture of bicycles,

two-wheelers, automobiles, industries producing nuts, bolts, screws, etc.



NOTES

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2.7 Accounting recording for Batch Costing

A batch consists of a number of units of a product which are of identical

nature. When a batch production is to be stared, the machines and equipment to

be used for the production are required to be set. The time required for setting -

up is recorded and the operator’s wages for such time are calculated. Overheads

to be charged according to the overhead absorption rate used are calculated for

the set-up time. The operator’s wages and the overhead charges for set-up timeare added to calculate the setting-up cost. (The setting -up cost is of fixed nature

and it remains same irrespective of the actual quantity to be produced in a batch.)

For batch production material is issued from the stores and all materials

issued for a batch is recorded against the particular number issued to the batch.

Direct workers working on a batch prepare time sheets showing the number

of batch and the starting time and finishing time for the work performed by them

for the batch production. As per the rate of remuneration applicable to the workers

the labour cost is calculated by the costing department and the total amount of the

labour cost is charged to the particular batch as direct labour cost.

Any expenses specially incurred for the batch are charged to the batch

cost as direct or chargeable expenses. Overheads are charged to the batch

according to the method seleted for aborption of overheads.

The setting-up cost, the direct material cost, direct labour cost, direct

exspenses and the amount of overheads charged are added together to find out

the total cost of production of a batch. This cost is divided by the quantity produced

in that batch to find out the cost per unit of the product. When a unit of the

product is sold to a customer at a certain selling price, the difference between the

selling price and total cost of the unit of product indicates the amount of profit

earned per unit.

2.8 Economic Batch Quantity (EBQ)

In order to control batch cost it is important to decide the quantity to be

produced in each batch which enables to keep the batch cost at optimum level.

Economic batch quantity is that quantity of a batch which enables the management

to keep the batch cost at minimum level. If the quantity of a batch is either

increased or decreased from the economic batch quantity determind the batch

cost will increase and become more than the batch cost incurred when economic batch quantity is produced.

It has already been mentioned that the batch cost consists of two types of

costs as under :

i) Setting-up cost : This is the cost incurred before the batch production is

started. In order to do the production machines are used and it is necessary to

check the machines and do necessary adjustments in them so that they are ready

for operations. Oiling and supplying the required consumables must be taken care



NOTES

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of. This work is generally done by the operator of the machine or the direct

worker who is appointed to do the work of production or to complete the expected

activity with the help of the machine.

The time taken by the worker and the rate at which he is paid wages decide

setting - up cost. The amount of the setting - up cost remains same and does not

change according to the quantity to be produced in each batch. Setting - up cost is

a fixed cost and therefore if the quantitty of the batch is small the per unit of

product cost increases and when the quantity to be produced in a batch increases,

the setting - up cost per unit of product becomes less.

ii) Carrying Cost : Carrying cost means the cost to be incurred for carrying one

unit of the product in inventory per annum. For deciding this cost, the cost of

production per unit of the product and the interest amount blocked up in the value

of the product when it is being stored for the year are taken into consideration . If

the cost of production of one unit of the product is large and the rate of intersest

is also high, it is obvious that the cost of carrying will become more.

When both these costs are added the batch cost becomes available. In

economic batch cost the setting-up cost and the carrying cost are approximately

equal and the total batch cost is the minimum. If batch quantity is increased or

decreased compared to the economic batch quantity the batch cost will be more

as compared to the batch cost calculated by using the economic batch quantity for

batch production.

Economic batch quantity can be calculated by following formula which is

similar to the formula used for calculating the economic order quantity (EOQ) in

respect of materials. Depending upon the details provided for calculating the

economic batch quantity two different formulas are required to be used. These

formulas are given below :-

1) When annual requirement of the product, the setting-up cost per batch and

the cost of carrying one unit of the product for the year is the information provided.

Economic Batch Quantity = 2 R.S

C

where R = Annual requirement of the product

S = Setting-up costs per batch

C = Carrying cost per unit of product for a year expressed in rupees.

2) When information about annual requirement of the product, setting-up costs

per batch, rate of interest p.a. on capital blocked in the product during storage and

the cost of production per unit of the product is provided :-

EBQ =2 R.S

IC



NOTES

35

Check Your Progress

i ) Define ‘Batch Costing’

and explain the meaning

of batch costing.

ii) What are the features of

‘Batch Costing’ ?

iii) State the advantages and

disadvantages of ‘Batch

Costing’.

iv) In which industries ‘BatchCosting’ is used ?

v) What do you understand

by the terms ‘set ting-up

costs’ and ‘carrying

costs’?

vi) What is meant by

‘Economic Batch

Quantity’ ? Give and

explain the formula used

for calculating Economic

Batch Quantity.

vii) Briefly explain how

accounting recording is

done under ‘batch

costing’.


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where EBQ = Economic Batch Quantity

R = Annual requirement of the product

S = Setting-up costs per batch

I = Rate of interest on capital

C = Cost of production per unit of product

2.9 Summary

Batch costing is a method of costing used for accumulation and ascertainment

of costs when a number of identical units of a product are produced by completing

one or more stages of production. The units produced are homogeneous and are

produced at the same time. The quantity which is produced constitutes batch

quantity. Each batch is separete and after completion of production of one batch

the production of the next batch is undertaken. Each batch is given a separate

batch number and the batch number is recorded on each unit of the product

manufactured in that batch. This helps in identification of a unit of product as belonging to a particular batch. A batch cost sheet is prepared for each batch and

it records the batch number, date of commencement of the batch production, the

date of completion of the batch production and the quantity produced in the batch.

Materials cost, labour cost, direct expenses and proportionate amount of overheads

to be charged to the batch are recorded in the Batch Cost Sheet and total cost of

the batch production is calculated by adding the amounts of costs incurred for the

batch. As per small or large quantity produced in a batch, the unit cost of the

product increases or decreases. To minimise such variations in the unit cost

Economic Batch Quantity is calculated and actual production quantity is kept near

the EBQ.

2.10 Key Terms

i) Batch Costing : It is that form of specific order costing under which each

batch is treated as a cost unit. Each batch consists of a number of identical

units of the product and accumulation and recording of costs is done for

each batch separately.

ii) Economic Batch Quantity (EBQ) : Economic Batch Quantity is that quantity

of a batch at which the ‘setting up costs’ and ‘carrying costs’ are almost

equal and cost of the batch becomes minimum. Formula used for EBQ is :

E B Q = 2 R.S

C

where R = Annual Requirement of the product

S = Setting-up cost per batch

C = carrying cost unit of product for a year expreesed in rupees.



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2.11 Questions

I - Theory Questions

(1) What is ‘Batch Costing’? Explain the features of batch costing.

(2) What do you understand by ‘batch costing’? Explain the procedure followed

for cost calcuation in batch costing.

(3) What is meant by Economic Batch Quantity? Explain the formula used for

calculating EBQ.

(4) Explain the meaning of batch costing. In which industries batch costing

method is used ?

(5) Explain the features, advantages and disadvaneages of batch costing.

(6) Write notes on.

(a) Setting - up costs.

(b) Production costs.

(c) Calculation of unit cost of a product in batch costing.

(d) Documents prepared in batch costing.

II - Multiple Choice Questions

(1) Batch Costing is a ------- of job costing.

(a) variable

(b) valuation

(c) verification

(d) opposite

(2) Batch is a ------------- of cost calculation.

(a) price

(b) cost

(c) unit

(d) value

(3) Which of the following statement is ‘wrong’ ?

(a) ‘Setting-up cost’ is the cost incurred before the batch production is

started.

(b) ‘Setting-up cost’ is a fixed cost.



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(c) ‘Setting-up cost’ is divided by the quantity produced in the batch to

find out the cost per unit of the product.

(d) ‘Setting-up Cost’ is the variable nature and it fluctuates as per actual

quantity to be produced in a batch.

(4) ‘Carrying cost’ means the cost to be incurred for carrying ------ of the

product in inventory per annum.

(a) all units

(b) two units

(c) one unit

(d) 100 units

(5) Any expenses specially incurred for the batch are charged to the batch

cost as ----------

(a) indirect expenses

(b) unchargeable expenses

(c) direct expenses

(d) emergency expenses

(6) Match the pairs.

Group I Group II

(a) Batch Costing (i) Example of Process Costing

(b) Setting up Cost (ii) Control batch cost.

(c) Carrying Cost (iii) Cost for carrying one unit of the

production.

(d) Economic Batch Quantity (iv)‘incurred before batch production’.

(v)‘Variation of job costing’.

Ans. : (a) = (v); (b) = (iv); (c) = (iii); (d) = (ii).

Ans. : (1 - a), (2 - c), (3 - d), (4 - c), (5 - c).


1. ‘Cost Accounting’ - Jawahar Lal

2. ‘Advanced Cost Accounting’ - Nigam and Sharma



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Unit 3 Batch Costing (Practical Problems)

Structure

3.0 Introduction

3.1 Unit objectives

3.2 Illustrations

3.3 Summary

3.4 Exercises

3.5 Further Reading

3.0 Introduction

In the previous Unit we have considered theoretical information related to

Economic Batch Quantity and preparation of Batch Cost Sheet for calculation of

batch cost and cost per unit of the product produced in a batch. In this Unit, a few

Illustrations are provided to understand how Economic Batch Quantity is calculated

and how Batch Cost Sheet is prepared to ascertain costs incurred for a batch

production.

3.1 Unit Objectives

After completing study of the various illustrations provided in this Unit you

should be able to :-

• Use the formula for calculating the Economic Batch Quantity; and

• Prepare Batch Cost Sheet showing total cost of a batch production and

calculate per unit cost of the product from the batch.

3.2 Illustrations

ILLUSTRATION 1

A firm engaged in the production of Y product uses batch costing. It has

given you following information :

Annual requirement of Y product is 9600 units. Setting-up costs per batch

amounts to ` 300. Annual cost of carrying one unit of Y product in the inventory

is ` 25.

You are required to calculate economic batch quantity for production of Y

product.

Batch Costing



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SOLUTION

Since rate of interest on capital and cost of production of one unit of Y

product is not provided in the problem following formula is used for calculating the

economic batch quantity for Y product :

EBQ = 2 R.S Where EBQ = Economic Batch Quantity

C R = Annual requirement of the product

S = Setting - up cost per batch

C = Cost of carrying one unit of the

product in the inventory for a year

EBQ = 2 x 9600 x ` 300

` 25

= 230400

= 480 units

480 units of Y product should be produced in each batch.

ILLUSTRATION 2

A manufacturer has accepted from a customer an order to supply him 600

components during one year. The setting - up cost per batch is estimated as ` 400

irrespective of the quantity of components produced in a batch. Production cost

of one component amounts to ` 120 and the interest rate is 10% p.a.

Calculate the economic batch quantity.

SOLUTION


IC

R = Annual requirement of the component

S = Setting - up cost per batch

I = Rate of interest p. a.

C = Cost of production of one

component.

EBQ = 2 x 600 x 400

.10 x 120

= 480000

12

= 40000

= 200 units

200 components should be produced in each batch.

Batch Costing



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Batch Cost Sheets for three months

Month 1st 2nd 3rd Total

Batch output (Units) 1040 1030 1070 3140

Sales value @ Rs.48 per unit ` 49,920 49,440 51,360 1,50,720

Materials Cost ` 21,800 22,000 22,400 66,200

Direct Wages ` 6,800 6,600 7,200 20,600

Factory overheads ` 6,800 6653.80 7,100 20553.80

Total Cost ` 35,400 35,253.80 36,700 107353.80

Profit per batch ` 14,520 14,186.20 14,660 43366.20

Total Cost per unit ` 34.04 34.23 34.30 34.19

Profit per unit ` 13.96 13.77 13.70 13.81

Overall position of the order for 3000 units of components :

Sales value of 3000 units at ` 48 per unit ` 1,44,000

Total cost of 3000 units at ` 34.19 ` 1,02,570

Profit from the order ` 41,430

(Note : Total units produced in three batches are 3140 units out of which 3000

units are supplied to the manufacturing concern. There remain 140 units

of the components in stock which can be sold by the factory and earn

profit from the sale.)

ILLUSTRATION 4

B Company manufactures component P-109 in one of its department fully.

The company uses batch costing method for calculation of cost for the component.

Materials used for manufacturing one unit of p-109 cost ` 45 and the operator

takes 30 minutes for producing one unit and he is paid wages at the rate of ` 20

per hour. Overheads are charged to the batch production at the rate of ` 10 per

machine hour. The operator spends 2 hours 30 minutes time for setting - up of the

machine irrespective of the actual number of units included in a batch.

Using the above information prepare batch cost sheets showing setting -

up cost, production cost and total cost of the batch assuming that the batch size is

(i) 10 units, (ii) 50 units and (iii) 100 units. Also calculate per unit setting-up cost,

production cost and total cost for each of the batch size mentioned above.

Batch Costing



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SOLUTION

i) Cost sheet for a batch of 10 units of P- 109 component

Cost of Cost per

the batch unit

` ` `

Setting - up cost :

Wages of operator for 2 hours 30 minutes

at ` 20 per hour 50

Overheads for 2 hours 30 minutes at

` 10 per machine hour 25 75 7.50

Production cost :

Materials cost 10 units at ` 45 per unit 450 45.00

Direct wages 5 hours at ` 20 per hour 100 10.00

Overheads for 5 machine hours at Rs 10 per hour 50 5.00

600

Total Cost (Setting - up cost + production cost) 675 67.50

ii) Cost Sheet for a batch of 50 units of P-109 Component

Cost of Cost per

the batch unit

` ` `

Setting - up Cost :


at ` 20 per hour 50

Overheads for 2 hours 30 minutes at


Production Cost :

Materials cost 50 units at ` 45 per unit 2250 45.00

Direct wages 25 hours at ` 20 per hour 500 10.00

Overheads for 25 machine hours at Rs 10 per hour 250 5.00

3000

Total cost (setting - up cost + production cost) 3075 61.50

Batch Costing



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iii) Cost Sheet for a batch of 100 units of component P-109

Cost of Cost per

the batch unit

` ` `

Setting - up cost :


at `

20 per hour 50Overheads for 2 hours 30 minutes at


Production Cost :

Materials Cost 100 units at ` 45 per unit 4500 45.00

Wages of operator for 50 hours at ` 20 per hour 1000 10.00

Overheads for 50 hours at Rs 10 per machine hour 500 5.00

6000

Total Cost (Setting-up Cost + Production Cost) 6075 60.75

(Note that the Setting-up Cost of the batch reduces as the number of units included

in the batch increase while the Production Cost per unit remains same at different

quantities in the batches.)

ILLUSTRATION 5

From the following information relating to Camlin India Ltd., find out

Economic Batch Quantity :-

i) Total number of units to be produced in a year 9000 units.

ii) Set-up Cost per batch ` 200

iii) Carrying Cost per unit of production ` 0.10

SOLUTION

EBQ = 2 US Where, EBQ = Economic Batch Quantity

C U = Units to be produced in a year

S = Set-up Cost per batch

C = Carrying Cost per unit of production.

EBQ = 2 x 9000 units x ` 200

` 0.10

=360000 units x

100

10

= 36000000 units

= 6000 units

Batch Costing



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ILLUSTRATION 6

Balaji Industries has to supply 1000 paper cones per day to a textile Industry.

They find that when they start a production run they can produce 2500 paper

cones per day. The cost of building a paper cone in stock for a year of 360

working days is ` 0.80 and the set-up cost of production run is ` 10 How frequently

should production run be made ?

SOLUTION

EBQ = 2 US Where, EBQ = Economic Batch Quantity

C U = Units to be produced in a year, i.e.

360 days x 1000 paper cones

= 3,60,000 paper cones

S = Set-up Cost per batch, i.e. ` 10

C = Carrying Cost per unit of production

i.e. ` 0.80

EBQ = 2 x 360000 paper cones x ` 10

` 0.80

= 7200000 paper cones x 100

80

= 90,00,000 paper cones

= 3000 paper cones

Production run in terms of days :

= EBQ

Production per day

= 3000 paper cones

1000 paper cones

= 3 days

ILLUSTRATION 7

In Aarti Drugs Manufacturing Co. Ltd., a component Z oxan - 100 is madeentirely in a cost centre FDC. Materials cost ` 0.50 per component and each

component takes 10 minutes to produce. The machine operator is paid at ` 3 per

hour and the machine hour rate is ` 6 per hour. The setting-up of the machine to

produce Zoxan - 100 takes 140 minutes.

You are required to prepare a Cost Sheet showing the Production Cost,

Setting-up Cost and Total Cost assuming that a batch of

(i) 10 components, (ii) 100 components and (iii) 1000 components is produced

separately.

Batch Costing



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SOLUTION

In the Books of Aarti Drugs Manufacturing Co. Ltd.,

Cost Sheet

For the period ended ------------

Component : Zoxan - 100

Batch : 10 components

Particulars Amount Total cost of Cost per

the Batch unit

Production Cost (A) 20.00 2.00

Materials cost 5.00

( ` 0.50 x 10 components)

Add Wages to machine operator 5.00

( ` 3x 1 hour 40 minutes

Add Machine Expenses 10.00

( ` 6x 1 hour 40 minutes)

Setting-up Cost (B) 21.00 2.10

Wages to Machine Operator 7.00

( ` 3x 2 hours 20 minutes)



Total Cost (A + B) (C) 41.00 4.10

In the Books of Aarti Drugs Manufacturing Co. Ltd.

Cost Sheet

For the period ended ----------



Particulars Amount Total cost of Cost per

the Batch unit

Production Cost (A) 200.00 2.00

Materials Cost 50.00


Add Wages to Machine Operator 50.00

( `

3x

16 hour 40 minutesAdd Machine Expenses 100.00


Setting-up Cost ----- (B) 21.00 0.21



Add Machine Expenses

( ` 6x 2 hours 20 minutes) 14.00

Total Cost (A + B) (C) 221.00 2.21

Batch Costing



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In the Books of Aarti Drugs Manufacturing Co. Ltd.

Cost Sheet

For the period ended ----------



Particulars Amount Total Cost of Cost per

the Batch unit

Production Cost (A) 2,000.00 2.00

Materials Cost 500.00


Add Wages to machine operator 500.00

( ` 3x 166 hour 40 minutes



Setting-up Costs (B) 21.00 0.021


( ` 3 x 2 hours 20 minutes)


( ` 6 x 2 hours 20 minutes)

Total Cost (A + B) (C) 2021.00 2.021

3.3 Summary

In this Units we have considered only Illustrations on the batch costing.

Two types of practical problems Viz. Calculation of Economic Batch Quantity

and preparation of Cost Sheet for finding out the Total Cost of batch and Unit

Cost of a product from the batch, we have considered. The formula used for

calculation of EBG is one of the following depending upon the information

provided :


C R = Annual requirement of the product

S = Setting-up Cost per batch

C = Cost of carrying one unit of

Advanced Cost Accounting-III

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