Job and batch costing

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JOB COSTING AND BATCH COSTING

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JOB COSTING• Job costing is a method of costing whereby cost is compiled for a job or

work order. The production is against customer’s orders and not for stock.

• The cost is not related to the unit of production but is a cost for the job, e. g printing of 5000 ledger sheets, repairs of 50 equipment’s, instead of printing one sheet or repair of one equipment.

• The elements of cost comprising Prime Cost viz. direct materials, direct labor and direct expenses are charged directly to the jobs concerned, the overhead charged to a job is an apportioned portion of the departmental overhead.

• Applied in industries where production is measured in terms of completed jobs like Printing Press, Automobile Garage, Repair workshops, Ship Building, Foundry and other similar manufacturing units which manufacture to customers’ specific requirements.

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DOCUMENTS USED IN A JOB ORDER COST SYSTEM(i) Production Order or Manufacturing Order:

This is a works order authorizing the production department to produce a specified quantity of a product which constitutes the job.

(ii) Cost Sheet:

For recording costs, very often a separate record called a cost sheet is used. The cost sheet and the works order may also be combined, when costs are recorded on the production order itself.

(iii) Other Documents:

The other documents which are used as control mechanism by the dispatching function are: Material Requisitions, Tool Orders, Time Tickets, Inspection Order, etc.

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JOB COST ACCOUNTING PROCEDURE • Cost of direct materials in respect of a job is obtained from copies of

Material Requisitions costed by the Stores Accounting Section.

• Cost of direct wages is obtained from various Time Tickets costed by the Payroll Department. Direct Expenses, if any, are also taken up.

• Manufacturing overheads are then applied at predetermined departmental absorption rates and recorded in the cost-sheet.

• Various overheads may be recorded in the separate columns meant for these in the cost sheet which are totaled to obtain the total cost of direct material, direct labour, direct expenses and apportioned manufacturing overheads.

• These four elements of cost together give the production cost or manufacturing cost of the job.

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TYPES OF ACTIVITIES Job costing involves the following accounting activities:

Materials: It accumulates the cost of components and then assigns these costs to a product or project once the components are used.

Labor: Employees charge their time to specific jobs, which are then assigned to the jobs based on the labor cost of the employees.

Overhead: It accumulates overhead costs in cost pools, and then allocates these costs to jobs.

Direct Expenses: Directly charged to individual jobs for which they are incurred.

JOB COSTING ALLOCATION OF MATERIALS• In a job costing environment, materials to be used on a product

or project first enter the facility and are stored in the warehouse, after which they are picked from stock and issued to a specific job.

• If spoilage or scrap is created, then normal amounts are charged to an overhead cost pool for later allocation, while abnormal amounts are charged directly to the cost of goods sold.

• Once work is completed on a job, the cost of the entire job is shifted from work-in-process inventory to finished goods inventory.

• Then, once the goods are sold, the cost of the asset is removed from the inventory account and shifted into the cost of goods sold, while the company also records a sale transaction.

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JOB COSTING ALLOCATION OF LABOR• In a job costing environment, labor may be charged directly to

individual jobs, if the labor is directly traceable to those jobs.

• All other manufacturing-related labor is recorded in an overhead cost pool and is then allocated to the various open jobs.

• The first type of labor is called direct labor, and the second type is known as indirect labor. When a job is completed, it is then shifted into a finished goods inventory account.

• Then, once the goods are sold, the cost of the asset is removed from the inventory account and shifted into the cost of goods sold, while the company also records a sale transaction.

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JOB COSTING ALLOCATION OF OVERHEAD• In a job costing environment, non-direct costs are accumulated into

one or more overhead cost pools, from which you allocate costs to open jobs based upon some measure of cost usage.

• The key issues when applying overhead are to consistently charge the same types of costs to overhead in all reporting periods, and to consistently apply these costs to jobs. Otherwise, it can be extremely difficult for the cost accountant to explain why overhead cost allocations vary from one month to the next.

• The overhead allocation process for standard costs is to use historical cost information to arrive at a standard rate per unit of activity, and then allocate this standard amount to jobs based on their units of activity.

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JOB COSTING ALLOCATION OF OVERHEADYou then subtract the total amount allocated from the overhead cost pool (which contains actual overhead costs), and dispose of any remaining amount in the overhead cost pool. You can use any of the following methods to dispose of the remaining amount:

▪Charge to cost of goods sold. Charge the entire variance to the cost of goods sold. This is the simplest method.

▪Allocate the variance. Allocate the variance to the accounts for finished goods, work-in-process, and cost of goods sold, based on the ending balances in these accounts. This approach is slightly more time-consuming, but is the most theoretically correct method under generally accepted accounting principles.

▪Charge to jobs. Allocate the variance to those jobs that were open during the reporting period. This approach is the most time-consuming. It essentially reverts a company back to an actual costing system, since the results of this method will approximate those created under an actual cost allocation system.

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ADVANTAGES OF JOB COSTING

• Profitability of each job can be individually determined.

• It provides a basis for estimating the cost of similar jobs which are to be taken in future.

• It provides the detailed analysis of the cost of material, labour and overheads for each job as and when required.

• Plant efficiency can be controlled by confining attention to costs relating to individual jobs.

• Job costing is essential for cost-plus contract where contract price is determined directly on the basis of cost.

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LIMITATIONS OF JOB COSTING

• It requires detailed record-keeping for different jobs.

• It is expensive to operate as it requires considerable detailed clerical work.

• With the increase in the clerical work the chances of errors are increased.

• A job may be charged for inefficiencies, although it has not caused any.

• The costs as ascertained are historical as they compiled after incidence and therefore does not provide control of cost unless it is used with standard costing system.

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ILLUSTRATION:1• The following information for the year ended 31/12/2008

is obtained from the books & record of a factory:

• Factory Overhead are 80% of wages, office overheads are 25% of factory cost & selling distribution overheads are 10 % of cost of production.

• The complete jobs realized Rs 4,10,000.

Completed Jobs (Rs) W.I.P. (Rs)Raw Material supplied from stores 88,000 32,000Wages 1,00,000 40,000Chargeable Expenses 10,000 4,000Materials returned to Stores 1,000 -

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ILLUSTRATION:1•Write up:1. WIP Ledger Control Account2. Completed Job Ledger Control Account3. Cost of Sales Account

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ILLUSTRATION:1-SOLUTIONConsolidated Work-In-Progress A/c

Dr Rs Crs Rs

To Raw Material consumed 32,000

To Wages 40,000

To Chargeable Expenses 4,000

To Factory Overheads (80% Of wages) 32,000

FACTORY COST 1,08,000

To Admin Overhead (25% of Factory Cost) 27,000

1,35,000 1,35,000

Note: Selling & Distribution Overhead is not charged in WIP A/c

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ILLUSTRATION:1-SOLUTIONConsolidated Completed Job A/c

Dr Rs Cr Rs

To Raw Material consumed 88,000 87,000 By Customer’s A/c (Amt. of Jobs Completed)

4,10,000

Less: Return to Stores (-) 1000

To Wages 1,00,000





Cost of Production 3,46,250

To Selling & Distribution Overhead 34,625

To Transfer to P & L A/c 29,125

4,10,000 4,10,000

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ILLUSTRATION:1-SOLUTIONCost of Sales A/c

Dr Rs Cr Rs

To Material consumed 87,000 By Bal. c/d 3,80,875

To Wages 1,00,000





3,46,250

To Selling & Distribution Overhead 34,625

COST OF SALES 3,80,875 3,80,875

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BATCH COSTING

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BATCH COSTING• In Batch Costing, a lot of similar units which

comprise the batch may be used as a cost unit for ascertainment of cost.

• Separate Cost Sheet is maintained for each batch by assigning a batch number.

• Cost per unit of product is determined by dividing the total cost of a batch by the number of units of that batch.

• Batch costing is used in number drug industries, ready made garment industries, electronic components manufacture, TV sets, radio etc.

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DETERMINATION OF ECONOMIC BATCH QUANTITY (EBQ)

•Determination of economic batch lot is the important work in batch costing.

•The two types of costs involved in batch costing are

(1) Set up cost (2) Carrying cost.

•Economic sBatch Quantity will balance both opposing costs.

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•EBQ is calculated by using the following formula:

where:Q = Batch sizeD = Demand per annumCh = Cost of holding one unit for one yearCo = Cost of setting up a batch ready to be producedR = Annual rate of production

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•If the production of the batch is done over a short period, D/R loses its significance.

•For short period, EBQ is given by:

where:D = Demand per annumCo = Cost of placing one orderCh = Cost of holding one unit for one yearQ = Reorder quantity (EOQ)

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NEED TO DETERMINE EBQ•EBQ can be determined to calculate the

optimum size of the batch.•If the batch size is high, set up cost per

unit may tend to decline and the carrying cost will increase.

•Size of the batch also influences the clerical and other machine set–up costs.

•Therefore, it is necessary to detrmine EBQ.

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BATCH COSTING•ADVANTAGES:

▫Reduces the initial capital outlay. ▫ Batch production reduces per unit cost.▫Reduction in time to produce single unit. ▫ Labor cost is reduced. ▫Useful for smaller businesses.

• DISADVANTAGES:▫Machine breakdown may stop whole

production.

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ILLUSTRATION:1 Following information relates to the manufacturing of a

component X - III in a cost centre :

Cost of materials 6 paise per componentOperator's wages 72 paise an hourMachine hour Rs. 1.50Setting up time of the machine 2 hours and 20 minutesManufacturing time 10 minutes per component Prepare cost sheets showing both production and setting up

costs-total and per unit when a batch consists of 1,000 components.

Cost Sheet for a Batch of 1000 Components

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ILLUSTRATION:1-SOLUTIONParticulars Amount (Rs) Amount (Rs)

Setting up costs:

Operator’s wages for 2 hrs 20 min @ 75 paise an hour

Machine overheads for 2 hrs and 20 min @ Rs. 1.50 an hour

1.74

3.50

Total Setting up costs 0.005 5.25Add: Production CostsMaterial costs for 1000 units @ 6 paise per unit

Operator’s wages for 10,000 mins (100x10) @ 72 paise an hour

Machine Overheads for 10,000 mins @ Rs.1.50 an hour

0.06 60

0.120 120

0.250 250

Total Production Costs 0.430 430

Total Costs 0.435 435.25

Cost Sheet for a batch of 1000 components

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ILLUSTRATION: 2

From the following information, you are required to calculate Economic Batch Quantity:

Annual demand for the product= 40,000

unitsSetup cost per batch= Rs. 750Carrying cost per unit annum= Rs. 15

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ILLUSTRATION:2-SOLUTIONCalculation Economic Batch Quantity :Economic Batch Quantity = √(2DS)/C

Where,D = Annual Demand in UnitsS = Set up Cost per batchC = Carrying Cost per unit per annum

Economic Batch Quantity = √(2 x 40,000 x 750)/15 = 2,000 units

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ILLUSTRATION:3 A Ltd. is committed to supply 24,000 bearings per

annum to B Ltd. on a steady basis. It is estimated that it costs 10 paise as inventory holding cost per bearing per month and that the set up cost per run of bearing manufacture is Rs.324.

(1) What should be the optimum run size for bearing

manufacture?(2) What would be the interval between two

consecutive optimum runs?(3) Find out the minimum inventory cost per annum.

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ILLUSTRATION:3-SOLUTION(i) Economic Batch or run size : EBQ= √(2DS)/CWhere,D = Annual Demand or production in unitsS = Setup cost per batchC = Annual carrying or holding cost per unit

E B Q = -. √(2 x 24,000 x 324)/12 = 3,600 units

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ILLUSTRATION:3-SOLUTIONAlternative Solution: The Economic batch size figure can also be

obtained by taking monthly figure as under:

= √(2 x 2000 units x Rs. 324)/0.10

= 3,600 units

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ILLUSTRATION:3-SOLUTION(ii) Number of set up per annum: =(Annual production)/(Economic Batch Quantity)

=(24,000)/(3600) = (20)/(3)

Interval between two consecutive optimum runs =(12/(20/3)) = 1.8 months (iii) Minimum Inventory Cost Per Year : = [ (24,000/3600)*324]+[(3600/2)*12] =Rs. 2,160+ Rs. 2,160 =Rs. 4,320

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Difference between Job Costing and Batch Costing

JOB COSTING BATCH COSTINGCosts are collected and accumulatedaccording to Jobs, Contracts or Work Order.

Lot of similar units which comprise the batch may be used as a cost unit for ascertainment of cost.

Each job is treated as a separate entity forthe purpose of costing.

Separate cost sheet is maintained for each batch by assigning a batch number.

The materials and labour costs are compliedthrough the respective abstracts and overheads are charged on predeterminedbasis.

Separate cost sheet is maintained for each batch by assigning a batch manner.

Costs are found out at the stage ofcompletion of the job.

Cost per unit of product is determined by dividing the total cost of a batch by the number of units of that batch.

Job costing is used in Printing, Furnituremaking, Ship Building etc.

Batch costing is used in drug industries, readymade garments, T.V. sets, Radio's and Electronic Components Manufacture.

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THANK YOU

Job and batch costing

Engineering