JOB AND BATCH COSTING NOTES.doc

8/9/2019 JOB AND BATCH COSTING NOTES.doc

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AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE-12NOTES

JOB AND BATCH COSTING

Costing systems may be applied to every type of business including public orprivate, manufacturer of goods or providers of services etc. Each type of business mustchoose a costing system that suits its particular operation. No one system will serveevery type of business.

The operation of a business may be classified as either Continuous or Specific order.Continuous operations are typically those in which a single type of good is producedand the cost units are identical. Production may involve a sequence of continuous orrepetitive operations. Eamples are manufacture of computers, production of mineralwater, oil refining, production of medicines and passenger and freight transport.

Specific order operations are those which are performed in response to special ordersreceived from customers and may be classified according to whether the operationsconsist of individual !obs, or the production of batches of identical units for a customer.

Job Costing:

"ob costing is that form of specific order costing which applies where the wor# isunderta#en as an identifiable unit such as re painting a house, repairing a television set,and servicing a motor car. $nder this method costs are collected and accumulated foreach !ob wor# order or pro!ect separately. Each !ob can be separately identified andhence it becomes essential to analyse the costs according to each !ob.

"ob costing is suitable where the !obs being wor#ed on are unique i.e. not standard.%ften they are being made to a specific order such as a custom&built car or a one offspecial eport order. Since each !ob is different from the net, it requires differentamounts of labour, material, and overhead spent on it and a separate record of its costneeds to be #ept.

Advantages of Job Costing System:

'ollowing are the advantages of "ob cost accounting.

(. )t provides a detailed analysis of cost of materials, wages, and overheads

classified by functions, departments and nature of epenses which enable

management to determine the operating efficiency of the different factors ofproduction, production centres and the functional units.

*. )t records costs more accurately and facilitates cost control by comparing actuals

with estimates.

+. )t enables the management to ascertain which of the !obs are more profitable

than the others, which are less profitable and which are incurring losses.

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. )t provides a basis for estimating the cost of similar !obs ta#en up in future and

thus helps in future production planning.

-. etermination of predetermined overhead rates in !ob costing necessitates the

application of a system of budgetary control of overheads with all its advantages.

Disadvantages of Job Costing:

'ollowing are the disadvantages of !ob cost accounting.

(. )t involves a great deal of clerical wor# in recording daily the cost of materials

issued, wages spent and overhead chargeable to each !ob or wor# order which

adds to the cost of cost accounting. Thus it is epensive.

*. The scope of committing mista#es are enough as the cost of one !ob may be

wrongly posted to the cost of other !ob.

+. Cost comparison among different !obs becomes difficult especially when drastic

changes ta#e place.. etermination of overhead rates may involve budgeting of overhead epenses.

-. "ob costing is a historical costing which ascertains the cost of a !ob or product

after it has been manufactured. )t does not facilitate control of cost.

Quoting for a job:

/hen a firm is as#ed to quote for a !ob, it must estimate the quantities of each of the

materials to be used, and the number of hours required to be spent on the "ob by

various grades of labour. The materials and labour must be priced and an appropriate

amount added for overheads. )f the firm has no shortage of wor#, it will decide what

profit margin it epects to ma#e on the !ob, and add this to arrive at the amount of the

quotation.

Example 1:

"obbings 0td is as#ed to quote a price to install central heating in a house. Thequotation is based on estimated costs as follows.

Estimated costs

12aterials + 3330abour ( 433%verhead 5*336 of labour7 + 33Total cost 8 (33

9dd profit 5*-6 of cost7 * 3*-9mount of quotation 10 125

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)f the quotation is accepted, the costs will be recorded on a !ob card as they are incurredby "obbings 0td."ob No.(34 installation of central heating at :;*-9mount of quotation 10 125 10 125

/hen the !ob has been completed, the actual costs have been entered on the !ob card,which shows that actual cost eceeded the estimated cost by 133 and the profit madeis only 1(>*- instead of 1*3*-. The !ob card will provide useful information the nettime "obbings 0td quotes for a similar !ob.

Bat! osting:

?atch costing is very similar to !ob costing and is applied when an order from acustomer involves the production of a number of identical items. 9ll the costs incurredare charged to the batch and the cost per unit is found by dividing the cost of the batchby the number of units in the batch. 'or eample, a large retailer might order -333

!ac#ets from a clothing manufacturer, to be made according to its own specifications.Costing a batch is similar to costing a !ob, since the batch is seen as the !ob.

?atch Costing@ )t is a form of !ob costing. )n this, the cost of a group of products isascertained. The unit of cost is a batch or a group of identical products instead of asingle !ob, order or contract. Separate cost sheets are maintained for each batch ofproducts by assigning a batch number. The cost per unit is ascertained by dividing thetotal cost of a batch by the number of items produced in that batch.?atch costing is employed by companies manufacturing in batches. )t is used byreadymade garment factories for ascertaining the cost of each batch of cloths made bythem. Pharmaceutical or drug industries, electronic component manufacturing units,radio manufacturing units too use this method of costing for ascertaining the cost of

their product.

The industries, where this method of costing is applied must posses thesefeatures@

a. The production is generally against customerAs order but not for stoc#.b. Each !ob has its own characteristics and needs special treatment.c. Each !ob is treated as a cost unit under this method of costing.d. The cost of production of every !ob is ascertained after the completion of the !ob.

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Thus cost is ascertained for each !ob separately. This method is applicable toprinters, machine tools manufactures, foundries and general engineering wor#shops.

Example 2:

Evocation 0td sells reproductions of antique furniture. )t places an order with 'a#efabs0td for -33 dining chairs at an agree price of 1+3 333 for the batch.

'a#efabs 0td has four production departments for which the following informationis given.2achining %9B 1+- per machine hour'inishing %9B 1*3 per direct labour hour 'rench polishing %9B 1(3 per direct labour hour

9ssembly %9B 1(- per direct labour hour

The cost incurred in the production of -33 dining chairs were@

irect materials 1-333irect labour@ 2achining (*- hours at 1(3 per hour

'inishing (83 hours at 1= per hour 'rench polishing **3 hours at 1(* per hour

9ssembly (33 hours at 18 per hour(>3 machine hours were boo#ed against the batch of chairs in the machiningdepartment.

'a#efabs 0td recovers its administration epenses at (-6 on the total cost ofproduction.The batch cost, cost per chair and profit per chair are calculated as follows.

Answer:Costs for bat! of 500 !airs

irect materials - 333irect labour@ 2achining 5(*- : 1(37 'inishing 5(83 : 1=7 'rench polishing 5**3 : 1(*7 9ssembly 5(33 : 187

(*-3(>*3*>3833 > +(3

Prime cost (( +(3Production overhead recovered 2achining 5(>3 : 1+-7 'inishing 5(83 : 1*37 'rench polishing 5**3 : 1(37 9ssembly 5(33 : 1(-

->33+>33**33(-33 (* =33

Cost of production * *(39dd administration costs revovered 51* *(3 :(-67

+ >+*

Total cost of batch of -33 chairs *4 8*Profit * (-8

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uotation Price +3 333

1*4 8*Cost per chair D &&&&&&&&&&&&& D 1--.>8

-33 1+3 333Profit per chair D &&&&&&&&&&&& 5&7 1--.>8 D 1.+(>

-33

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JOB AND BATCH COSTING NOTES.doc