JOB COSTING

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JOB COSTING

Job costing is that form of specific order costing which applies where the work is undertaken as an identifiable unit such as:

(i) Manufacture of products to customers’ specific requirements;(ii) Fabrication of certain materials where raw materials are supplied by the customers;(iii) Repairs are done within a factory or at customers’ premises;(iv) Manufacturing goods for stock purposes in anticipation of orders to be received in future;(v) Internal capital expenditure jobs etc.

Features of Job Costing

Under this method, costs are collected and accumulated for each job, work order or project separately. Each job can be separately identified and hence it becomes essential to analyze the costs according to each

job. The industries, where this method of costing is applied, must possess these features:

(i) The production is generally against customers’ orders but not for stock.(ii) Each job has its own characteristics and needs special treatment.(iii) There is no uniformity in the flow of production from one department to department. The nature of

the job determines the departments through which the job has to be processed. This production is intermittent and not continuous.

(iv) Each job is treated as a cost unit under this method of costing.(v) Each job is distinctively identified by a production order throughout the production stage.(vi) The cost of production of every job is ascertained after the completion of the job.

The job costing method is applicable to printers, machine tools manufacturers, foundries and general engineering workshops.

Objectives of Job Order Costing

(i) It helps to find out the cost of production of every job or order and to know the profit or loss made on its execution. This helps the management to judge the profitability of each job and decide the future course of action.

(ii) It helps the management to make more accurate estimates for costs of similar jobs to be executed in future on the basis of past records. The management can easily and accurately determine and quote prices of jobs of a similar nature which are in prospect.

(iii) It helps the management to control the operational inefficiencies by making a comparison of actual costs with estimated ones.

(iv) It helps the management to provide a valuation of work-in-progress.

Following factors must be considered before adopting a system of job order costing:

(a) Each job (or order) should be continuously identifiable from the stage of raw materials to completion stage.(b) This system should be adopted when it becomes absolutely necessary as it is very expensive and requires a

lot of clerical work in estimating costs, designing and scheduling of production.

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Pre-requisites for Job-Order Costing

In order to achieve the purposes of job order costing, a considerable amount of clerical work will be involved and to ensure effective and workable system, the following factors are necessary:

(a) A sound system of production control.(b) Comprehensive work documentation. Typically this includes: work order and /or operation tickets, bills of

materials and/or materials requisitions, jig and tool requisitions etc.(c) An appropriate time booking system using either time sheets or piece work tickets.(d) A well organized basis to the costing system with clearly defined cost centres, good labour analysis,

appropriate overhead absorption rates and a relevant issue pricing system.

Advantages of Job-Order Costing System

(i) It provides a detailed analysis of cost of materials, wages, and overheads classified by functions, departments and nature of expenses which enable management to determine the operating efficiency of the different factors of production, production centres and functional units.

(ii) It records costs more accurately and facilitates cost control by comparing actual with estimates.(iii) It enables the management to ascertain (determine) which of the jobs are more profitable, which are

less profitable and which are incurring losses.(iv) It provides a basis for estimating the cost of similar jobs taken up in future and thus helps in future

production planning.(v) Determination of predetermined overheads in job costing necessitates the application of a system of

budgetary control of overheads with all its advantages.(vi) The detailed cost records of the past years can be used for statistical purposes in the determination of

the trends of cost of the different types of jobs and their relative efficiencies.(vii) It is useful in quoting cost plus contract.

Disadvantages of Job-Order Costing System

(i) It involves a great deal of clerical work in recording daily the cost of materials issued, wages spent and overheads chargeable to each job or work order which adds to the cost of cost accounting.

(ii) The scope of committing mistakes is high as the cost of one job may be wrongly posted to another job.(iii) Cost comparison among different jobs becomes difficult especially when drastic changes take place.(iv) Job costing is historical costing which ascertains the cost of a job or a product after it has been

manufactured. It does not facilitate control of cost unless it is used with standard or estimated costing.

Procedure Of Job Order Costing System

The procedure for job order cost system is summarized as follows:

(1) Receiving an Enquiry: The customer will usually enquire about the price, after specifying the quality to be maintained, the duration within which the job is to be executed and other specifications of the job before placing an order.

(2) Estimation of the Price of the Job: The cost accountant estimates the cost of the job keeping in mind the specifications of the customer. While preparing an estimate, the cost of execution of similar jobs in the previous year and possible changes in various estimates of cost are taken into consideration. The prospective customer is informed the estimate of the job.

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(3) Receiving of Order: If the customer is satisfied with the price quoted, and other terms of execution, he will then place the order.

(4) Production Order: If the job is accepted, a Production Order is made by the Planning Department. It is in the form of instructions issued to the foreman to proceed with the execution of the job. It forms an authority for starting the work. It contains all the information regarding production. Sufficient copies of the production order are prepared so that each of the department managers and foremen who are required to take part in any part of the production gets a copy of the same.

PRODUCTION ORDERS.No…………Description……….Code No……………Customer Order No……..Material Requisition Nos…….Operation Nos……….Machine Nos…………Quantity Ordered……Date………..Date of Commencement……Date of Finish…………..

Operation Quantity

Clock Time Operation No. Dept. No No. Details Made Rejected

(5) Recording of Costs: The costs are collected and recorded for each job under separate Production Order Number. Generally, Job Cost Sheet (or Card) is maintained for each job. This is a document which is used to record direct material, direct wages and overheads applicable to respective jobs. The bases of collection of costs are:(a) Materials: Materials Requisition, Bill of Materials or Materials Issue Analysis Sheet.(b) Wages: Operation Schedule, Job Card or Wages Analysis Sheet.(c) Overheads: Standing Orders Numbers or Cost account Numbers.

All the basic documents will contain cross reference to respective Production Order Numbers for convenience in collection of costs.

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JOB COST SHEETJob/Production Order No……….Customer………………Particulars………………….Quantity………..Date Commenced…..Date Completed……..

Material Labour OverheadsDate Dept Material

Requisition Number

AmountRs

Date Dept Time Ticket No.

AmountRs

Date Dept RateRs

AmountRs

Total (Rs)

Total(Rs)

Total(Rs)

SummaryEstimated Cost

RsActual cost

RsDifference

RsMaterialsLabourOverheadsTotal

(6) Completion of Job: On completion of a job, a completion report is sent to the costing department. The expenditure under each element of cost is totaled and the total job cost is ascertained. The actual cost is compared with the estimated cost so as to reveal the efficiency or inefficiency in operation.

(7) Profit or loss on Job: The profit or loss on each job is determined by comparing the actual expenditure or cost with the price obtained.

PROBLEMS ON JOB COSTING AND THEIR SOLUTIONS

Q (1) The following direct costs were incurred on Job No.239 of XYL Co. Ltd.

Materials: Rs 6010.Wages: Dept .A: 60 hours@ Rs 30 per hour. Dept. B: 40 hours @ Rs 20 per hour. Dept. C: 20 hours @ Rs 50 per hour.

Overheads for these three departments were estimated as follows:Variable overheads: Dept .A: Rs 15,000 for 1500 labour hours. Dept. B: Rs 4,000 for 200 labour hours Dept. C: Rs 12,000 for 300 labour hours.Fixed overheads: Estimated at Rs 40,000 for 2000 normal working hours.

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You are required to calculate the cost of Job No. 239 and calculate the selling price to give profit of 25% on selling price.

Solution

Job Cost Sheet

Job No: 239

Rs Rs(1) Direct Materials(2) Wages Dept. A – 60 hours X Rs 30

Dept. B – 40 hours X Rs 20 Dept. C – 20 hours X Rs 50

(3) Variable Overheads Dept. A – 60 hours X Rs 10 Dept. B – 40 hours X Rs 20 Dept. C – 20 hours X Rs 40

(4) Fixed Overheads120 hours @Rs 20 per hour

Profit (25% of Selling Price or 331/3% of Cost)

1,800800

1000

600800800

TOTAL COST

SELLING PRICE

6,010

3,600

2,200

2,400

14,210

4,737

18,947

Working Notes:

Overhead rates per hour are calculated as follows:

Variable overhead

Dept. A: Rs 15,000/1,500 = Rs 10 per hour.

Dept. B: Rs 4,000/200 = Rs 20 per hour.

Dept. C: Rs 12,000/300 = Rs 40 per hour.

Fixed overhead: Rs 40,000/200 hours = Rs 20 per hour.

Total hours worked on the job = 60 +40+20 = 120 hours.

Q (2) The following direct costs were incurred on Job No.323 of Brahma Putra Consultants. Ltd.

Materials: Rs 500.Wages: X: 10 hours@ Rs 2.50 per hour. Y: 8 hours @ Rs 3.00 per hour. Z: 5 hours @ Rs 4.00 per hour.

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Overheads for these three departments were estimated as follows:

Variable overheads: X: Rs 7,000 for 7,000 labour hours. Y: Rs 6,000 for 3,000 labour hours Z: Rs 4,000 for 1,000 labour hours.Fixed overheads: Estimated at Rs 30,000 for 7,500 normal working hours.

You are required to calculate the cost of Job No. 323 and calculate the selling price to give profit of 33.33% on selling price.

Solution

Job Cost Sheet

Job No: 323

Rs Rs(1) Direct Materials(2) Wages X– 10 hours X Rs 2.50

Y – 8 hours X Rs 3.00 Z – 5 hours X Rs 4.00

(3) Variable Overheads Dept. A – 10 hours X Rs 1.00 Dept. B – 8 hours X Rs 2.00 Dept. C – 5 hours X Rs 4.00

(4) Fixed Overheads23 hours @Rs 4 per hour

Profit (33.33% of Selling Price or 50% of Cost)

252420

101620

TOTAL COST

SELLING PRICE

500

69

46

92

707

354

1,061

Working Notes:

Overhead rates per hour are calculated as follows:

Variable overhead

Dept. A: Rs 7,000/7,000 = Rs 1.00 per hour.

Dept. B: Rs 6,000/3,000 = Rs 2.00 per hour.

Dept. C: Rs 4,000/1,000 = Rs 4.00 per hour.

Fixed overhead: Rs 30,000/7,500 hours = Rs 4.00 per hour.

Total hours worked on the job = 10 + 8 + 5 = 23 hours.

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Q (3) Job No.718 was commenced on 10 th October 2002 and completed on 1 st November, 2002. Materials used were Rs 600 and labour charged directly to the job was Rs 400. Other information was as follows:

Machine No.215 was used for 40 hours; the machine hour rate is Rs 3.50

Machine No.169 was used for 30 hours; the machine hour rate is Rs 4.00.

Six welders worked on the job for 5 days of 8 hours each; the direct labour rate for welders is Rs 20 paise.

Other expenditures of the concern not apportioned for calculating the machine hour or the direct hour rates amounted to Rs 20,000; total direct wages for the period being Rs 20,000.

Determine the works cost of Job No.718.

Solution: Job Cost Sheet

Job No: 718

Date Started: 10-10-2002 Date Finished: 1-11-2002

Particulars Rs Rs(1) Materials 600(2) Labour 400

PRIME COST 1,000(3) Factory Overhead(a) Machine No.215 (40 hours @ Rs 3.50 per hour) 140(b) Machine No.169 (30 hours @ Rs 4.00 per hour) 120(c) Welders (6x5X8X0.20) 48(d) Other Expenses (100% of direct wages) 400 708

WORKS COST 1,708

Working Notes:

Other Expenses are charged at 100% of direct wages as calculated below:

(Other Expenses/Direct Wages) X 100 = (20,000/20,000) X 100 = 100%.

Q (4) A work order for 100 units of a commodity has to pass through four different machines of which the machine hour rates are Machine I – Rs 1.25; Machine II- Rs 2.50, Machine III – Rs 3.00 and Machine IV – Rs 2.25.

The following expenses have been incurred on the work order – Materials: Rs 8,000 and Wages: Rs 500.

Machine I has been engaged for 200 hours, Machine II for 160 hours, Machine III for 240 hours and Machine IV for 132 hours.

After the work order has been completed, materials worth Rs 400 are found to be surplus and were returned to store.

Administration overheads used to be 40% of works costs, but on account of all-round rise in the cost of administration, distribution and selling costs, there has been a 50% rise in the office overhead expenditure. Moreover, it is known that 10% of the production will have to be scrapped as not being up to the specification and the sale proceeds of the scrapped output will be only 5% of the cost of sales.

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If the manufacturer wants to make a profit of 20% on the total cost of the work order, find the selling price of a unit of commodity rate for sale.

STATEMENT SHOWING THE SELLING PRICE OF A UNIT

Particulars Rs Rs(1) Materials used = (Rs 8000- Rs 400) 7,600

(2) Direct Wages 500PRIME COST 8,100

(3) Works overhead at Machine Hour Rate(a) Machine I for 200 hours @ Rs 1.25 per hour.(b) Machine II for 160 hours @ Rs 2.50 per hour(c) Machine III for 240 hours @ Rs 3.00 per hour(d) Machine IV for 132 hours @ Rs 2.25 per hour

250400720297

1,667WORKS COST 9,767

Administration Overheads(a) 40% of Works Cost = 40% of 9767(b) Increase this year = 50% of 3907

39071954

586115628

Less: Sale Proceeds of Scrap:Scrap: 10% of production: Rs 1563

Sale Proceeds: 5% of Scrap = 5% of 1563 (-) 78TOTAL COST OF THE WORK ORDER 15,550

Profit @ 20% of the total cost 3,110SELLING PRICE OF 100 Units 18,660

SELLING PRICE OF 1 Unit 186.60

Q (5) As a cost accountant, you find that the selling price of a product has been calculated as follows;

Materials: Rs 24.00

Direct Wages: 20 hours @ Rs 1.00 per hour Rs 20.00

(Dept 1:10 hours, Dept 2: 6 hours Dept 3: 4 hours) ________

PRIME COST: Rs 44.00

Overheads @ 50% on the prime cost: Rs 22.00

_________

TOTAL COST: Rs 66.00

An analysis of the previous year’s Profit and Loss account shows the following:

Materials: Rs 35,000; Direct Wages: Dept I: Rs 5,000; Dept II: Rs 6,000; Dept III: Rs 4,000.

Factory overheads: Dept I: Rs 5,000; Dept II: Rs 3,000; Dept III: Rs 3,000.

Selling & Distribution overheads: Rs 12,200.

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You are required to (a) draw up a job cost sheet; (b) calculate and enter the revised cost using the previous year’s figure as a basis; and (c) add to the total job cost 10% for profit and give the final selling price.

Solution

Calculation of Factory Overhead Rates

(a) Direct Wages (Rs)(b) Direct Labour Rate (Rs/hour)(c) Direct Hours= (a)/(b)(d) Factory Overheads(e) Factory Overhead Rate per

Direct Labour Hour (Rs) = (d/c)

Departments1 2 3

5,0001.005,0005,000

1.00

6,0001.006,0003,000

0.50

4,0001.004,0003,000

0.75

Selling and distribution overheads = Rs 12,200.

Works Cost = Materials + Wages + Factory overheads = Rs 35,000 + Rs (5,000+6,000+ 4,000) +

Rs (5,000+3,000+3,000) = Rs 61,000.

(Selling and distribution overheads/Works Cost) = (Rs 12,200/Rs 61,000)X 100 = 20%.

Therefore, Selling and distribution overheads = 20% of Works Cost.

JOB COST SHEET

Particulars Rs Rs(a) Materials 24.00

(b) Direct WagesDept I: 10 hours X 1.00Dept II: 6 hours X 1.00Dept III: 4 hours X 1.00

10.006.004.00

20.00PRIME COST 44.00

(c) Factory overheadsDept I: 10 hours X 1.00Dept II: 6 hours X 0.50Dept III: 4 hours X 0.75

10.003.003.00

16.00WORKS COST 60.00

Selling and Distribution overheads = 20% of Works Cost 12.00COST OF SALES 72.00

Profit @ 10% of the cost of Sales 7.20SELLING PRICE 79.20

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Q (6) The selling price of Job No. 0123 has been calculated as follows;

Materials: Rs 15.50

Direct Wages: 22hours @ Rs 0.25 per hour Rs 5.50

(Dept A: 10 hours, Dept B: 4 hours Dept C: 8 hours) ________

PRIME COST: Rs 21.00

Overheads @ 33.33% on the prime cost: Rs 7. 00

_________

TOTAL COST: Rs 28.00

An analysis of the previous year’s Profit and Loss account shows the following:

Rs Rs Rs(1) Materials used 1,55,000 Sales 2,70,000(2) Direct Wages(a) Dept A(b) Dept B(c) Dept C

10,00012,0008,000

30,000(3) Factory Overheads(a) Dept A(b) Dept B(c) Dept C

5,0008,0002,000

15,000(4) Selling costs 60,000

(5) Net Profit 10,0002,70,000

You are required to (a) draw up a job cost sheet; (b) calculate and enter the revised cost using the previous year’s figure as a basis; and (c) add to the total job cost 10% for profit and give the final selling price.

Solution

Calculation of Factory Overhead Rates

(a) Direct Wages (Rs)(b) Direct Labour Rate (Rs/hour)(c) Direct Hours= (a)/(b)(d) Factory Overheads(e) Factory Overhead Rate per

Direct Labour Hour (Rs) = (d/c)

Departments1 2 3

10,0000.25

40,0005,000

0.125

12,0000.25

48,0008,000

0.1667

8,0000.25

32,0002,000

0.0625

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Selling costs = Rs 60,000.

Works Cost = Materials + Wages + Factory overheads = Rs 1, 55,000 + Rs (10,000+12,000+ 8,000) +

Rs (5,000+8,000+2,000) = Rs 2, 00,000.

(Selling and distribution overheads/Works Cost) = (Rs 60,000/Rs 2, 00,000) X 100 = 30%.

Therefore, Selling and distribution overheads = 20% of Works Cost.

JOB COST SHEET

Particulars Rs Rs(a) Materials 15.50(b) Direct Wages

Dept I: 10 hours X 0.25Dept II: 4 hours X 0.25Dept III: 8 hours X 0.25

2.501.002.00

5.50PRIME COST 21.00

(c) Factory overheadsDept I: 10 hours X 0.125Dept II: 4 hours X 0.1667Dept III: 8hours X 0.0625

1.250.670.50

2.42WORKS COST 23.42

Selling and Distribution overheads = 30% of Works Cost 7.03COST OF SALES 30.45

Profit @ 10% of the cost of Sales 3.05SELLING PRICE 33.50

Work-In-Progress

Sometimes, Consolidated Completed Jobs Account is to be prepared along with Consolidated Work-In-Progress Account. The preparation of these accounts is discussed as under:

(i) The consolidated completed jobs account is debited with the total amount spent on materials, labour and overheads in respect of all completed jobs and credited by the amount received from customers on account of completed jobs. The difference is the profit or loss on completed jobs.

(ii) The consolidated work-in-progress account is periodically debited with all the costs, direct and indirect, incurred in the execution of the incomplete jobs and credited with the total cost of these incomplete jobs. The balance in this account at any time represents the cost of jobs not yet completed.

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Q (7) Following information for the financial year ended 31 st March, 2009 is obtained from the books and records of a factory:

Completed Jobs(Rs)

Work-In-Progress(Rs)

Raw Materials supplied from Stores 1,00,000 34,000Wages 1,00,000 40,000Materials transferred to Work-In-Progress 2,000 2,000Materials returned to Stores 1,000 ------

Factory Overheads are 80% of Wages and Administration Overheads are 25% of Factory Cost.

The value of the executed (completed) jobs during the financial year ended 31 st March, 2009 was Rs 4, 10,000.

Prepare :

(i) Consolidated Completed Jobs Account showing the profit made or loss incurred on the jobs and (ii) Consolidated Work-In-Progress Account.

Solution

CONSOLIDATED COMPLETED JOBS ACCOUNT

Dr Cr

Rs Rs RsTo Raw Materials Consumed By Customer’s A/c

(the amount of jobs completed)

4,10,000

Supplies from Stores 1,00,000Less: Transferred to WIP (-) 2,000

98,000Less: Returned to Stores (-) 1,000

97,000To Wages 1,00,000To Factory Overheads (80% of Wages) 80,000

Factory Cost 2,77,000To Administration Overheads (25% of Factory Cost) = 25% of Rs 2,77,000 69,250Net Profit Transferred to Profit & Loss A/c 63,750

4,10,000 4,10,000

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CONSOLIDATED WORK-IN-PROGRESS ACCOUNT

Dr Cr

Rs Rs RsTo Raw Materials Consumed By Balance c/d 1,35,000

Supplies from Stores 34,000Add: Transferred from Completed Jobs 2,000

36,000To Wages 40,000To Factory Overheads (80% of Wages) 32,000

Factory Cost 1,08,000To Administration Overheads (25% of Factory Cost) = 25% of Rs 1,08,000 27,000

1,35,000 1,35,000

Q (7) Nahar Electricals Ltd., engaged in job work, has completed all jobs in hand on 30 th March, 2009, except Job No. 1448. The cost sheet on 30 th March, 2009, showed direct materials and direct labour costs of Rs 40,000 and Rs 30,000 respectively as having been incurred on Job No.1448.

The costs incurred by the business on 31 st March, 2009, the last day of the accounting were as follows:

Direct Materials (Job 1448) Rs 2,000

Direct Labour (Job 1448) Rs 8,000

Indirect Labour Rs 2,000

Miscellaneous factory overhead Rs 3,000

It is the practice of the business to make the jobs absorb factory overheads on the basis of 120% of direct labour cost.

Calculate the cost of Work-In-Progress of Job 1448 as on 31 st March, 2009.

Solution

Cost up to 30 th March, 2009(Rs)

Cost incurred on 31 st March,2009

(Rs)

Total(Rs)

Direct Material 40,000 2,000 42,000Direct Labour 30,000 8,000 38,000Factory Overheads (120% of Direct Labour Cost)

36,000 9,600 45,600

Total Cost 1,06,000 19,600 1,25,600

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