Job Batch Costing

Areas to be covered:
 JOB COSTING

 JOB COSTING PROCEDURES

 COLLECTION OF JOB COST

 USE OF JOB COSTING INFORMATION

 PRICING THE JOB WITH COST PLUS PRICING

 BATCH COSTING

 USE OF BATCH COSTING

 TREATMENT OF RECTIFICATION WORK

Job Costing:
Continuous operation costing method is used when there is a continuous flow of identical

units. Process costing is a typical form of continuous production process.

Specific order costing method is used when the work consists of separately identifiable jobs,

batches or contracts. Work only commences after an order is received.

Job: A job is a cost unit which consists of a single order or contract.

Job Costing: Job costing consists of a single order undertaken to customers’ special

requirements and is usually for a short duration. It is a system where each order is unique. This

creates the need for the cost of each unit to be calculated separately.
 JOB COSTING PROCEDURES:
The normal procedure in jobbing organizations involves:
• An initial enquiry is received from a customer.
• Details are confirmed and agreed with the customer as to the precise dimensions, quality
of materials, quality of finished goods, required delivery date, etc.
• A cost estimate is prepared based on the customer’s requirement.
• A profit mark-up or margin will be added to the estimated total cost in order to calculate
selling price for the job.
• If the estimate is accepted the job can be scheduled. All the material, labour or
equipment required will be arranged.
• After the completion of the job, actual cost of the job will compare with the estimated
selling price for the calculation of actual profit.
 Job Sheet / Job Card
Cost of each job is recorded on a job sheet or job card. It is separately prepared for each

job because each job is different from another job.

A typical job cost card is as follows:

Rs.
Direct material X
Direct labour X
Direct expense X
PRIME COST X
Production overheads (absorbed) X
PRODUCTION COST X
Non- manufacturing overheads X
TOTAL COST X
mark up/margin X
SELLING PRICE X
 Collection of Job Cost Information
Direct material Cost:

Estimated material cost will be calculated by taking actual material cost from the material

requisitions and by applying values to issues or from the invoices of material specifically

purchased.

Direct Labour Cost:

• Estimated labour time requirement will be determined. Labour rate will need to be

considered for any increase or overtime.

• Actual labour hours are recorded over time sheets or on job cards.
 Collection of Job Cost Information
Direct Expenses:

• Estimated expenses shall be determined form the suppliers.

• Details of actual expenses will be determined from the invoices.

Production Overheads:

• Estimated production overheads will be calculated from overhead absorption rate in

operation based on an estimated activity level (like budgeted labour hours).

• Actual production overheads are charged to the job using absorption rate and actual results

(like actual labour hours). This means absorbed overheads are charged to jobs.
Collection of Job Cost Information
Non Manufacturing Overheads:

Non Manufacturing overheads are charged to a job as a percentage of some cost such as

Prime Cost, Production Cost etc.

Profit:

Usual method of setting a selling price is cost plus pricing method. This method adds a profit to

total cost to arrive at a selling price. The final price to be charged will be affected by what

competitors charge and by what a customer is willing to pay.

 USES OF JOB COSTING INFORMATION:
• In making a decision as to the lowest price at which a job should be undertaken.

• In the estimation of a price for quotation to the customer.

• In the valuation of the partly completed job for balance sheet purpose.

• In the comparison of actual with budgeted data to facilitate operational control and for

future cost or price estimation.

PRICING THE JOB WITH COST PLUS PRICING

• Cost plus pricing is a method of determining the sales price by calculating the full cost of a

product and adding a percentage mark up or margin of profit.

• The aim of job costing is to collect all the cost information related to the job.
 Example 1:
Job costs for Job ABC are:

Direct material $250

Direct Labour $200

Production overheads 75% of labour cost

Non-production overheads 20% of production cost

Profit 20% of selling price

What is the selling price of Job ABC?

Solution:

Direct Material
Direct Labour
Direct Expense
PRIME COST
Production overheads (absorbed)
PRODUCTION COST
Non-production overheads
TOTAL COST
Profit margin
SELLING PRICE
 Batch Costing:
It is very much similar to that of job costing. It is a cost unit, where a quantity of identical items is

manufactured. It consists of a separate, readily identifiable group of product units which

maintains their separate identity throughout the production process.

Batch costing is essentially a variation of job costing. Batches may be made specifically to

customer requirements. The procedures for costing batches are very similar to job costing.

The batch is treated as a job during production and all the cost are collected related to the

job. Once the batch is completed, the cost per unit can be calculated.

$ ℎ
ℎ
 Uses of Batch Costing:
Batch costing is appropriate in following circumstances:

• Where similar number of items are made for each order.

• Where a business produces a single item to meet customer’s specifications but where the

product being made contains components that are also used in other products. Such

components will be made in batches.

Example 2: Andy Ltd manufactures model ships to order and has the following budgeted

overheads for the year, based on normal activity level.

Departments Budgeted overheads ($) Budgeted activity

Welding $4,500 1,500 labour hours

Assembly $6,500 1,000 labour hours

Selling and administrative overheads are 15% of production cost. An order for 120 model ships,
made as Batch A, incurred the following costs.

Materials $8,500

Labour : 140 hours welding shop $8/hour

200 hours assembly shop $12/hour

$3,000 was paid for the hire of special X-ray equipment for testing the welds. Calculate the cost

per unit for Batch A.

Solution:
Direct material
Direct labour
Welding:
Assembly:
Direct expense
PRIME COST
Production overheads (absorbed)
Welding:
Assembly:
PRODUCTION COST
Non-production overheads
TOTAL COST

Cost per unit:

 Work In Progress:
At the period end, the value of work in progress is simply the sum of cost incurred on

incomplete jobs (charged as closing work in progress).

Example 3: A firm uses job costing. Details of the three jobs worked on during a period are:
$ Job A $ Job B $ Job C
Opening work-in-progress 22,760 3,190 –
Direct materials 4,620 11,660 14,335
Direct labour 12,125 10,520 7,695

Overheads are absorbed at 40% of prime cost in each period. Jobs B and C remained
incomplete at the end of the period. What is the value of the closing work-in-progress?

Solution:

$ Job B $ Job C
Opening work-in-progress
Direct material
Direct labour
Production overheads absorbed
Closing work-in-progress
 Treatment of Rectification Work

Rectification cost is the cost incurred in rectifying sub-standard outputs. Rectification is

necessary where defects are discovered during the job or after completion of the job which

requires.

Rectification cost can be treated in two ways:

• If the rectification is occurred and identified with a specific job, then rectification should be

charged as a direct cost to the job concerned.

• If it is regarded as a normal part of the work, then rectification cost should be treated as

production overheads and absorbed into the cost of all jobs using overhead absorption rate.
Practice Questions