,

8

Job Costing and Batch Costing

In an era of technological revolution, industries have grown in volume and varied in activities of production. Each industry has its own special characteristic features. One such variety is specific-order industries. Specific-order industries are those where work consists of separate jobs or batches or contracts, each of which is authorized by a special order or contract. Elements of cost are accumulated in such type of industries. The manner in which costs are accumulated for ascertain product costs in specific industries will be explained in detail in this chapter.

8.1 MEANING AND DEFINITION OF JOB COSTING

Job costing is one of the methods of costing. It is also known as job order costing. In this system, work is undertaken to customer’s specific requirements on the basis of orders. Such orders are of comparatively short duration. The work is carried out within the factory. The work passes through processes or operation activities in such a way as to identify the unit continuously till it reaches finished product. “The term may also be applied to work such as property repairs and the method may be used in the costing of internal capital expenditure jobs.”

This method of costing is used in industries which are engaged in printing, steel structures, switch gear, heat exchangers, transformers, motors, pumps, pressure vessels, general engineering works, oil well and shipping.

8.2 FEATURES OF JOB COSTING

1. A job consists of a single order or contract.
2. It is a cost unit by itself.
3. Each job is unique in nature.
4. Products are not manufactured for general consumption.
5. Each order is given a job number.
6. Costs are accumulated with reference to this number.
7. Costs are ascertained for each order.
8. Generally the duration of job order is comparatively short (products).
9. An important feature of job costing is that it is possible to identify a job at each stage of its manufacturing process.
10. In job costing, it is not necessary that each job will flow through all the production cost centres in a predetermined manner.
11. The purpose of job costing is to bring together all the costs incurred for completing a job.

8.3 OBJECTIVES OF JOB COSTING

The main objectives of job costing are:

1. To ascertain the cost of production of every order
2. To ascertain the profitability of each job in order to undertake future orders of similar nature
3. To control operational efficiency by comparing actual costs with estimated costs
4. To plan future course of activities

8.4 PROCEDURE OF JOB COSTING

The following procedure is followed for job costing.

8.4.1 Step 1: Pre-production Procedure

It starts from preparing quotations and culminates in the acceptance of quotations by customer. Tenders are floated by customers. After analysing the specific features, a detailed cost estimate is to be prepared by the design and estimation department with the assistance of costing department to quote the price. An estimation sheet is prepared after scrutinizing the reference job. Once the quotation, thus prepared based on various factors, is accepted by the customer, the manufacturer intimates in advance to the concerned departments.

8.4.2 Step 2: Allotment of Job Number

Every order received is given a separate distinguishing number which is referred to as job number. Every job or order is to be identified with this number throughout its production process. The main purpose of assigning job number for each job or order is for proper accounting and administrative convenience.

8.4.3 Step 3: Issuance of Production Order

A production order (or job order or manufacturing order) is an authorization to the factory to manufacture the job. This order is issued by the production planning department/commercial department on the receipt of job order. It is issued to the foreman of the relevant department. Instructions to costing department are also issued simultaneously. Specimen of production order is shown as follows:

8.4.4 Step 4: Maintenance of Job Cost Card

A job cost card or job cost sheet is maintained for each job. The costs are collected and recorded for each job under separate production order number. The bases of collection of costs are:

1. Materials: Materials requisition, bill of materials, stores requisition slip, materials issue analysis sheet.
2. Wages: Time and job cards, wages abstract, operation schedule, amount paid for labour for completion of one job etc. (cost of indirect labour is charged to factory overhead).
3. Direct expenses: Vouchers
4. Overheads: Generally, overhead rate is determined based on past records. Each job is charged at a predetermined rate—Standing order numbers or Cost account numbers.

All the basic documents will carry to respective production order numbers.

The other details or contents of a job cost card can be read from the proforma as shown here:

In case a job passes through more than one department, the proforma of job cost card differs and is shown here:

Profit/loss can be ascertained by preparing job cost card.

8.4.5 Step 5: Collection of Costs

1. Accounting for materials:
   1. Purchases of materials for a particular job are charged to that particular job.
   2. Materials issued from stores are priced on suitable basis (FIFO, LIFO, weighted average) and charged to the job.
   3. Transfer of materials from one job to another is credited to the transferor job and charged to the transferee job.
   4. Materials returned to the stores are credited to that job.
   5. Cost of normal waste of materials is charged to the job.

      Wastage relating to the process is treated as overhead. Abnormal wastage is charged to costing profit and loss account.

2. Accounting for direct labour:
   1. Cost of direct labour is charged to the job.
   2. In case overtime occurs at the request of customer, it is directly charged to the job, whereas other overtime cost is treated as overhead.
   3. Overtime premium, if abnormal, will be charged to costing profit and loss account.
3. Accounting of direct expenses:
   1. All direct expenses relating to a job are charged to the respective jobs.
   2. Hiring of special machinery, subcontracting are also direct expenses.
4. Accounting for overhead:
   1. Predetermined rates are to be used for charging overheads to jobs.
   2. Basis of apportioning overheads will have to be determined in advance.

8.4.6 Step 6: Job Cost Analysis

Actual costs are compared with estimates made while preparing quotation price. Variances are ascertained and analysed in detail for each cost centre and overheads. Following are the merits of job cost analysis:

1. It helps the valuation of work-in-progress at year end.
2. It facilitates ascertaining profit in each job.
3. Estimation for future jobs can be made with accuracy.
4. It facilitates control and taking corrective measures.

8.4.7 Step 7: Job Cost Book-Keeping

Proper book-keeping is essential for job cost book-keeping.

8.4.8 Accounting for Work-in-Process

1. The account is to be maintained in the cost ledger, to represent the jobs under production. (Work has been initiated but not yet completed.)
2. It may be maintained in any of the methods mentioned below:
   1. A composite work-in-process account for the entire factory.
   2. A composite work-in-process account for every department.
3. This account is periodically debited with all costs incurred for the job.
4. At specified intervals, a summary of completed job is prepared and the work-in-process account is credited with the cost of completed jobs.
5. The balance in work-in-process account represents the cost of jobs not yet completed.

Illustration 8.1

Following data are available from the cost records of Aditya & Co. Ltd with respect to Job No. 108.

 

Materials		Rs. 10,000
Wages:	Department X	40 hours @ Rs. 10 per hour
	Department Y	50 hours @ Rs. 12 per hour
	Department Z	60 hours @ Rs. 15 per hour
Factory overheads (Variable):
	Department X	Rs. 8,000 (estimated)
	Department Y	Rs. 10,000 (estimated)
	Department Z	Rs. 12,000 (estimated)
The estimated direct labour hours during the budget period:
	Department X	4,000 hours
	Department Y	4,000 hours
	Department Z	4,000 hours

 

Fixed overheads: Rs. 20,000 for 20,000 normal working hours.

You are required to calculate the cost of Job No. 108 and calculate the selling price required to earn a profit of 20% on cost.

Solution

Overhead absorption rates are to be calculated:

Step 1: Variable overheads:

Step 2: Fixed overheads:

Substituting the values in the formula we get,

Step 3: Cost of the Job No. 108 is computed as follows:

 

Particulars	Rs.	Amount Rs.
Step (a): Direct materials (Given)		10,000
Step (b): Direct wages (Given)
Department X – 40 hours × Rs. 10 per hour	400
Department Y – 50 hours × Rs. 12 per hour	600
Department Z – 60 hours × Rs. 15 per hour	900	1,900
Step (c): Variable overheads: (*1 – step 1)
Department X – 40 hours × Rs. 2 per hour	80
Department Y – 50 hours × Rs. 2.50 per hour	125
Department Z – 60 hours × Rs. 3 per hour	180	385
Step (d): Fixed overheads: (*2 – step 2)
(40 + 50 + 60 hrs): 150 hrs × Re 1 / hr		150
Step (e) TOTAL COST		12,435
Step (f) PROFIT AT 20% ON COST		2,487
Step (g) SELLING PRICE		14,922

Illustration 8.2

A work order for 500 units of a commodity has to pass through three different machines for which the machine hour rates are:

Machine No. 1 – Rs. 1.00; Machine No. 2 – Rs. 2.00; and Machine No. 3 – Rs. 3.00.

The following expenses have been incurred on the work order:

Materials Rs. 10,500, Wages Rs. 1,000.

   Machine No. 1 has been engaged for 250 hours

   Machine No. 2 has been engaged for 150 hours

   Machine No. 3 has been engaged for 120 hours

After the work has been completed, materials worth Rs. 500 are returned to the stores.

Office overheads used to be 40% of works cost. But on account of rise in the cost of administration, distribution and sale, there has been a 50% rise in the office overhead expenditure.

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 cost of sales.

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

Solution

Total cost of the work order has to be computed stage by stage, that is:

This is done as follows:

 

Particulars	Rs.	Rs.
Step 1: Materials used (Total – returned) (10,500 − 500)		10,000
Step 2: Direct wages		1,000
Step 3: PRIME COST (Step 1 + Step 2)		11,000
Step 4: Works overheads (@ machine hr. rate)
(i) Machine No. 1: 250 hours × Rs. 1.00 per hour	250
(ii) Machine No. 2: 150 hours × Rs. 2.00 per hour	300
(iii) Machine No. 3: 120 hours × Rs. 3.00 per hour	360	910
Step 5: WORKS COST (Step 3 + Step 4)		11,910
Step 6: Office overheads (@ 60% of works COST)		7,146
(40% + 50% of 40% = 60%)		19,056.00
Step 7: Less: Process of scrap
(5% of 10% of Rs. 19,056)		95.28
Step 8: TOTAL COST OF WORK ORDER		18,960.72
Step 9: Profit @ 20% of total cost		3,792.14
Step 10: SELLING PRICE of 500 units		22,752.86
Step 11: Selling price of one unit		45.50

Illustration 8.3

The quantity specified on a production order was 5,000 units of an article in the manufacture of which four operations were involved. The piece rates for these four operations were in the following sequence: Rs. 30; Rs. 40; Rs. 30; and Rs. 50 per unit. The company recovered factory overhead expenses based on direct labour cost, and the current overhead rate is 75%. The entire quantity of material authorized for the order, namely, 2000 kg @ Rs. 300 per kg, was issued to the shop. Of this, 100 kg was returned as scrap arising in course of manufacture, valued at Rs. 2,000.

At the year end, the order was incomplete; only 500 units were fully completed and transferred to finished stock. Stock-taking of the work-in-progress revealed the following position:

 

Material in process:	1,400 kg
Material in hand, in shop (unprocessed):	300 kg
Production in partly completed stage:	4,000 units

Extent of work performed:

 

Up to first operation stage:	2,000 units
Up to the second operation stage:	1,500 units
Up to the third operation stage:	500 units
Up to the fourth operation stage:	nil

 

You are required to compare the cost of the work-in-progress.

Solution

 

Particulars	Rs.	Rs.
Step I: Material cost:
(i) Material in hand: 300 kg × Rs. 300		90,000
(ii) Materials in process: 1,400 kg × Rs. 300	4,20,000
Less: Proportion cost of scrap	1,400	4,18,600
		5,08,600
Step II: Labour cost:
Operation 1 – 2,000 units @ Rs. 30	60,000
Operation 2 – 1,500 units @ Rs. 70 (30 + 40)	1,05,000
Operation 3 – 500 units @ Rs. 100 (30 + 40 + 30)	50,000	2,15,000
Step III: Factory overhead: 75% of Rs. 2,15,000 (75% on direct labour)		1,61,250
Step IV: Total Cost of work-in-progress (Step I + Step II + Step III)		8,84,850

Illustration 8.4

Gemini Manufacturing Company processed production through two departments (i) machining and (ii) finishing. Overhead rates are predetermined based on machine hours in the machine department and the direct labour wages in the finishing department.

The figures for 2009–10 based on which the overhead rates were arrived at are furnished below:

	Machining Department Rs.	Finishing Department Rs.
Direct labour–wages	25,00,000	25,00,000
Factory overheads	75,00,000	50,00,000
Direct labour hours	20,00,000	40,00,000
Machine hours	25,00,000	15,00,000

The cost sheet for Job No. 750 indicates the following:

	Machining Department	Finishing Department
Material consumed	Rs. 80	Rs. 10
Direct labour wages	Rs. 50	Rs. 40
Direct labour hours	30 hrs	40 hrs
Machine hours	20 hrs	10 hrs

Assuming that the production order No. 750 consisted of 20 numbers of part No. 780, you are required to prepare a cost sheet showing the unit cost of the part.

Solution

NOTE: Factory overheads are to be calculated as follows:

1. For machining department
   
2. For finishing department
   

Illustration 8.5

Model: Ledger control account

The following information for the year ended 31 December 2009 is obtained from the books and records of a factory:

	Completed Jobs Rs.	Work-in-progress Rs.
Raw materials supplied stores	1,00,000	40,000
Wages	1,25,000	50,000
Chargeable expenses	15,000	5,000
Materials returned to stores	5,000	-

Factory overheads are 75% of wages. Office overheads are 20% of factory cost, and selling and distribution overheads are 10% of cost of production.

The completed jobs realized Rs. 4,50,000.

Write up:

1. Work-in-progress ledger control account
2. Completed job ledger control account and
3. Cost of sales account

[B. Com (Hons) Delhi. Modified]

Solution

The required accounts have to be presented in ledger form as follows:

1. Work-in-progress ledger control account
   
2. Completed jobs account
   
3. Cost of sales account
   

8.5 BATCH COSTING

Batch costing may be said as another form of “job costing”. The terminology of CIMA defines batch cost as “aggregated costs relative to a cost unit which consists of a group of similar articles which maintains its identity throughout one or more stages of production”. Batch costing may be defined as “that form of specific order costing which applies when similar articles are manufactured in batches, either for sale or for use within the undertaking. In most cases the costing is similar to job costing”.

The term “batch” means a group of products of similar nature. Under this method of costing, a batch is regarded as a single cost unit.

1. Costs are accumulated against each batch.
2. Separate cost sheets are maintained for each batch of products.
3. Each batch is given a separate number.
4. The accounting system is similar to that of job costing, that is, material requisitions are prepared batch-wise, the direct labour is charged batch-wise, and the overheads are recovered batch-wise.
5. The cost of each unit is ascertained when the batch is completed.
6. This is ascertained by dividing the total cost of the batch by the number of units produced in that batch.
7. This method is used in organizations which manufacture items in definite batches–pharmaceutical or drug industries, components for radios, TVS, watches, drilling machines, gas cylinders etc.

8.5.1 Special Features of Batch Costing

1. Batch-wise cost collection: A batch number is allotted to each batch and costs are accumulated for each batch.
2. Identical products: Items that are produced in a batch are identical in nature.
3. Grouping: It is possible to classify items into groups for the purpose of costing.

8.5.2 Economic Batch Quantity (EBQ)

In batch costing, the most important factor is the determination of optimum size of the batch, which is termed as “economic batch quantity”. To put in simple words, it is the determination of “how much to produce”. The need for economic batch quantity arises when the rate of production is in excess of the rate of sales turnover and a decision has to be taken on the optimum size of the batch.

8.5.3 Economic Batch Quantity: Meaning and Method of Determination

Two main elements that are associated with economic batch quantity are:

1. set-up cost
2. carrying costs (or) storage costs

The set-up cost is incurred for setting up tools and machines for each batch. It is a fixed amount per batch. This is incurred irrespective of the size of the batch. If there is an increase in the number of batches, the total set up cost increases. But when batch quantity increases, there is an increase in storage cost (carrying cost) followed by a decline in set-up cost. Storage cost consists of interest on capital, defective work, storage loss, obsolescence, premium etc. This cost is mentioned as a rate per unit.

8.5.4 Factors Determining EBQ

EBQ is that point where storage costs equal the set-up costs. At this point the total costs are at minimum level. EBQ is based on the following factors:

1. cost of production (direct materials + direct wages + direct expenses + production overhead)
2. set-up cost
3. cost of storage
4. rate of interest on capital
5. demand for the product
6. skill of labour
7. wastage of materials etc.

The most commonly used formula for determining EBQ is:

Illustration 8.6

X Ltd is supplying to Modern Radios an important component R-103, 12,000 units per annum. It is estimated that it costs 10 paise as inventory-holding cost per component per month and that the set-up cost per run of component manufacture is Rs. 162.

1. What should be the optimum run size for the component R-103 manufacture?
2. What would be the interval between two consecutive optimum runs?
3. Determine the minimum inventory cost.

Solution

Optimum run size is nothing but economic batch quantity.

1. 1. Write down the formula:
      
   2. Substituting the values, we get:
      

   ∴ Economic batch quantity = 1,800 units

2. Interval between optimum run is to be computed as follows:
   1. Write down the formula:
      
   2. Interval between two consecutive optimum runs
      
3. Inventory cost is minimum at EBQ. At that level, storage cost = set-up cost

   Based on the assumption that the components are supplied evenly throughout the year, average inventory will be

   Minimum inventory cost per annum

   

Illustration 8.7

Following information relates to the manufacture of a component in a cost centre:

 

Cost of materials	10 paise per component
Operator’s wages	80 paise an hour
Machine hour rate	Rs. 2
Set-up time of the machine	2 hrs 30 minutes
Manufacturing time	10 minutes per component

 

You are required to prepare cost sheets showing both production and set-up costs–total and per unit when a batch consists of 10, 100 and 1,000 components.

 

[C.A. (Inter); I.C.W.A. (Inter); B.com (Hons) Delhi; M.Com, Madras University. Modified]

Solution

Set-up costs and production costs are to be calculated as follows:

 

Particulars	Total Rs.	Per Unit Rs. (÷10)
(A) Set-up Cost:
Step 1: Operator’s wages: (2 hr 30 min × Rs. 0.80/hr)	2.00
Step 2: Overheads of the machine (2 hr 30 min × MHR @ Rs. 2/hr)	5.00
Step 3: Total set-up cost (Step 1 + Step 2)	7.00	0.70
(B) Production Costs:
Step 4: Materials cost for 10 units @ 0.10 / unit	1.00	0.10
Step 5: Wages for the operator (10 units × 10 min / per comp) × Rs. 0.80/hr	1.33	0.13
Step 6: Overheads of machine (10 units × 10 min / per unit) × Rs. 2/hr	3.33	0.33
Step 7: Total production cost (Step 4 + Step 5 + Step 6)	5.66	0.56
Step 8: Total production cost + set-up cost
[(A) + (B)] (Step 3 + Step 7)	12.66	1.26

Particulars	Total Rs.	Per Unit Rs. (÷100)
(A) Setting-up Cost:
Step 1: Operator’s wages: (2 hr 30 min × Rs. 0.80)	2.00
Step 2: Overheads of the machine: (2 hr 30min × Rs. 2)	5.00
Step 3: Total set-up cost (Step 1 + Step 2)	7.00	0.07
(B) Production Costs:
Step 4: Materials cost for 100 units @ 0.10	10.00	0.100
Step 5: Operator wages @ (100 units ×10 min) × Rs. 0.80/hr	13.33	0.133
Step 6: Overheads of machine (100 units × 10 min) ×Z Rs. 2/hr	33.33	0.333
Step 7: Total production cost (Step 4 + Step 5 + Step 6)	56.66	0.566
Step 8: Total production cost + set-up cost
[(A) + (B)] (Step 3 + Step 7)	63.66	0.636

Particulars	Total Rs.	Per Unit Rs. (÷1000)
(A) Setting-up Cost:
Step 1: Operator’s wages (2 hr 30 min @ 0.80/hr)	2.00
Step 2: Overheads of the machine (2 hr 30 min @ Rs. 2/hr)	5.00
Step 3: Total set-up costs (Step 1 + Step 2)	7.00	0.007
(B) Production Costs:
Step 4: Materials cost for 1,000 units @ 0.10/unit	100.00	0.100
Step 5: Operators wages (1,000 × 10) @ .80/hr	133.33	0.133
Step 6: Machine overheads (1,000 x 10) × Rs. 2/hr	333.33	0.333
Step 7: Total production cost (Step 4 + Step 5 + Step 6)	566.66	0.566
Step 8: Total production cost + set-up cost
[(A) + (B)] (Step 3 + Step 7)	573.66	0.573

FOR PROFESSIONAL COURSES

8.6 BACK FLUSH COSTING

Under job costing method, the following procedure is being adopted, generally. As and when materials are received, accounting entries are made for purchases. Entries are made in work-in-progress accounts at once, when materials are issued and consumption of other resources occur. The job account in work-in-progress ledger is debited with direct material cost, direct labour and direct expenses. Overheads are charged as and when necessary. In-toto job costing method provides enough cost information in detail quickly. Job costing method leaves audit trials. Hence it has become necessary to eliminate such elaborate documentation system. Of late, the trend is to adopt minimum accounting information. Back flush costing method aims at this simple accounting procedure.

Back flush costing may be defined as “cost accounting system which focusses on the output of an organisation and then works back to attribute costs to stock and cost of sales”. This method emphasizes that only when the manufacture of a job is complete, accounting entries must be made. No need to keep work-in-progress account only when units are completed; costs are assigned to such completed units. Standard or budgeted costs serve as the basis for assigning costs to finished products. Back flush costing may be defined as “costing system that omits recording some or all of the journal entries relating to the cycle from the purchase of direct material to the sale of finished goods.” This method is also called post-deduct costing, delayed costing and end-point costing. Accordingly, this method has three versions.

8.6.1 Version 1 (Method 1)

A combined direct materials inventory and work-in-progress is maintained to record purchases and consumed materials for completed units. Standard or budgeted rates are used for assessing consumption. Labour costs and overheads are recorded in one conversion cost control account.

1. The cost of completed units is recorded in finished goods control account.
2. The cost of units sold is recorded in cost of goods sold account.
3. Completed units are valued on the basis of standard costs or budgeted costs.
4. At the end of the month, the unabsorbed (under- or over-absorbed) conversion costs are transferred to cost of goods sold account. (They are not allocated or apportioned as in job costing.)

Illustration 8.8

 

Purchase of raw materials in June	Rs. 22,000
Conversion costs (including labour) in June	Rs. 20,000
Units completed in June	2,000
Units sold in June	1,600
Standard cost per unit of output
Materials       Rs. 20
Conversion cost       Rs. 10
	_____  Rs. 30

 

There are no direct material variances in June. It is also found that there are no opening stocks of raw materials, work-in-progress and finished goods.

Solution

Under this method, journal entries are to be recorded for

1. purchase of raw materials
2. conversion costs incurred
3. cost of units completed
4. transfer of unabsorbed conversion costs

Finally, inventory balances are shown.

These are shown as follows:

 

8.6.2 Version 2 (Method 2)

To record purchases and consumption by units sold, a combined direct raw materials, work-in-progress and finished goods inventory has to be maintained. The account under this method is christened as “inventory control account”. To calculate the cost of direct materials consumed, standard rates or budgeted rates are used.

The cost of units sold is recorded in the cost of goods sold account. At the end of the month, unabsorbed conversion costs are transferred to cost of goods sold account.

The main difference between these methods (version 1 and version 2) is: In version 1, the physical sequences are taken as complete when the units of output have been completely manufactured, whereas in version 2, physical sequences are taken as complete only on sale of units produced.

Illustration 8.9

Same figures as in Illustration 8.8.

Solution

 

8.6.3 Versions 3 (Method 3)

1. Under this method, no accounting entry is recorded for the purchases of raw materials.
2. Accounting entry is passed, when cost of finished goods are recorded (only entry).
3. This is the simplest of the three versions.

Illustration 8.10

Same as in Illustration 8.8.

Solution

 

Job costing, a method of costing, which work is undertaken to customer’s specific requirements on the basis of orders.

Features of Job costing: (i) A job consists of a single order or contract. (ii) Itself is a cost-unit; (iii) Each job is unique (iv) Products are not manufactured for general consumption (v) Costs are ascertained for each order (vi) It is possible to identify a job at each stage of its manufacturing process.

Procedure of job costing is explained in stages (with adequate specimen of records to be used in each stage) in section 8.4.1 to 8.4.8 (Ref: The text).

Accounting for work in process is explained in illustrations from 8.1 to 8.5.

Batch costing may be defined as aggregated costs relative to a cost unit which consists of a group of similar articles which maintains its identity throughout the manufacturing process. ‘Batch’ refers to a group of products of similar nature. The cost of each unit is ascertained by dividing the total cost of a batch by the number of units produced in that batch.

Special features of Batch costing: (i) Costs are accumulated for each batch (ii) Items produced are identical and (iii) Items may be grouped for the purpose of costing.

Economic Batch Quantity: It refers to the determination of “how much to produce.” Set up costs and carrying costs are the main elements which are associated with EBQ.

Ascertainment of EBQ is explained in illustration 8.6. Back flush costing is a cost accounting system that focusses on the output of an organisation and then works back to attribute costs to stock and cost of sales. This method has three versions which are illustrated in 8.8, 8.9 & 8.10.

Job Costing: A costing method designed for undertaking specific order of work to customer’s specific requirements.

Job Cost Card: A document or record for each job, acts as a subsidiary ledger for work-in-progress control account in cost ledger.

Batch Costing: A costing method designed for undertaking specific order of work (similar articles produced in batches).

Set-Up Cost: Cost incurred in setting-up machines and tools for each batch of production.

Storage Cost: Includes interest on capital locked up, defective work, obsolescence, insurance premium etc.

Economic Batch Quantity: Optimum level or size of batch, concept similar to economic order quantity of materials.

Back Flush Costing: A cost accounting system which focuses on the output of an organization and then works back to attribute costs to stock and cost of sales.

QUESTION BANK

 

I. State whether the following statements are true or false

1. Under job costing, the job itself is a cost unit.
2. It is not possible to identify a job at each stage of its manufacture.
3. Costs are accumulated and ascertained job-wise.
4. Job costing can be used only in small organizations.
5. Job costing may be used where products of similar nature in large numbers are produced.
6. Under batch costing, a batch is considered as a cost unit.
7. In batch costing, items are classified into groups for purposes of costing.
8. Economic batch quantity is nothing but economic ordering quantity of materials.
9. Set-up cost is a fixed amount, incurred irrespective of the size of each batch.
10. Back flush costing method will keep track of costs at each production stage and needs elaborate costing procedure from the beginning to the end.
11. Under back flush costing, there is no work-in-progress account.
12. Standard costs or budgeted costs are used for the valuation of finished products.

Answers:

 

1. True	2. False	3. True	4. False
5. False	6. True	7. True	8. False
9. True	10. False	11. True	12. True

 

II. Fill in the blanks with apt word(s)

1. In job costing each job is a _________.
2. In job costing, costs are accumulated and assigned __________.
3. In job costing each order is of comparatively __________ duration.
4. Work is undertaken based on _________ specific requirements and not for general consumption.
5. A _____ number is allotted to each order and costs are accumulated and determined for each order.
6. ______ card is said to be the subsidiary ledger for work-in-progress control account in cost ledger, in job costing method.
7. Under batch costing, a ______ is regarded as a single cost unit.
8. Batch costing is used when items of _________ are produced in a batch.
9. Costs are collected ________ under batch costing method.
10. There are two main elements of cost associated with economic batch quantity. They are _______ and _________.
11. Back flush costing method focuses on _______ products and then comes back to attribute costs to stock and cost of sales.
12. In back flush costing method, finished goods are assigned costs based on _________ or _________ costs.

Answers:

1. cost unit
2. job-wise
3. short
4. customer’s
5. job order
6. job cost
7. batch
8. identical nature
9. batch-wise
10. set-up cost; storage cost
11. finished
12. standard; budgeted

III. Multiple choice questions: Choose the correct answer:

1. Job costing is suitable for
   1. firms manufacturing goods to customer’s specific requirements
   2. firms manufacturing small articles in large numbers
   3. firms manufacturing goods for common use
   4. firms manufacturing goods on a continuous basis
2. Job costing is used in
   1. chemical manufacturing
   2. ship-building
   3. brick-making
   4. cement production
3. Transformer manufacturers adopt
   1. batch costing
   2. contract costing
   3. job costing
   4. process costing
4. Which one of the following is not a feature of job costing
   1. work flow structure is not predetermined
   2. unique nature of work
   3. custom-made work
   4. work is of long duration
5. Where materials used and work performed differ product to product, which one of the methods would be more suitable?
   1. job costing
   2. batch costing
   3. contract costing
   4. process costing
6. Manufacturers of components of television adopt
   1. job costing
   2. batch costing
   3. contract costing
   4. single or output costing
7. At the level of production of economic batch quantity, which of the following costs is minimum?
   1. set-up cost
   2. storage cost
   3. total cost
   4. carrying cost

Answers:

 

1. (a)	2. (b)	3. (c)	4. (d)
5. (a)	6. (b)	7. (c)

1. Define job costing.
2. Specify any four features of job costing.
3. What is a job cost card?
4. Define batch costing.
5. Mention any four features of batch costing.
6. Indicate the industries suitable for job costing.
7. Name the industries suitable for batch costing.
8. What do you mean by economic batch quantity?
9. How would you determine economic batch quantity?
10. Explain (i) set-up cost and (ii) storage cost.
11. Explain back flush costing.

1. What is job order costing? What are the special features of job costing? Give examples.
2. Elucidate job costing procedure step by step.
3. Explain batch costing. What are its main features?
4. Discuss in detail back flush costing method.
5. In an organization making a wide variety of engineering products, each order is the subject of a job cost sheet. It is found that for a number of smaller jobs, the cost of compiling these costs is up to 50% of the total direct production cost of the job. Give your reaction to this situation, suggesting an alternative procedure.

 

1. From the following information prepare Job No. 236 account in the job cost ledger.

 

	Rs.
Direct materials purchased	3,600
Direct materials received from stores	25,200
Direct wages	14,400
Other direct expenses	1,500

 

The works overheads are to be taken at 75% of wages and administrative overheads at 25% of works cost. The contract price of Job No. 236 which is completed is fixed at Rs. 82,500.

 

[Madras University]

[Ans: Cost of production: Rs. 69,375; Profit: Rs. 13,125]

2. The cost information relating to two jobs in a factory is given below:

 

Job No. 1	Job No. 2
Materials: Rs. 40	Materials Rs. 20
Wages at 40 paise per hour for 150 hrs	Wages at 40 paise per hour for 200 hours

 

In a factory, the overheads are recovered at 100% of prime cost. Find out the works cost of both the jobs and comment upon the basis of ascertaining the job cost.

 

[Sri Venkateswara University]

3. X Ltd. took up two jobs during the first week of June 2009. The following details are available:

	Job 10 Rs.	Job 11 Rs.
Materials supplied	4,000	2,800
Wages paid	1,800	1,200
Direct expenses	200	-
Materials transferred from 11 to 10	200	200
Materials returned to stores	-	100

[Ans: Cost of job 10: Rs. 6,200; Cost of job 11: Rs. 3,700]

4. From the following information, prepare Job No. 15, and Job No. 16 accounts in the job cost ledger:

	Job No. 15 Rs.	Job No. 16 Rs.
Direct materials	9,600	4,800
Materials received from stores	67,200	57,600
Direct wages	38,400	20,000
Other direct expenses	4,000	2,000

The production overheads are to be taken at 100% of wages and administration overheads at 20% of the production cost. The contract price of Job No. 15, which is completed, is fixed at Rs. 2,20,000. Job No. 16 is in progress.

 

[Karnataka University; Andhra University; Bharathidasan University. Modified]

[Ans: Job No. 15: Sales, Rs. 2,20,000; Profit, Rs. 23,000; Administration overhead, Rs. 39,400 Job No. 16: Total cost, Rs. 1,30,500]

5. From the following particulars, prepare the cost sheet for Job No. 101 and find out the value of the job: Materials issued for the job, Rs. 6,000. Productive wages, Rs. 4,600. Direct expenses, Rs. 500. Provide 60% on productive wages for works on cost and on works cost for office on cost. Profit is to be realized on the selling price at 15%.

 

[Sri Venkateswara University]

[Ans: Sales: Rs. 18,344; Profit: Rs. 2,751.62]

6. The following direct costs were incurred on Job No. 415 of Standard Radio Company:

Materials: Rs. 4,010

Wages:

Department A; 60 hours @ Rs. 3 per hour

Department B; 40 hours @ Rs. 2 per hour

Department C; 20 hours @ Rs. 5 per hour

Overhead expenses for these three departments were estimated as follows:

Variable Overheads:

   Department A: Rs. 5,000 for 5,000 labour hours

   Department B: Rs. 3,000 for 1,500 labour hours

   Department C: Rs. 2,000 for 500 labour hours

Fixed Overheads: Estimated at Rs. 20,000 for 10,000 normal working hours.

You are required to calculate the cost of Job No. 415 and calculate the price to give profit of 25% on selling price.

 

[Madras University; Calicut University; Madurai Kamaraj University; Sri Venkateswara University]

[Ans: Selling price: Rs. 6,440; Profit: Rs. 1,610; Cost of the job: Rs. 4,830]

7. Following data relate to the month of December 2009:

1. Opening balance of the job on 1 December 2009:
   
2. Direct materials requisition during December 2009:

    

   Job No.	Rs.
   410	120
   411	280
   412	225
   413	300
   	925

    

3. Direct labour distribution:

    

   Job No.	Hours	Rs.
   410	400	600
   411	200	450
   412	300	675
   413	100	225
   		1,950

    

4. Factory overheads are applied to jobs on production according to direct labour hour rate, which is Rs. 2.
5. Factory overheads incurred in December 2009 are Rs. 2,100.
6. Job No. 411 and 412 were completed during the month. They were billed to customer at a price which included 15% of the price of the job for selling and distribution expenses and another 10% of price for the profit.

Prepare:

1. Job cost sheet for Job Nos. 411 and 412.
2. Determine the price for the jobs.
3. Calculate the value of work-in-progress.
4. Prepare an income statement showing gross profit for December 2009.

[Madras University]

[Ans: (a) Cost of sales: Job No. 411, Rs. 2,880; Job No. 412, Rs. 1,800 Profit: Job No. 411, Rs. 320; Job No.412, Rs. 200 Billing price: Job No. 411, Job No. 412, Rs. 2,000 Rs. 3200;

 

Work-in-Progress:	Inventory:	Rs. 2,675 (total)
Materials:		Rs. 500
Labour:		Rs. 975
Overheads:		Rs. 1200
Total sales:		Rs. 5,200
Works cost:		Rs. 4,000
Under-absorbed factory overheads:		Rs. 100
Gross profit:		Rs. 1,200]

8. A factory follows job costing. The following cost data are obtained from its books for the year ending 31 March 2010.

 

	Rs.
Direct materials	45,000
Direct wages	37,500
Profit	30,450
Selling and distribution overheads	26,250
Administration overheads	21,000
Factory overheads	22,500

 

Prepare a cost sheet and find out overhead recovery rates and percentage of profit on sales.

[Ans: Prime cost: Rs. 82,500; Works cost: Rs. 1,05,000; Cost of production: Rs. 1,26,000; Cost of sales: Rs. 1,52,250 Percentage of profit on sales = 16.67%

Overhead recovery rates:

 

Percentage of works overheads to wages	60%
Percentage of administration overhead to works cost	20%
Percentage of selling and distribution overhead to works cost	25%]

9. The estimated material cost of a job is Rs. 5000 and direct labour cost is likely to be Rs. 1,000. In machine shop, it will require machinery by Machine No. 8 for 20 hours and by Machine No. 11 for 6 hours. Machine hour rates for Machine No. 8 and No. 11 are Rs. 10 and Rs. 15 respectively. Considering only machine shop cost, the direct wages in all other shops last year amounted to Rs. 80,000 as against Rs. 48,000 for factory overheads. Last year factory cost of all jobs amounted to Rs. 2,50,000 as against Rs. 37,500 office expenses.

Prepare a quotation which guarantees 20% profit on selling price.

 

[Madras University]

[Ans: Price to be quoted: Rs. 9,904.38]

10. The following particulars rebate to the year ended 31 March 2010:

	Completed Jobs Rs.	Work-in-Progress. Rs.
Materials issued	1,50,000	30,000
Wages	1,05,000	21,000
Chargeable expenses	22,500	1,500
Materials returned to stores	1,500	–

Works expenses were 60% of prime cost. Administration overheads were 30% of works cost. The value of jobs completed during the year was Rs. 7,50,000.

Prepare:

1. Consolidated completed jobs account to ascertain profit or loss during the year
2. Consolidated work-in-progress account.

[Ans:

1. Completed Jobs: Total cost. Rs. 5,74,080; Profit, Rs. 1,75,920
2. Consolidated work-in-progress: Closing work-in-progress, Rs. 1,09,200]

[Model: Batch costing]

11. M/S Exee Tools Ltd has an order to supply 48,000 special tools per annum. The set-up cost of tools per run is Rs. 648. It is estimated that it costs 10 paise as inventory-holding cost per tool per month. What should be the optimum run size for tools manufacturing?

[Ans: 7,200 units]

12. A contractor has to supply 10,000 paper cones per day for 320 days in a year. He finds that when he starts production, he can produce 20,000 units a day. The cost of holding a paper cone for 1 year is 2 paise and the set-up cost of a production run is Rs. 20. How frequently should production run be made?

 

[Madras University]

[Ans: Economic batch quantity: 80,000 units; Days required per batch: 4 days; Frequency of production: 80 times]

13. Compute the economic batch quantity for the company using batch costing with the following information:

 

Monthly demand for the component	2,000 units
Set-up cost per batch	Rs. 120
Annual rate of interest	6%
Cost of manufacture per unit	Rs. 6.

 

[Madras University]

[Ans: 4,000 units]

14. A component item involves material cost of Rs. 6 per unit and 10 minutes to produce. The operator is paid Rs. 72 per hour and machine hour rate is Rs. 150. The setting-up of the machine to produce the component takes 2 hours and 20 minutes. Prepare cost sheet showing production and set-up costs for a batch of (1) 100 units and (b) 1000 units

 

[Madras University. Modified]

[Ans:	(i) For 100 units:
	Production cost: Rs. 4,300
	Set-up cost: Rs. 518
	Total cost: Rs. 4,818
	Cost/unit: Rs. 48.18
	(ii) For 1000 units: Production cost: Rs. 43,000 Set-up cost: Rs. 518 Total cost: Rs. 43,518 Cost per unit: Rs. 43.158]

15. A work order for 500 units of a commodity has to pass through four different machines, the machine hour rates of which are:

 

Machine No. 1	Rs. 1.25
Machine No. 2	Rs. 3.00
Machine No. 3	Rs. 4.00
Machine No. 4	Rs. 2.50

 

The following expenses have been incurred on the work order:

Materials Rs. 20,000; Wages Rs. 1,500

Machine 1 worked for 200 hours

Machine 2 worked for 300 hours

Machine 3 worked for 240 hours

Machine 4 worked for 100 hours

After the work order has been executed, materials worth Rs. 1,000 were returned to stores.

Office overheads are to be estimated at 60% of works cost; 10% of the production is going to be discarded, being unsatisfactory for which ½ of the cost can be realized from sale in the scrap market.

Find out the rate of selling price per unit if 20% profit on sale price is desired. Assume the net result output is 500 units.

 

[Madras University]

[Ans:	Sale Price: Rs. 86.86 per unit Total sales:
	Rs. 43,434 Profi t: Rs. 8,686.86 Works cost:
	Rs. 22,860 Offi ce overhead: Rs. 13,716 Discarded units sold: Rs. 1,829]

 

16. The following information for the year ended 31 December 2009 is obtained from the books and records of a factory:

	Completed Jobs Rs.	Work-in-Progress Rs.
Raw materials	88,000	32,000
Supplied stores
Wages	1,00,000	40,000
Chargeable expenses	10,000	4,000
Materials returned to stores	1,000	–

Factory overheads are 80% of wages. Office overheads are 25% of factory cost and selling and distribution overheads are 10% of cost of production.

1. Work-in-progress ledger control account
2. Completed job ledger control account and
3. Cost of sales account

[B.Com. (Hons) Delhi. Modified]

[Ans: (i) Rs. 1,35,000, (ii) Rs. 3,46,250 and (iii) Profit Rs. 29,125]

17. A factory used job costing. The following cost data are obtained from its books for the year ended 31 December 2009

 

	Rs.
Direct materials	2,70,000
Direct wages	2,25,000
Profit	1,82,700
Selling and distribution expenses	1,57,500
Administration overheads	1,26,000
Factory overheads	1,35,000

1. Prepare a job sheet indicating the prime cost, works cost, production cost, cost of sales and the sales value.
2. In 2010, the factory receives an order for a number of jobs. It is estimated that direct materials required will be Rs. 3,60,000 and direct labour will cost Rs. 2,25,000. What should be the price for these jobs if the factory intends to earn the same rate of profit on sales assuming that the selling and distribution overheads have gone up by 15%. The factory recovers factory overheads as a percentage of direct wages and administration and selling and distribution overheads as a percentage of works cost, based on cost rates prevailing in the previous year.

[C.A. (Inter). Modified]

[Ans: Prime cost: Rs. 4,95,000; Works cost: Rs. 6,30,000; Cost of production Rs. 7,56,000; Cost of sales Rs. 9,13,500; Sales value: Rs. 4,96,200; Price: Rs. 12,85,200]

18. A shop floor supervisor of a small factory presented the following cost for Job No. A to determine the selling price:

 

	Per unit (Rs.)
Material	70
Direct wages (14 hrs @ Rs. 2.50/hr)	35
Chargeable expenses (stores)	5
	110
Add: for expenses (overheads)	37
Cost	147

Analysis of the profit and loss account shows the following:

It is noted that average hourly rates for the two departments X and Y are similar.

You are required to:

1. Draw up a job cost sheet.
2. Calculate the revised cost using overheads figures as shown in the profit and loss account as the basis for charging overheads to departments X and Y.
3. Add 20% of total costs to determine selling price.

[C.S. (Inter)]

[Ans: Profit: Rs. 26.25; Selling price: Rs. 157.50]

19. A factory can produce 60,000 units per annum at its optimum capacity. The estimated unit cost of production is as follows:

 

	Rs.
Direct material	3
Direct labour	2
Indirect expense	1,50,000 p.a.
Fixed	5/unit

 

Variable–Semi–variable: Rs. 50,000 p.a. up to 50% capacity and an extra of Rs. 10,000 for every 25% increase in capacity or part thereof.

The factory produces only against orders (and not for stock). The production programme of the factory is as indicated below. The management desires to ensure a profit of Rs. 1,00,000 for the year. Work out the average selling price at which each unit should be quoted:

First 3 months of the year: 50% of the capacity

Remaining 9 months: 80% of the capacity

Ignore selling and administration overheads.

 

[I.C.W.A. (Inter)]

[Ans: Rs. 17.24]

20. In an engineering company the factory overheads are recovered on a fixed percentage basis on direct wages and administrative overheads are absorbed on a fixed percentage basis on factory cost.

The company has furnished the following data relating to two jobs undertaken by it in a period:

	Job 101 Rs.	Job 102 Rs.
Direct material	54,000	37,500
Direct labour	42,000	30,000
Selling price	1,66,650	1,28,250
Percentage profit on total cost	10%	20%

Required:

1. Compute the percentage recovery rates of factory overheads and administrative overheads.
2. Calculate the amount of factory overheads, administration overhead and profit for each of the two jobs.
3. Using the above recovery rates, fix the selling price of Job 103, the additional data being:

   Direct materials Rs. 24,000

   Direct wages Rs. 20,000

   Profit percentage on selling price

[C.A. (Inter)]

[Ans: Factory overheads: 60% of direct wages Administration overheads: 25% of factory cost. Job Factory overheads Administration overheads

 

	Rs.	Rs.
Job 101	25,200	30,300
Job 102	18,000	21,375
Job 103–selling price: Rs. 80,000]

21. A, an employee of XYZ Co., gets the following emoluments and benefits:

1. Salary Rs. 250 p.m.
2. Dearness allowance (DA)

   on 1st Rs. 100 of salary Rs. 400

   on next Rs. 100 of salary Rs. 100

   on balance every Rs. 100 Rs. 50 or part thereof

    

3. Employer’s contribution to:

    

   Provident fund	8% of salary and DA
   ESI	4% of salary and DA

    

4. Bonus 20% of salary and DA
5. Other allowances 2,725 p.a.

A works for 2,400 hours per annum; out of which 400 hours are non-productive but treated as normal idle time. A worked for 18 effective hours in Job No. 13 where the cost of direct material equals A’s earnings and the overhead applied is 100% of prime cost. The sale value of the job is quoted to earn a profit of 10% on such value.

You are required to find out:

1. the effective hourly cost of A and
2. the expected sale value of Job No. 13.

[I.C.W.A. (Inter)]

[Ans: (a) Rs. 7.50 and (b) Rs. 600]

22. X Co., engaged in job work, has completed all jobs in hand on 30 December, and showed direct materials and direct labour cost of Rs. 80,000 and Rs. 60,000 respectively as having been incurred on Job No. 501.

The costs incurred by the business on 31 December 2009, the last day of the accounting year, were as under:

 

Direct materials (Job 501)	Rs. 4,000
Direct wages (Job 501)	Rs. 16,000
Indirect labour	Rs. 4,000
Miscellaneous factory overheads	Rs. 3,000

 

It is the practice of the business to make the jobs absorb factory overheads based on 120% of direct labour cost. Calculate the value of work-in-progress of Job No. 501 on 31 December 2009.

 

[Delhi University, B. Com. (Hons). Modified]

[Ans: Rs. 2,51,200]

[Model: Batch costing]

23. Component “Pee” is made entirely in cost centre 100. Material cost is 6 paise per component and each component takes 10 minutes to produce. The machine operator is paid 72 paise per hour and the machine hourrate is Rs. 1.50. The setting-up of the machine to produce component Pee takes 2 hours 20 minutes.

Based on the information, prepare cost sheets showing the production and set-up costs, both in total and per component assuming that a batch of (a) 10 components (b) 100 components and (c) 1,000 components are produced.

 

[C.A. (Inter); I.C.W.A. (Inter)]

[Ans: (a) Rs. 9.48; Rs. 0.948 (b) Rs. 48.18; Rs. 0.48 (c) Rs. 435.18; Rs. 0.435]

24. X Ltd is committed to supply 24,000 bearings per annum to Y 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 would be the optimum run size for bearing manufacture?
2. What should be the interval between two consecutive optimum runs?
3. Assuming that the company has a policy of manufacturing 6,000 bearing per run, how much extra costs the company would be incurring when compared to the optimum run suggested in (a) above?
4. What is the minimum inventory holding cost?
5. Find out the minimum inventory cost per annum

[C.A. (Inter). Modified]

[Ans: (a) 3,600 units; (b) 54 days; (c) Rs. 576 (Rs. 4,896 – Rs. 4,320); (d) Rs. 2,160; (e) Rs. 4,320]

25. Batch No. 37 incurred the following costs:

 

Direct materials	Rs. 3,280
Department A	420 labour hours @ Rs. 3.50
Department B	686 labour hours @ Rs. 3.00

 

Factory overheads are absorbed on labour and the rates are Rs. 8 per hour for Department A and Rs. 5 per hour for Department B. The firm uses a cost plus system for setting selling price and expects a 25% gross profit (sales value minus factory cost).

Administrative overheads are absorbed as 10% of selling price.

Assuming that 1,000 units were produced in Batch No. 37, calculate:

1. the selling price per unit
2. the total amount of administrative overheads recovered by patch No. 37
3. the notional net profit per unit

[C.A. (Inter). Modified; I.C.W.A. (Inter). Modified; Madurai Kamaraj University, M.Com.]

[Ans: (a) Rs. 18.13; (b) Rs. 1813; (c) Rs. 2.72]

[Model: Back flush costing]

26.

	Rs.
Purchase of raw materials in January 2010	25,000
Conversion costs (inclusive of labour) in January	20,000
Units computed in January	1,200
Units sold in January	1,000
Standard cost per unit of output

 

	Rs.
Materials	12
Conversion cost	6
	18

There are no direct material variances in January. It is also found that there are no opening stocks of raw materials, work-in-progress and finished goods. How would you treat the above under back flush costing. Apply all the versions.