Chapter 6Job Order Costing System

The term ‘costing’ refers to the techniques and processes of determining costs

of a product manufactured or services rendered. The first stage in cost

accounting is to ascertain the cost of the product offered or the services

provided. In order to do the same, it is necessary to follow a particular method

of ascertaining the cost. The methods of costing are applied in various business

units to ascertain the cost of product or service offered. Different methods of

costing are required to be used in different types of businesses. For example,

costing methods used in a manufacturing business will differ from the methods

used in a business that is offering services. Even in a manufacturing business,

some business units may have production in a continuous process, i.e. output of

a process is an input of the subsequent process and so on, while in some

businesses production is done according to the requirements of customers and

hence each job is different from the other one. Different methods of costing are

used to suit these diverse requirements. These methods of costing are discussed

in detail in this chapter.

Methods of Costing

As mentioned in the above paragraph, the methods of costing are used to

ascertain the cost of product or service offered by a business organization. There

are two principle methods of costing. These methods are as follows

I. Job Costing II. Process Costing

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Q.1. What do you mean by methods of costing?

Ans.1. Methods of costing are used to ascertain the cost of product or service offered by a business organization.

Q.2. There are two principle methods of costing.

I. Job Costing II. Process Costing (True)

Other methods of costing are the variations of these two principle methods. The

variations of these methods of costing are as follows.

I. Job Costing: Batch Costing, Contract Costing, Multiple Costing.

II. Process Costing: Unit or Single Output Costing, Operating Costing, Operation

Costing.

The Job Costing and its variations are discussed in detail in the following

paragraphs.

I. Job Costing: This method of costing is used in Job Order Industries where the

production is as per the requirements of the customer. In Job Order industries,

the production is not on continuous basis, rather it is only when order from

customers is received and that too as per the specifications of the customers.

Consequently, each job can be different from the other one. Method used in

such type of business organizations is the Job Costing or Job Order Costing. The

objective of this method of costing is to work out the cost of each job by

preparing the Job Cost Sheet. A job may be a product, unit, batch, sales order,

project, contract, service, specific program or any other cost objective that is

distinguishable clearly and unique in terms of materials and other services used.

The cost of completed job will be the materials used for the job, the direct labor

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employed for the same and the production overheads and other overheads if

any charged to the job. The following are the features of job costing.

It is a specific order costing

A job is carried out or a product is produced to meet the specific requirements

of the order

Job costing enables a business to ascertain the cost of a job on the basis of which

quotation for the job may be given.

While computing the cost, direct costs are charged to the job directly as they are

traceable to the job. Indirect expenses i.e. overheads are charged to the job on

some suitable basis.

Each job completed may be different from other jobs and hence it is difficult to

have standardization of controls and therefore more detailed supervision and

control is necessary.

At the end of the accounting period, work in progress may or may not exist.

Q.3. Job costing is used in Job Order Industries where the production is as per

the requirements of the____________.

Ans.3. Customer

Q.4. In Job Order industries, the production is on continuous basis, rather

it is only when order from customers is received and that too as per the

specifications of the customers. (False)

Ans.4. In Job Order industries, the production is not on continuous basis, rather

it is only when order from customers is received and that too as per the

specifications of the customers. (True)

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Methodology used in Job Costing

As discussed above, the objective of job costing is to ascertain the cost of a job

that is produced as per the requirements of the customers. Hence it is necessary

to identify the costs associated with the job and present it in the form of job cost

sheet for showing various types of costs. Various costs are recorded in the

following manner.

Direct Material Costs: Material used during the production process of a job and

identified with the job is the direct material. The cost of such material consumed

is the direct material cost. Direct material cost is identifiable with the job and is

charged directly. The source document for ascertaining this cost is the material

requisition slip from which the quantity of material consumed can be worked

out. Cost of the same can be worked out according to any method of pricing of

the issues like first in first out, last in first out or average method as per the

policy of the organization. The actual material cost can be compared with

standard cost to find out any variations between the two. However, as each job

may be different from the other, standardization is difficult but efforts can be

made for the same.

Direct Labor Cost: This cost is also identifiable with a particular job and can be

worked out with the help of ‘Job Time Tickets’ which is a record of time spent by

a worker on a particular job. The ‘job time ticket’ has the record of starting time

and completion time of the job and the time required for the job can be worked

out easily from the same. Calculation of wages can be done by multiplying the

time spent by the hourly rate. Here also standards can be set for the time as well

as the rate so that comparison between the standard cost and actual cost can be

very useful.

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Direct Expenses: Direct expenses are chargeable directly to the concerned job.

The invoices or any other document can be marked with the number of job and

thus the amount of direct expenses can be ascertained.

Overheads: This is really a challenging task as the overheads are all indirect

expenses incurred for the job. Because of their nature, overheads cannot be

identified with the job and so they are apportioned to a particular job on some

suitable basis. Predetermined rates of absorption of overheads are generally

used for charging the overheads. This is done on the basis of the budgeted data.

If the predetermined rates are used, under/over absorption of overheads is

inevitable and hence rectification of the same becomes necessary.

Work in Progress: On the completion of a job, the total cost is worked out by

adding the overhead expenses in the direct cost. In other word, the overheads

are added to the prime cost. The cost sheet is then marked as ‘completed’ and

proper entries are made in the finished goods ledger. If a job remains

incomplete at the end of an accounting period, the total cost incurred on the

same becomes the cost of work in progress. The work in progress at the end of

the accounting period becomes the closing work in progress and the same

becomes the opening work in progress at the beginning of the next accounting

period. A separate account for work in progress is maintained.

Q.5. The source document for ascertaining direct material cost is the

___________________from which the quantity of material consumed can be

worked out.

Ans.5. Material requisition slip

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Q.6.Direct labor cost is identifiable with a particular job and can be worked out

with the help of ________________which is a record of time spent by a worker

on a particular job.

Ans.6. ‘Job Time Tickets’

Q.7. If a job remains incomplete at the end of an accounting period, the total

cost incurred on the same becomes the cost of work in progress. (True)

Advantages of Job Costing

The following are the advantages of job costing.

Accurate information is available regarding the cost of the job completed and

the profits generated from the same.

Proper records are maintained regarding the material, labor and overheads so

that a costing system is built up.

Useful cost data is generated from the point of view of management for proper

control and analysis.

Performance analysis with other jobs is possible by comparing the data of

various jobs. However it should be remembered that each job completed may

be different from the other.

If standard costing system is in use, the actual cost of job can be compared with

the standard to find out any deviation between the two.

Some jobs are priced on the basis of cost plus basis. In such cases, a profit

margin is added in the cost of the job. In such situation, a customer will be

willing to pay the price if the cost data is reliable. Job costing helps in

maintaining this reliability and the data made available becomes credible.

Limitations of Job Costing

Job costing suffers from certain limitations.

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These are as follows.

It is said that it is too time consuming and requires detailed record keeping. This

makes the method more expensive.

Record keeping for different jobs may prove complicated.

Inefficiencies of the organization may be charged to a job though it may not be

responsible for the same.

In spite of the above limitations, it can be said that job costing is an extremely

useful method for computation of the cost of a job. The limitation of time

consuming can be removed by computerization and this can also reduce the

complexity of the record keeping.

Q.8. What are the limitations of the job costing?

Ans.8. Limitations of Job costing are as follows.

It is said that it is too time consuming and requires detailed record keeping. This

makes the method more expensive.

Record keeping for different jobs may prove complicated.

Inefficiencies of the organization may be charged to a job though it may not be

responsible for the same.

Q.9. Write the advantages of job costing.

Ans.9. Following are the advantages of job costing.

Accurate information is available regarding the cost of the job completed and

the profits generated from the same.

Proper records are maintained regarding the material, labor and overheads so

that a costing system is built up.

Useful cost data is generated from the point of view of management for proper

control and analysis.

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Performance analysis with other jobs is possible by comparing the data of

various jobs. However it should be remembered that each job completed may

be different from the other.

If standard costing system is in use, the actual cost of job can be compared with

the standard to find out any deviation between the two.

Some jobs are priced on the basis of cost plus basis. In such cases, a profit

margin is added in the cost of the job. In such situation, a customer will be

willing to pay the price if the cost data is reliable. Job costing helps in

maintaining this reliability and the data made available becomes credible.

Format of Job Cost Sheet

The format of job cost sheet is given below.

XYZ LTD.

JOB ORDER COST SHEET

Customer Invoice No. Selling Price Per Unit: Cost Per Unit:

Date: Job Order No: Total Cost

Product Description

Particulars Dates and Ref. No. Total Amount [SR ] Per Unit [SR]Direct Materials: Dept I Dept II Dept III TotalDirect LaborOverheadsTotal Costs

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Example 6.1

A factory uses a job costing system. The following data are available from the

books at the year ending on 31st March 2014.

Particulars Amount [SR]

Direct Materials 1800000Direct Wages 1500000Profit 1218000Selling and Distribution Overheads 1050000Administrative Overheads 840000Factory Overheads 900000

Required:

A. Prepare a job cost sheet showing the prime cost, works cost, production cost,

cost of sales and sales value.

B. In the year 2014-15, the factory has received an order for a number of jobs. It

is estimated that the direct materials would be SR2400000 and direct labor

would cost SR1500000. What would 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

overhead as a percentage of direct wages and administrative and selling and

distribution overhead as a percentage of works cost, based on the cost rates

prevalent in the previous year.

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Solution: The Job Cost Sheet is shown belowParticulars Total Amount [SR ] Total Amount [SR ]

Direct Costs: - Direct Materials Direct LaborPrime Cost [Direct Materials + Direct Labor]

18000001500000 3300000

Factory Overheads 900000Factory/Works Cost [Prime Cost + Factory Overheads]

4200000

Administrative Overheads 840000Cost of Production [Factory Cost + Administrative Overheads]

5040000

Selling and Distribution Overheads 1050000Cost of Sales [Cost of Production + Selling and Distribution Overheads

6090000

Profit [As Given ] 1218000Sales [Cost of Sales + Profit ] 7308000% of Factory Overheads to Direct Wages: SR900000/1500000*100 = 60%% of Administrative Overheads to Works Cost: SR840000/4200000 *100 = 20%% of Selling and Distribution Overheads to Works Cost:

SR1050000/4200000*100 =25%B. Statement showing Price Quotation for a Job

Particulars Total Amount [SR ] Total Amount [SR ]Direct Costs: - Direct Materials Direct LaborPrime Cost [Direct Materials + Direct Labor]

24000001500000 3900000

Factory Overheads– 60% of Direct Labor 900000Factory/Works Cost [Prime Cost + Factory Overheads]

4800000

Administrative Overheads –20% of Works Cost 960000Cost of Production [Factory Cost + Administrative Overheads]

5760000

Selling and Distribution Overheads 28.75% of Works Cost [25% + 15% = 28.75%]

1380000

Cost of Sales [Cost of Production + Selling and Distribution Overheads

7140000

Profit 16.67 % of Sales [20% on cost] 1428000Sales [Cost of Sales + Profit ] 8568000

Example 6.2

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The following information for the year ended on 31st March 20014 is obtained

from the books and records of a manufacturing company.

Particulars Completed Jobs SR. Work In Progress SR.Raw material supplied from stores 88000 32000Wages 100000 40000Chargeable expenses 10000 4000Material returned to stores 1000 ---------------

Factory overheads are 80% of wages. Office overheads are 25% of factory cost and selling and distribution overheads are 10% of cost of production. The completed jobs realized SR410000.Prepare: Work in Progress Ledger Control Account, Completed Job Ledger Control Account and Cost of Sales Account.

Solution:Consolidated Work-in-Progress Account

Dr. Cr.Particulars Amount (SR) Particulars Amount (SR)

Raw materials consumed 32 000Wages 40 000Chargeable expenses 4000Factory overheads[80% of wages]

32000

Factory cost 108 000Administrative overheads[25% of SR 108 000]

27 000

Total 135000

Note: In the above account, selling and distribution overheads are not charged.

Consolidated Completed Job AccountDr. Cr.

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Particulars Amount (SR) Particulars Amount (SR)Raw Materials: SR88 000Less: Returns 1 000

87000 Customer’s Account

410000

Wages 100000Chargeable Expenses 10000Factory overheads [80% of direct wages] 80000Factory Cost 277 000Administration overheads [25% of SR 277 000]

69250

Cost of production 346 250Selling and distribution expenses 34 625Net profit transferred to Profit and Loss A/c

29 125

Total 410 000 410 000

Cost of Sales AccountDr. Cr.

Particulars Amount (SR) Particulars Amount (SR)Materials consumed 87 000 Balance c/d 380875Wages 100 000Direct charges 10000Factory overheads [80% of wages] 80 000Factory cost 277 000Administrative overheads[25% of SR277 000]

69250

Cost of production 346250Selling and distribution10% of Cost of production

34625

Cost of sales 380875 380875

Example 6.3

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A company has two manufacturing shops. The shop floor supervisor presented

the following cost for Job No. A to determine the selling price.

Particulars Amount SR. Per UnitMaterial 70Direct wages Department X–8 hours, Department Y – 6 hours = 14 hours @ SR.2.50 per hour 35Chargeable expenses [stores] 5

110Add: 33 1/3 % for overheads 37

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Analysis of the Profit and Loss A/c shows the following

Dr. Profit and Loss Account Cr.

Particulars Amount SR. Particulars Amount SR.To Materials used 1,50,000 By Sales less returns 2,50,000To Direct wagesDepartment XDepartment Y

10,00012,000

To Stores expenses 4,000To OverheadsDepartment XDepartment Y

5,0009,000

To Gross profit c/d 60,000Total 2,50, 000 Total 2,50, 000

It is noted that average hourly rates for the two departments, X and Y are similar.You are required to [a] Draw up a job cost sheet[b] Calculate the revised cost using overheads figures as shown in the profit and loss account as the basis of charging overheads to department X and Y.[c] Add 20% of total cost to determine selling price.

Solution:

Calculation of Overhead Absorption Rates Based on Direct Labor Hour Rate

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Particulars Department X Department YI] Direct wages as per Profit and Loss A/c SR10, 000 SR12, 000II] Direct wage rate per hour SR2.50 SR2.50III] Direct labor hours [I /II] 4, 000 hours 4, 800 hoursIV] Overheads SR5000 SR9000V] Overheads rate per labor hour [IV / III] SR1.25 SR1.875

Calculation of Overhead Absorption Rates Based on Percentage of Direct Wages

Particulars Department X Department YOverheads SR5000 SR9000Direct wages SR10, 000 SR12, 000% of overheads to direct wages 50% 75%

Job Cost Sheet [Overheads absorption on the basis of Direct Labor Hour Rate]

Particulars Amount SR. Per UnitMaterial 70.00Direct wages:Department X: SR2.50 * 8 hours = SR20.00Department Y: SR2.50 * 6 hours = SR15.00 35.00Chargeable expenses 5.00Prime Cost [Material + Labor + Chargeable expenses] 110.00Overheads:Department X: SR1.25 * 8 hours = SR10.00Department Y: SR1.875 * 6 hours = SR11.25 21.25Total Cost 131.25Add: Profit 20% on cost 26.25Value of Job A 157.50

Job cost sheet [overhead absorption rate based on percentage of direct wages]

Particulars Amount SR. Per UnitMaterial 70.00

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Direct wages:Department X: SR2.50 * 8 hours = SR20.00Department Y: SR2.50 * 6 hours = SR15.00 35.00Chargeable expenses 5.00Prime Cost [Material + Labor + Chargeable expenses] 110.00Overheads:Department X: 50% of SR.20 = SR.10.00Department Y: 75% of SR.15 = SR.11.25 21.25Total Cost 131.25Add: Profit 20% on cost 26.25Value of Job A 157.50

Example 6.4

From the following details, you are required to calculate the cost of Job No.215 and find out the price to give a profit of 25% on total cost Materials SR 2000

Wages Dept. - A -30 hours @ SR3 per hour B -20 hours @ SR2 per hour C- 10 hours @ SR5 per hour

Overhead expenses for these three departments were estimated as follows:

Variable Overheads

Dept. - A- SR 1,000 for 1,000 labour hours B- SR 6,000 for 3,000 labour hours C- SR 2,000 for 400 labour hours

Fixed Overheads

Estimated at SR l0000 for 5000 normal working hours

Solution:

Job Cost Sheet (Job. No.2I5)

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Amounts Amounts SR SR

Direct Materials 2000Wages

Dept. A =30hrs x SR 3 = 90 B =20hrs x SR 2 = 40 C =10 hrs x SR 5= 50 180

Variable Overheads

Dept. A = 30 x (SR 1,000 /1,000 hrs) = 30Dept. B = 20 x (SR 6,000 /3,000 hrs) = 40Dept. C = l0 x (SR 2,000 /400 hrs) = 50 120

Fixed Overheads60 hrs x (SR 10,000 /5,000 hrs) = 120

Total Cost 2,420Profit 25% on total cost [(25/100) x 2,420] = 605 Selling Price SR 3,025

Example 6.5

The information given below has been taken from the records of an engineering

works in respect of Job. No. 111 and Job. No. 222.

Job. No.111 Job. No.222 SR SR

Materials Supplied 5,000 3,000Wages Paid 1,100 800Direct Expenses 400 200Material transferred from 222 to 111 300 300Materials return to stores - 200You are required to find out the cost of each of Job and calculate profit or loss if any assuming that Job No. 222 is completed and invoiced to the customer at SR 4000/-.Solution:

Job. No. 111Particulars Amount SR Particulars Amount SR

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To Materials To Wages To Direct Expenses To Material transferred From Job. No. 222

To Balance b/d

5,000 1,100

400

3006,8006,800

By Balance c/d 6,800

6,800

Job. No. 222Particulars Amount SR Particulars Amount SR

To Materials To Wages To Direct Expenses To P & L a/c (Profit transferred)

3,000 800 200

5004,500

By Materials transferred to Job. No. III By Materials return to stores By Sales

300 200

4,000

4,500

Question 1

The accounts of the RR Engineering Company Ltd. show the following cost figures for 2013:

SRMaterials consumed 350000 Direct manual and machine labour wages 270000 Works overhead expenses 810000 General overhead expenses 56000

Show the work cost and the total cost of manufacture, the percentages that the works overheads bear to the direct manual and machine labour cost and the percentage that the general overheads bear to the works cost. What price should the company quote to manufacture a refrigerator which is estimated to require on expenditure of SR 7200 in materials and SR 6000 in wages so that it will yield a profit of 20% on the selling price?

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