AL WADI INTERNATIONAL SCHOOL

ACCOUNTING

GRADE-12

NOTES
JOB AND BATCH COSTING
Costing systems may be applied to every type of business including public or
private, manufacturer of goods or providers of services etc. Each type of business must
choose a costing system that suits its particular operation. No one system will serve
every type of business.
The operation of a business may be classified as either Continuous or Specific order.
Continuous operations are typically those in which a single type of good is produced
and the cost units are identical. Production may involve a sequence of continuous or
repetitive operations. Examples are manufacture of computers, production of mineral
water, oil refining, production of medicines and passenger and freight transport.
Specific order operations are those which are performed in response to special orders
received from customers and may be classified according to whether the operations
consist of individual jobs, or the production of batches of identical units for a customer.
Job Costing:
Job costing is that form of specific order costing which applies where the work is
undertaken as an identifiable unit such as re painting a house, repairing a television set,
and servicing a motor car. 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 analyse the costs according to each job.
Job costing is suitable where the jobs being worked on are unique i.e. not standard.
Often they are being made to a specific order such as a custom-built car or a one off
special export order. Since each job is different from the next, it requires different
amounts of labour, material, and overhead spent on it and a separate record of its cost
needs to be kept.
Advantages of Job Costing System:
Following are the advantages of Job cost accounting.
1. 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 the functional units.
2. It records costs more accurately and facilitates cost control by comparing actuals
with estimates.
3. It enables the management to ascertain which of the jobs are more profitable
than the others, which are less profitable and which are incurring losses.

JOB COSTING

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AL WADI INTERNATIONAL SCHOOL

ACCOUNTING

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NOTES
4. It provides a basis for estimating the cost of similar jobs taken up in future and
thus helps in future production planning.
5. Determination of predetermined overhead rates in job costing necessitates the
application of a system of budgetary control of overheads with all its advantages.
Disadvantages of Job Costing:
Following are the disadvantages of job cost accounting.
1. It involves a great deal of clerical work in recording daily the cost of materials
issued, wages spent and overhead chargeable to each job or work order which
adds to the cost of cost accounting. Thus it is expensive.
2. The scope of committing mistakes are enough as the cost of one job may be
wrongly posted to the cost of other job.
3. Cost comparison among different jobs becomes difficult especially when drastic
changes take place.
4. Determination of overhead rates may involve budgeting of overhead expenses.
5. Job costing is a historical costing which ascertains the cost of a job or product
after it has been manufactured. It does not facilitate control of cost.
Quoting for a job:
When a firm is asked to quote for a job, it must estimate the quantities of each of the
materials to be used, and the number of hours required to be spent on the Job by
various grades of labour. The materials and labour must be priced and an appropriate
amount added for overheads. If the firm has no shortage of work, it will decide what
profit margin it expects to make on the job, and add this to arrive at the amount of the
quotation.
Example 1:
Jobbings Ltd is asked to quote a price to install central heating in a house. The
quotation is based on estimated costs as follows.

Materials
Labour
Overhead (200% of labour)
Total cost
Add profit (25% of cost)
Amount of quotation
JOB COSTING

Estimated costs
$
3 000
1 700
3 400
8 100
2 025
10 125
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AL WADI INTERNATIONAL SCHOOL

ACCOUNTING

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NOTES

If the quotation is accepted, the costs will be recorded on a job card as they are incurred
by Jobbings Ltd.
Job No.107 installation of central heating at XYZ

Materials
Labour
Overhead (200% of labour)
Total cost
Add profit (25% of cost)
Amount of quotation

Estimated
$
3 000
1 700
3 400
8 100
2 025
10 125

Actual
$
2 740
1 920
3 840
8 500
1 625
10 125

When the job has been completed, the actual costs have been entered on the job card,
which shows that actual cost exceeded the estimated cost by $400 and the profit made
is only $1625 instead of $2025. The job card will provide useful information the next
time Jobbings Ltd quotes for a similar job.
Batch costing:
Batch costing is very similar to job costing and is applied when an order from a
customer involves the production of a number of identical items. All the costs incurred
are charged to the batch and the cost per unit is found by dividing the cost of the batch
by the number of units in the batch. For example, a large retailer might order 5000
jackets from a clothing manufacturer, to be made according to its own specifications.
Costing a batch is similar to costing a job, since the batch is seen as the job.
Batch Costing: It is a form of job costing. In this, the cost of a group of products is
ascertained. The unit of cost is a batch or a group of identical products instead of a
single job, order or contract. Separate cost sheets are maintained for each batch of
products by assigning a batch number. The cost per unit is ascertained by dividing the
total cost of a batch by the number of items produced in that batch.
Batch costing is employed by companies manufacturing in batches. It is used by
readymade garment factories for ascertaining the cost of each batch of cloths made by
them. Pharmaceutical or drug industries, electronic component manufacturing units,
radio manufacturing units too use this method of costing for ascertaining the cost of
their product.
The industries, where this method of costing is applied must posses these
features:
a. The production is generally against customers order but not for stock.
b. Each job has its own characteristics and needs special treatment.
c. Each job is treated as a cost unit under this method of costing.
d. The cost of production of every job is ascertained after the completion of the job.
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AL WADI INTERNATIONAL SCHOOL

ACCOUNTING

GRADE-12

NOTES

Thus cost is ascertained for each job separately. This method is applicable to
printers, machine tools manufactures, foundries and general engineering workshops.
Example 2:
Evocation Ltd sells reproductions of antique furniture. It places an order with Fakefabs
Ltd for 500 dining chairs at an agree price of $30 000 for the batch.
Fakefabs Ltd has four production departments for which the following information
is given.
Machining
OAR $35 per machine hour
Finishing
OAR $20 per direct labour hour
French polishing
OAR $10 per direct labour hour
Assembly
OAR $15 per direct labour hour
The cost incurred in the production of 500 dining chairs were:
Direct materials $5000
Direct labour:
Machining
125 hours at $10 per hour
Finishing
180 hours at $9 per hour
French polishing
220 hours at $12 per hour
Assembly
100 hours at $8 per hour
160 machine hours were booked against the batch of chairs in the machining
department.
Fakefabs Ltd recovers its administration expenses at 15% on the total cost of
production.
The batch cost, cost per chair and profit per chair are calculated as follows.
Answer:
Costs for batch of 500 chairs
Direct materials
Direct labour:

5 000
Machining (125 X $10)
Finishing (180 X $9)
French polishing (220 X $12)
Assembly (100 X $8)

Prime cost
Production overhead recovered
Machining (160 X $35)
Finishing (180 X $20)
French polishing (220 X $10)
Assembly (100 X $15
Cost of production
Add administration costs revovered ($24 210 X
15%)
Total cost of batch of 500 chairs
Profit
JOB COSTING

1250
1620
2640
800
5600
3600
2200
1500

6 310
11 310

12 900
24 210
3 632
27 842
2 158
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ACCOUNTING

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NOTES
Quotation Price

30 000

$27 842
Cost per chair = ------------- = $55.684
500
$30 000
Profit per chair = ------------ (-) $55.684 = $4.316
500

JOB COSTING

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