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Introduction
As mentioned in the first chapter, 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
indifferent 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.
5.2 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 areas follows] Job CostingII] Process Costing 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 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.
1. It is a specific order costing
2. A job is carried out or a product is produced is produced to meet the specific requirements of the
order
3. Job costing enables a business to ascertain the cost of a job on the basis of which quotation for
the job may be given
4. 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.
5. 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.
6. At the end of the accounting period, work in progress may or may not exist.
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.
chemicals, cement, etc. Since each product is identical, product cost can be determined by dividing total
manufacturing costs by total units produced. This average cost applies equally to all units produced. Job
Order Costing is used by companies where products are identifiable by individual units or batchesauto
repair, tax return preparation, case in an attorneys office, ship construction, etc. The costs attributable to
a particular job are assigned directly to it.
In a manufacturing environment, costs are accumulated on a Job Cost Sheet (Exhibit 3-4, Page 95). Note
that the direct material cost comes from material requisition forms and the direct labor costs from
employee time tickets. However, since manufacturing overhead consists of numerous costs some of
which are not immediately available, Manufacturing Overhead is charged on an applied basis. At the
beginning of the year the company calculates a predetermined overhead rate by dividing estimated total
manufacturing overhead cost by estimated total units of allocation base. Note the example on Page
94. Overhead is charged to an individual job by multiplying the predetermined overhead rate by the
number of units of allocation base charged to the particular job.
-----------------------------------------------------------------------It means ascertaining costs of an individual job, work order or project separately. According to ICMA
London, job costing is that form of specific order costing which applies where work is undertaken to
customers specific requirements and each order is of comparatively of short duration. Under this
method of costing, each job is considered to be a distinct cost unit. As such, each job is separately
identifiable.
In the case of a job, work is usually carried out within the factory or workshop. Sometimes, a job is
accomplished even in the customers premises. This method of costing is applicable to ship building,
printing, engineering, machine tools, readymade garments, shoes, hats, furniture, musical instruments,
interior decorations etc.
Features:
1.
2.
3.
4.
5.
6.
Each job has its own characteristics, depending up on the special order placed by the customer.
Each job is treated as a cost unit.
A separate job cost sheet is made out for each job on the basis of distinguishing numbers.
A separate work in progress ledger is maintained for each job.
The duration of the job is normally a short period.
Profit or loss is determined for each job independently of others
Identify Job
The first step in the job-costing process is to identify the scope of the project or job. For a manufacturing
company, this might be an order to produce 10,000 widgets. For an architectural firm, it could mean the
design of a high-rise building. To accurately perform a job costing, it is important to know everything the
job entails.
2
Identify Costs
Step two is to identify the direct costs associated with the job. If the job is to manufacture 10,000 widgets,
there are direct costs involved including the raw materials and parts needed to make the widgets. The
other direct costs associated with a job are labor costs. Determine how many employee hours will be
needed to complete the job and multiply it by the average hourly wage.
3
In addition to the direct costs associated with a job, the project will incur indirect costs. Examples include
the use of manufacturing equipment, power to run the equipment, salaries of supervisors or managers
overseeing the job, lighting and even the depreciation on the machines used in the process. Allocation
bases are determined by looking at previous jobs and seeing what the indirect costs totaled at the
completion of the project.
4
Indirect Costs
Once the allocation bases are defined, indirect costs are identified for the new project. Using the widget
manufacturing example, indirect costs might include the machine hours needed to make the widgets or
the number of supervisor hours to oversee the manufacture of the widgets.
5
Compute Rate
The cost allocation bases discussed in step three are total indirect cost figures based on completed jobs or
projects. Determine a single unit rate by taking the total cost figure and dividing it by the number of
single units that were produced in the prior project. This single unit rate will be used in the calculation of
indirect costs for the new project.
6
To determine the total indirect costs, take the single unit cost rate that was calculated in step five and
multiply it by the number of units to be produced. This will provide the estimated total of all indirect
costs.
7
The final step in the job costing process is to add the direct costs to the indirect costs that have been
calculated. The final figure is the estimated cost for the total project. Compare this figure with the figure
quoted to the customer to complete the job. The difference between the two figures identifies either the
profit or the loss for completion of the project.
Illustration I
From the following particulars calculate the cost of Job No.505 and price for the job to give a profit of
25% on the selling price.
Material
:
Rs. 6820
Wage details:
Department
X : 60 hrs @ Rs. 3 per hr
Y : 50 hrs @ Rs. 3 per hr
Z : 30 hrs @ Rs. 5 per hr
The variable Overheads are as follows:
Department
X : Rs. 5000 for 5000 hrs
Y : Rs. 4000 for 2000 hrs
Z : Rs. 2000 for 500 hrs
The total fixed expenses amounted to Rs. 20,000 for 10,000 working hours.
Calculate the cost of Job No. 505 and price for the job to give a profit of 25% on selling price
Solution:
Job Cost Sheet No. 505
Rs.
Direct Material
6,820
Wages:
Department X
60x3= 180
Department Y
50x3 =
150
Department Z
30x5=150 480
-----------------Prime Cost 7,300
Overheads: - Variables
Department X 60 x1 = 60
Department Y 50 x2= 100
Department Y 30x 4= 120 280
-----------------7,580
Fixed OH 140 x 2 = 280(60+50+30 x 2) 280
-----------------Total cost 7,860
Profit 25% on selling price ie 1/3 of cost 7860 x1/3 2, 620
----------------Selling price 10,480
Practical problem 1
The following information is extracted from the Job ledger in respect of Job No. 205
Materials Rs. 8,500
Wages: 80 hours @ Rs. 6 per hour
Variable OH incurred for all jobs is Rs. 10,000 for 4,000 labour hours.
Find the profit if the job is billed for Rs. 8,400.
Practical Problem 2
From the following information, ascertain the work cost of Job No. 505
The job was commenced on 10th January 2011 and completed on 1st Feb.2011. Materials used were Rs.
2,400 and labour charges were Rs. 1,600. Other details were as follows:
Indirect labour cost in the factory amounted to Rs. 1,200
Machine X was used for 50 hours @ Rs. 20 per hour
Machine Z was used for 40 hours @ Rs. 22 per hour