Job and Batch costing in CMA

1. JOB COSTING AND BATCH
COSTING
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2. JOB COSTING
• Job costing is a method of costing whereby cost is compiled for a job or work
order. The production is against customer’s orders and not for stock.
• The cost is not related to the unit of production but is a cost for the job, e. g
printing of 5000 ledger sheets, repairs of 50 equipment’s, instead of printing
one sheet or repair of one equipment.
• The elements of cost comprising Prime Cost viz. direct materials, direct labor
and direct expenses are charged directly to the jobs concerned, the overhead
charged to a job is an apportioned portion of the departmental overhead.
• Applied in industries where production is measured in terms of completed
jobs like Printing Press, Automobile Garage, Repair workshops, Ship
Building, Foundry and other similar manufacturing units which manufacture
to customers’ specific requirements.
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3. DOCUMENTS USED IN A JOB ORDER
COST SYSTEM
(i) Production Order or Manufacturing Order:
This is a works order authorizing the production department to produce a
specified quantity of a product which constitutes the job.
(ii) Cost Sheet:
For recording costs, very often a separate record called a cost sheet is used. The
cost sheet and the works order may also be combined, when costs are recorded on
the production order itself.
(iii) Other Documents:
The other documents which are used as control mechanism by the dispatching
function are: Material Requisitions, Tool Orders, Time Tickets, Inspection Order,
etc.
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4. JOB COST ACCOUNTING
PROCEDURE
• Cost of direct materials in respect of a job is obtained from copies of
Material Requisitions costed by the Stores Accounting Section.
• Cost of direct wages is obtained from various Time Tickets costed by the
Payroll Department. Direct Expenses, if any, are also taken up.
• Manufacturing overheads are then applied at predetermined departmental
absorption rates and recorded in the cost-sheet.
• Various overheads may be recorded in the separate columns meant for these
in the cost sheet which are totaled to obtain the total cost of direct material,
direct labour, direct expenses and apportioned manufacturing overheads.
• These four elements of cost together give the production cost or
manufacturing cost of the job.
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5. TYPES OF ACTIVITIES
Job costing involves the following accounting activities:
Materials: It accumulates the cost of components and then assigns
these costs to a product or project once the components are used.
Labor: Employees charge their time to specific jobs, which are then
assigned to the jobs based on the labor cost of the employees.
Overhead: It accumulates overhead costs in cost pools, and then
allocates these costs to jobs.
Direct Expenses: Directly charged to individual jobs for which they
are incurred.
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6. JOB COSTING ALLOCATION OF
MATERIALS
• In a job costing environment, materials to be used on a product or project
first enter the facility and are stored in the warehouse, after which they are
picked from stock and issued to a specific job.
• If spoilage or scrap is created, then normal amounts are charged to an
overhead cost pool for later allocation, while abnormal amounts are charged
directly to the cost of goods sold.
• Once work is completed on a job, the cost of the entire job is shifted from
work-in-process inventory to finished goods inventory.
• Then, once the goods are sold, the cost of the asset is removed from the
inventory account and shifted into the cost of goods sold, while the company
also records a sale transaction.
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7. JOB COSTING ALLOCATION OF
LABOR
• In a job costing environment, labor may be charged directly to individual
jobs, if the labor is directly traceable to those jobs.
• All other manufacturing-related labor is recorded in an overhead cost pool
and is then allocated to the various open jobs.
• The first type of labor is called direct labor, and the second type is known as
indirect labor. When a job is completed, it is then shifted into a finished
goods inventory account.
• Then, once the goods are sold, the cost of the asset is removed from the
inventory account and shifted into the cost of goods sold, while the company
also records a sale transaction.
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8. JOB COSTING ALLOCATION OF
OVERHEAD
• In a job costing environment, non-direct costs are accumulated into one or
more overhead cost pools, from which you allocate costs to open jobs based
upon some measure of cost usage.
• The key issues when applying overhead are to consistently charge the same
types of costs to overhead in all reporting periods, and to consistently apply
these costs to jobs. Otherwise, it can be extremely difficult for the cost
accountant to explain why overhead cost allocations vary from one month to
the next.
• The overhead allocation process for standard costs is to use historical cost
information to arrive at a standard rate per unit of activity, and then allocate
this standard amount to jobs based on their units of activity.
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9. JOB COSTING ALLOCATION OF
OVERHEAD
You then subtract the total amount allocated from the overhead cost pool (which contains
actual overhead costs), and dispose of any remaining amount in the overhead cost pool. You can
use any of the following methods to dispose of the remaining amount:
▪Charge to cost of goods sold. Charge the entire variance to the cost of goods sold. This is
the simplest method.
▪Allocate the variance. Allocate the variance to the accounts for finished goods, work-in-
process, and cost of goods sold, based on the ending balances in these accounts. This approach
is slightly more time-consuming, but is the most theoretically correct method under generally
accepted accounting principles.
▪Charge to jobs. Allocate the variance to those jobs that were open during the reporting
period. This approach is the most time-consuming. It essentially reverts a company back to an
actual costing system, since the results of this method will approximate those created under an
actual cost allocation system.
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10. ADVANTAGES OF JOB COSTING
• Profitability of each job can be individually determined.
• It provides a basis for estimating the cost of similar jobs which are to be taken in
future.
• It provides the detailed analysis of the cost of material, labour and overheads for each
job as and when required.
• Plant efficiency can be controlled by confining attention to costs relating to individual
jobs.
• Job costing is essential for cost-plus contract where contract price is determined
directly on the basis of cost.
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11. LIMITATIONS OF JOB COSTING
• It requires detailed record-keeping for different jobs.
• It is expensive to operate as it requires considerable detailed clerical work.
• With the increase in the clerical work the chances of errors are increased.
• A job may be charged for inefficiencies, although it has not caused any.
• The costs as ascertained are historical as they compiled after incidence and
therefore does not provide control of cost unless it is used with standard
costing system.
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12. ILLUSTRATION:1
• The following information for the year ended
31/12/2008 is obtained from the books & record of a
factory:
• Factory Overhead are 80% of wages, office overheads are
25% of factory cost & selling distribution overheads are
10 % of cost of production.
• The complete jobs realized Rs 4,10,000.
Completed Jobs (Rs) W.I.P. (Rs)
Raw Material supplied from stores 88,000 32,000
Wages 1,00,000 40,000
Chargeable Expenses 10,000 4,000
Materials returned to Stores 1,000 -
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13. ILLUSTRATION:1
• Write up:
1. WIP Ledger Control Account
2. Completed Job Ledger Control Account
3. Cost of Sales Account
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14. ILLUSTRATION:1-SOLUTION
Consolidated Work-In-Progress A/c
Dr Rs Crs Rs
To Raw Material consumed 32,000
To Wages 40,000
To Chargeable Expenses 4,000
To Factory Overheads (80% Of wages) 32,000
FACTORY COST 1,08,000
To Admin Overhead (25% of Factory Cost) 27,000
1,35,000 1,35,000
Note: Selling & Distribution Overhead is not charged in WIP A/c
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15. ILLUSTRATION:1-SOLUTION
Consolidated Completed Job A/c
Dr Rs Cr Rs
To Raw Material consumed 88,000 87,000 By Customer’s A/c (Amt.
of Jobs Completed)
4,10,000
Less: Return to Stores (-) 1000
To Wages 1,00,000
To Chargeable Expenses 10,000
To Factory Overheads (80% Of wages) 80,000
FACTORY COST 2,77,000
To Admin Overhead (25% of Factory Cost) 69,250
Cost of Production 3,46,250
To Selling & Distribution Overhead 34,625
To Transfer to P & L A/c 29,125
4,10,000 4,10,000
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16. ILLUSTRATION:1-SOLUTION
Cost of Sales A/c
Dr Rs Cr Rs
To Material consumed 87,000 By Bal. c/d 3,80,875
To Wages 1,00,000
To Chargeable Expenses 10,000
To Factory Overheads (80% Of wages) 80,000
FACTORY COST 2,77,000
To Admin Overhead (25% of Factory Cost) 69,250
3,46,250
To Selling & Distribution Overhead 34,625
COST OF SALES 3,80,875 3,80,875
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17. BATCH COSTING
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18. BATCH COSTING
• In Batch Costing, a lot of similar units which comprise
the batch may be used as a cost unit for ascertainment of
cost.
• Separate Cost Sheet is maintained for each batch by
assigning a batch number.
• Cost per unit of product is determined by dividing the
total cost of a batch by the number of units of that batch.
• Batch costing is used in number drug industries, ready
made garment industries, electronic components
manufacture, TV sets, radio etc.
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19. DETERMINATION OF ECONOMIC
BATCH QUANTITY (EBQ)
• Determination of economic batch lot is the
important work in batch costing.
• The two types of costs involved in batch costing
are
(1) Set up cost
(2) Carrying cost.
• Economic sBatch Quantity will balance both
opposing costs.
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20. DETERMINATION OF ECONOMIC
BATCH QUANTITY (EBQ)
• EBQ is calculated by using the following
formula:
where:
Q = Batch size
D = Demand per annum
Ch = Cost of holding one unit for one year
Co = Cost of setting up a batch ready to be produced
R = Annual rate of production
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21. DETERMINATION OF ECONOMIC
BATCH QUANTITY (EBQ)
• If the production of the batch is done over a
short period, D/R loses its significance.
• For short period, EBQ is given by:
where:
D = Demand per annum
Co = Cost of placing one order
Ch = Cost of holding one unit for one year
Q = Reorder quantity (EOQ)
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22. NEED TO DETERMINE EBQ
• EBQ can be determined to calculate the
optimum size of the batch.
• If the batch size is high, set up cost per unit may
tend to decline and the carrying cost will
increase.
• Size of the batch also influences the clerical and
other machine set–up costs.
• Therefore, it is necessary to detrmine EBQ.
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23. BATCH COSTING
• ADVANTAGES:
▫ Reduces the initial capital outlay.
▫ Batch production reduces per unit cost.
▫ Reduction in time to produce single unit.
▫ Labor cost is reduced.
▫ Useful for smaller businesses.
• DISADVANTAGES:
▫ Machine breakdown may stop whole production.
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24. ILLUSTRATION:1
Following information relates to the manufacturing of a
component X - III in a cost centre :
Cost of materials 6 paise per component
Operator's wages 72 paise an hour
Machine hour Rs. 1.50
Setting up time of the machine 2 hours and 20 minutes
Manufacturing time 10 minutes per component
Prepare cost sheets showing both production and setting up
costs-total and per unit when a batch consists of 1,000
components.
Cost Sheet for a Batch of 1000 Components
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25. ILLUSTRATION:1-SOLUTION
Particulars Amount (Rs) Amount (Rs)
Setting up costs:
Operator’s wages for 2 hrs 20 min @
75 paise an hour
Machine overheads for 2 hrs and 20
min @ Rs. 1.50 an hour
1.74
3.50
Total Setting up costs 0.005 5.25
Add: Production Costs
Material costs for 1000 units @ 6
paise per unit
Operator’s wages for 10,000 mins
(100x10) @ 72 paise an hour
Machine Overheads for 10,000 mins
@ Rs.1.50 an hour
0.06 60
0.120 120
0.250 250
Total Production Costs 0.430 430
Total Costs 0.435 435.25
Cost Sheet for a batch of 1000 components
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26. ILLUSTRATION: 2
From the following information, you are
required to calculate Economic Batch Quantity:
Annual demand for the product= 40,000 units
Setup cost per batch= Rs. 750
Carrying cost per unit annum= Rs. 15
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27. ILLUSTRATION:2-SOLUTION
Calculation Economic Batch Quantity :
Economic Batch Quantity = √(2DS)/C
Where,
D = Annual Demand in Units
S = Set up Cost per batch
C = Carrying Cost per unit per annum
Economic Batch Quantity = √(2 x 40,000 x 750)/15
= 2,000 units
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28. ILLUSTRATION:3
A Ltd. is committed to supply 24,000 bearings per
annum to B 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 should be the optimum run size for bearing
manufacture?
(2) What would be the interval between two
consecutive optimum runs?
(3) Find out the minimum inventory cost per annum.
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29. ILLUSTRATION:3-SOLUTION
(i) Economic Batch or run size :
EBQ= √(2DS)/C
Where,
D = Annual Demand or production in units
S = Setup cost per batch
C = Annual carrying or holding cost per unit
E B Q = -. √(2 x 24,000 x 324)/12
= 3,600 units
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30. ILLUSTRATION:3-SOLUTION
Alternative Solution:
The Economic batch size figure can also be
obtained by taking monthly figure as under:
= √(2 x 2000 units x Rs. 324)/0.10
= 3,600 units
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31. ILLUSTRATION:3-SOLUTION
(ii) Number of set up per annum:
=(Annual production)/(Economic Batch Quantity)
=(24,000)/(3600)
= (20)/(3)
Interval between two consecutive optimum runs
=(12/(20/3))
= 1.8 months
(iii) Minimum Inventory Cost Per Year :
= [ (24,000/3600)*324]+[(3600/2)*12]
=Rs. 2,160+ Rs. 2,160
=Rs. 4,320
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32. Difference between Job Costing and
Batch Costing
JOB COSTING BATCH COSTING
Costs are collected and accumulated
according to Jobs, Contracts or Work Order.
Lot of similar units which comprise the
batch may be used as a cost unit for
ascertainment of cost.
Each job is treated as a separate entity for
the purpose of costing.
Separate cost sheet is maintained for each
batch by assigning a batch number.
The materials and labour costs are complied
through the respective abstracts and
overheads are charged on predetermined
basis.
Separate cost sheet is maintained for each
batch by assigning a batch manner.
Costs are found out at the stage of
completion of the job.
Cost per unit of product is determined by
dividing the total cost of a batch by the
number of units of that batch.
Job costing is used in Printing, Furniture
making, Ship Building etc.
Batch costing is used in drug industries,
readymade garments, T.V. sets, Radio's and
Electronic Components Manufacture.
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33. THANK YOU
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