JOB COSTING

 Methods or Types of Costing

Costing is the technique and process of ascertaining
costs. In order to do the same, it is necessary to follow a
particular method of ascertaining cost. Different methods
of costing are applied to different industries depending
upon the type of manufacture and their nature. Broadly the
costing methods are classified into the following:
(a) Specific Order Costing (Job or Terminal Costing)
(b) Operation Costing or Process or Period Costing

 Specific Order Costing: Specific order costing is the

category of basic costing methods applicable where the
work consists of separate jobs, batches or contracts
each of which is authorised by a specific order or
contract. It includes job costing consisting batch costing
and contract costing.

 Job Order Costing: CIMA London defines job costing as

“the category of basic costing methods which is
applicable where the work consists of separate contracts,
jobs or batches each of which is authorised by specific
order or contract”.
Industries which manufacture products or render
services against specific orders as distinct from continuous
production for stock or sales use the job costing or job
order method of cost accounting. The method is also known
under various other names, such as specific order costing,
production order costing, job lot costing or lot costing.
Every order in job costing is separate and it is not essential
that the same manufacturing operations be carried out or
the same materials be utilized in respect of each. However,
a number of identical orders or identical products may be
combined together to form lots or batches, each such lot or
batch constituting a job order.
In the job costing system, an order or a unit, lot, or batch
of a product may be taken as a cost unit, i.e. a job. In job
costing, there is no averaging of costs except to the extent
that in the ascertainment of unit cost, the cost of a lot of
products in one order is obtained. A job or an order may
extend to several accounting periods and job costs are,
therefore, not related to particular periods.

 Job cost accounting is followed in three types of

manufacturing organisations:
(i) Jobbing concerns
(ii) Small firms
(iii) Large enterprises manufacturing a variety of products
(i) Jobbing concerns: Some concerns manufacture a variety
of products according to customer’s specifications and do
not generally confine their activities to producing uniformly
any specific product for sale in the market. The jobs,
products or services are dissimilar or unique and non-
repetitive having different specifications and methods of
manufacture, and each one requires different types, sizes
and quantities of materials and equipments and utilizes
different labour hours. Such concerns must of necessity to
use job cost accounting.
(ii) Small firms: Though manufacturing a number of specific
products, small manufacturing concerns may find process
costing difficult to apply because due to small sales, no
product can have a run long enough to establish a product
line. On account of the frequent changes from one product
to another, job costing would be suitable for determining
the cost of each lot of products.
(iii) Large enterprises manufacturing a variety of products:
A single department would be manufacturing several
products, perhaps all at a time, so that none of the
departments is specialized for continuous runs of product
lines. As definite process departments cannot be
established, job costing is more suitable in such cases. Job
costing is applicable to engineering concerns, construction
companies, ship-building, furniture making, hardware and
machine manufacturing industries, repair shops, automobile
garages and several such other industries where jobs or
orders can be kept separate.
 Procedure for Job Cost Accounting
On receipt of an order from the customer or an
indication from the sales department for manufacturing a
particular product, the production planning department
prepares a suitable design for the product or job. It also
works out the requirements of materials for the product
and prepares a list of operations indicating the various
operations to be carried out and their sequence, and the
shops, departments, plants or machines to be entrusted
with each of the operations. A Production Order is issued
giving instructions to the shops to proceed with the
manufacture of the product. The production order
constitutes the authority for work. Usually a production
order contains all relevant information regarding
production, such as detailed particulars of the job or
product, the quantity or units to be manufactured, date of
start of production, probable date of completion, details of
materials required as per the bill of materials, the
operations and the various shops involved in performing
them and the route of the job should take.
The production order usually lays down only the
quantities of materials required and the time allowed for
the operations, but the values of materials and labour are
also sometimes indicated. In the later case, the production
order serves the combined purpose of an order for
manufacture as well as the cost sheet on which the cost of
the order is compiled. The production order also provides
for the material and labour on account of normal wastage or
spoilage of the product in the final stage or during the
various stages of manufacture.

 Production orders may, in general, be of three

types:
(i) Assembly type of order
(ii) Sub-assembly type of order
(iii) Components or parts production type

(i) Assembly type of order:

Where components are purchased and assembled into a
product in the factory. A production order for assembly
only is required.

(ii) Sub-assembly type of order:

Components are purchased and sub-assemblies and
assemblies are made in the factory. Production orders for
each sub-assembly and final assembly will be necessary.

(iii) Components or parts production type:

Components are manufactured and sub-assembled and the
sub-assemblies are assembled into the final product.
Separate production orders for each component, sub-
assembly and final assembly are issued.
 Copies of Production Orders may be distributed as
follows:
(a) One copy to the stores for provisioning and issue of
materials on demand
(b) One copy each to the departments or shops concerned
to undertake production by demanding materials and
employing men and machines on the operations
(c) One copy to the cost department for working out the
cost of the job Separate job cost sheets are maintained for
each job. If a job consists of several major or important
operations, separate cost sub-sheets for recording the
costs of the various operations may be maintained and the
aggregate cost, in summary, shown in the main cost sheet .

 Material Cost
On receipt of a production order, the shop draws
the requisite materials from the stores. Surplus, excess
or incorrect materials are returned from the shops to
the stores on materials return notes. Scrap and waste
arising in the course of manufacture are returned in a
similar manner. The materials requisitions, materials
return notes and materials transfer notes are ‘costed’ in
accordance with the methods of Labour Cost Labour
summaries or wages analysis sheets are prepared for
each accounting period and the totals of these
statements are debited to Work-in-Progress Account or
Overhead Control Account by credit to Wages Control
 Account. Amounts on account of overtime, idle time, shift
differential and fringe benefits may also be included in
the wages analysis sheet. Direct labour costs are posted
on the respective cost sheets and indirect labour is
treated in the manner indicated for indirect material.

 Manufacturing Overhead
Overhead costs are accumulated against standing
order numbers and against cost centres. Overhead rates,
predetermined or actual as the case may be, are worked out
for each such centre. The overhead applied to each job is
obtained by multiplying the overhead rate by the actual
base variable spent on the job.

 Completion of Jobs
Postings of direct material, direct labour, direct
expenses and manufacturing overhead costs to the cost
sheet for a job or production order are made periodically
throughout the run of the job or order. The completion
report is an indication that the manufacturing operations
are over and further expenditure on the job should cease so
that the cost sheet may not be closed.
 Work-in-Progress
The cost of an incomplete job i.e., a job on which some
manufacturing processes or operations are still due before
it can be made into the finished product is termed Work-in-
Progress or Work-in-Process. If a production order has
been only partly completed by the end of an accounting
period, it is essential that the closing stock of the work-in-
progress be determined.

 Cost Control in Job Order System

Control over job costs may be exercised by comparison
of the actual costs with the estimated costs established as
basis for fixing job prices. Here again, adequate cost
control is available for direct material and direct labour
only; overhead costs cannot be controlled in terms of
individual jobs. Control of overhead is, therefore, confined
to the department as a whole for which predetermined
overhead rate has been determined. Comparison may also be
made with the costs of previous periods or of earlier
batches of production, if any. Standard costs may be used
in job type plants, particularly where the product or the
particular operations of the job are of a standardised
nature.

 Advantages of Job Costing

Job costing offers the following advantages:
a) The cost of material, labour and overhead for every job or
product in a department is available daily, weekly or as often
as required while the job is still in progress.
b) On completion of a job, the cost under each element is
immediately ascertained. Costs may be compared with the
selling prices of the products in order to determine their
profitability and to decide which product lines should be
pushed or discontinued.
c) Historical costs for past periods for each product, compiled
by orders, departments, or machines, provide useful
statistics for future production planning and for estimating
the costs of similar jobs to be taken up in future. This
assists in the prompt furnishing of price quotations for
specific jobs.
d) The adoption of predetermined overhead rates in job costing
necessitates the application of a system of budgetary control
of overhead with all its advantages.
e) The actual overhead costs are compared with the overhead
applied at predetermined rates; thus, at the end of an
accounting period, overhead variances can be analyzed.
f) Spoilage and defective work can be easily identified with
specific jobs or products.
g) Job costing is particularly suitable for cost-plus and such
other contracts where selling price is determined directly on
the basis of costs.

 Limitations of Job Costing

The limitations of job costing are:
1) Job costing is comparatively more expensive as more
clerical work is involved in identifying each element of
cost with specific departments and jobs.
2) With the increase in the clerical processes, chances of
errors are enhanced.
3) The cost as ascertained, even where they are compiled
very promptly, are historical as they are compiled after
incidence.
4) The cost compiled under job costing system represents
the cost incurred under actual conditions of operation.
The system does not have any scientific basis.

 Job Cost Card/Sheet

Each job is dissimilar to other due to specific and
customised requirements. In order to ascertain cost of a
particular job, it is necessary to record all the expenditure
related to a job separately. For this purpose, job cost
card/sheet is used. Job cost card is a cost sheet, where the
quantity of materials issued, hours spent by different class
of employees, amount of other expenses and share of
overheads are recorded. This is helpful in knowing the total
cost, profitability etc. of a job. A format of job cost
card/sheet is shown below.
Description: Job No:
Blue print no: Quantity:
Material No: Date of delivery:
Reference No: Date commenced:
Date finished:

Date Reference Details Materials Labour Overhead

Total

Summary of costs Estimated (`) Actual (`)

Direct Material cost

Direct Wages For the
Production overhead job:
PRODUCTION COST Units
Administration and produced:
Selling Distribution Cost/unit:
overheads Remarks:
Prepared
by:
Checked
by:

TOTAL COST
Profit/Loss
SELLING PRICE

 Accounting of Costs for a Job

Entries in Control Accounts
1. For purchase of materials:
Stores Ledger Control A/c......................................................... Dr.
To Cost Ledger Control A/c*
2. For the value of direct materials issued to job:
Work-in-Process control A/c .................................................. Dr.
To Stores Ledger Control A/c
3. For return of direct materials from jobs:
Stores Ledger Control A/c........................................................ Dr.
To Work-in-Process Control A/c
4. For return of materials to suppliers:
Cost Ledger Control A/c........................................................... Dr.
To Stores Ledger Control A/c
5. For indirect materials:
Factory Overhead Control A/c ............................................... Dr.
To Stores Ledger Control A/c
6. For wages paid:
Wages Control A/c .................................................................... Dr.
To Cost Ledger Control A/c
7. For direct wages incurred on jobs:
Work-in-Process Control A/c ................................................. Dr.
To Wages Control A/c
8. For indirect wages:
Factory Overhead Control A/c .............................................. Dr.
To Wages Control A/c
9. For any indirect expense paid:
Factory Overhead Control A/c ............................................... Dr.
To Cost Ledger Control A/c
10. For charging overhead to jobs:
Work-in-Process Control A/c ................................................... Dr.
To Factory Overhead Control A/c
11. For the total cost of job completed:
Cost of Sales A/c......................................................................... Dr.
To Work-in-Process Control A/c
12. The balance of Cost of Sales A/c is transferred to
Costing Profit and loss A/c;
For such transfer:
Costing Profit and loss A/c........................................................ Dr.
To Cost of Sales A/c
13. For the sales value of jobs completed:
Cost Ledger Control A/c........................................................... Dr.
To Costing profit and loss A/c**

Note:

1. General ledger adjustment account is the other name of Cost

Ledger Control Account.

2. The balance of Costing profit and loss account shall now

represent profits or loss. The balance of Cost Ledger Control
Account shall be carried forwarded. With the balance on all the
accounts Trial Balance can be drawn.

 Reports in Job Costing System

Report on profits on completed jobs A statement
may be prepared monthly to indicate the gross profit
earned on all jobs completed during the month. This
statement is useful for the management for
evaluating past performances. Net profit analysis
may also be made in a similar manner if
administration, selling and distribution overheads for
the job are included in the statement.
Report on cost variances If cost estimates are
developed, a cost variance report showing the deviations of
actual costs from the estimated costs may be prepared in
order that significant differences may be brought to light
and investigated. The report may be prepared separately
for a job, or for a department showing the variances in
respect of all jobs undertaken by the department during a
period

Illustration 1:
As newly appointed Cost Accountant, you find that the
selling price of Job No. 9669 has been calculated on the
following basis:
Particulars Amount (`)
Materials 12.08
Direct Wages-22 hours at 25 paise per hour 5.50
Department A – 10 Hours
B – 4 Hours
C - 8 Hours
Prime Cost 17.58
Plus 33% on prime cost 5.86
23.44
An analysis of the previous year’s profit and loss account
shows the following:
Particulars Amount (`) Particulars Amount (`)
Materials Used 77,500 Factory Overheads:
Direct Wages: A 2,500
A 5,000 B 4,000
B 6,000 C 1,000
C 4,000 Selling Costs 30,000
You are required to:
1. Calculate and enter the revised costs using the previous
year’s figures as a basis;
2. Draw up a Job Cost Sheet;
3. Add to the total job cost 10% for profit and give the
final selling price.

Illustration 2:
A work order for 100 units of a commodity has to pass
through four different machines of which the machine hour
rates are: Machine P – ` 1.25, Machine Q – ` 2.50, Machine
R – ` 3 and Machine S – ` 2.25 Following expenses have been
incurred on the work order – Materials ` 8,000 and Wages `
500. Machine - P has been engaged for 200 hours. Machine -
Q for 160 hours, Machine - R for 240 hours and Machine - S
for 132 hours. After the work order has been completed,
materials worth ` 400 are found to be surplus and are
returned to stores. Office overhead used to be 40% of
works costs, but on account of all-round rise in the cost of
administration, distribution and sale, there has been a 50%
rise in the office overhead expenditure. Moreover, it is
known that 10% of production will have to be scrapped as
not being upto the specification and the sale proceeds of
the scrapped output will be only 5% of the cost of sale. If
the manufacturer wants to make a profit of 20% on the
total cost of the work order, find out the selling price of a
unit of commodity ready for sale.

Illustration 3:
The data pertaining to Heavy Engineering Ltd. using are as
follows at the end of 31.3.2018. Direct material ` 9,00,000;
Direct wages ` 7,50,000; Selling and distribution overhead
` 5,25,000; Administrative overhead ` 4,20,000, Factory
overhead ` 4,50,000 and Profit ` 6,09,000.
(a) Prepare a cost sheet showing all the details.
 (b) For 2017-18, the factory has received a work order. It
is estimated that the direct materials would be ` 12,00,000
and direct labour cost ` 7,50,000. What would be the price
of work order if the factory intends to earn the same rate
of profit on sales, assuming that the selling and distribution
overhead has gone up by 15%? The factory recovers factory
overhead as a percentage of direct wages and
administrative and selling and distribution overheads as a
percentage of works cost, based on the cost rates prevalent
in the previous year.

Illustration 4:
A manufacturing company is divided into three production
departments – A, B and C. All production is to customers’
orders. All orders are dissimilar and they go through all the
three departments. Manufacturing Costs for a given period
were as follows:
Particulars Dept A Dept B Dept C Dept D

Amount Amount Amount Amount

(`) (`) (`) (`)
Direct material 1,80,000
Direct Labour 40,000 20,000 30,000 90,000
Indirect manufacturing 20,000 40,000 30,000 90,000
costs
The cost of producing a particulars order was determined
as follows:
Particulars Amount (`)
Direct Material 1,000
Direct Labour:
Department A 120
Department B 280
Department C 200 600
Indirect manufacturing Costs 600
2,200
The General Manager had a hazy idea that the jobs
executed on orders of this nature are under-priced. So, the
services of a firm of cost accountants, of which you are a
member, have been acquired for a thorough investigation.
Can you detect, after a careful perusal of the limited
available information, the fundamental fallacy of the
company’s method assuming that the direct labour cost is an
acceptable basis for distributing indirect manufacturing
costs? Prepare a revised cost for order distributing
indirect manufacturing costs in a manner you consider more
correct than the company’s procedure.
 Illustration 5:
A shop floor supervisor of a small factory presented the
following cost for Job no.555 to determine selling price
Particulars Per unit (`)
Materials 70
Direct Wages 18 Hours at 2.5 45
Dept. X- 8 hours
Dept. Y- 6 hours
Dept. Z- 4 hours
Chargeable expenses (special stores item) 5
120
Plus 33% Overheads 40
160
Analysis of the Profit/Loss Account for 2016 shows the
following
Particulars Amount Amount (`) Particulars Amount (`) Amount (`)
(`)
Materials 10,000 1,50,000 Sales 2,50,000
Direct Wages: 12,000
Dept. X 8,000
Dept. Y 30,000
Dept. Z 4,000
5,000
Special stores
9,000
items 2,000
Overheads: 16,000
Dept. X 2,00,000 Gross profit 2,50,000
Dept. Y 50,000 b/d
50,000
Dept. Z 2,50,000
20,000 50,000
Gross profit
30,000
c/d
50,000
Selling
expenses
Net profit c/d
It is also noted that average hourly rates for the 3
departments, X, Y and Z are similar.
You are required:
(a) Draw up a job cost sheet;
(b) Calculate the entire revised cost using 2016

actual figures as basis;

(c) Add 20% to total cost to determine selling price.

Illustration 6:
In a factory following the Job Costing Method, an abstract
from the work in process as at 30th September, was
prepared as under.
Amount (`)

Job No. Materials Direct Labour Factory Overheads

Applied

115 1,325 400 hrs 800 640

118 810 250 hrs. 500 400

120 765 300 hrs 475 380

2,900 1,775 1,420

Materials used in October were as follows:

Amount (`)

Material Job no. Cost

requisitions No.

54 118 300

55 118 425

56 118 515

57 120 665

58 121 910

59 124 720

3,535

A summary of Labour Hours deployed during October is as under:

NUMBER OF HOURS
JOB NO.
SHOP A SHOP B

115 25 25

118 90 30

120 75 10

121 65 -

124 20 10

275 75
Indirect Labour:

Waiting for
material 20 10

Machine breakdown 10 5

Idle time 5 6

Overtime premium 6 5

316 101

A shop credit slip was issued in October, that material

issued under requisition No.54 was returned back to stores
as being not suitable. A material transfer note issued in
October indicated that material issued under requisition
No.55 for Job 118 was directed to Job 124. The hourly rate
in shop A per labour hour is `3 while at shop B it is ` 2 per
hour. The factory overhead is applied at the same rate as in
September; Jobs 115, 118 and 120 were completed in
October. You are asked to compute the factory cost of the
completed jobs. It is practice of the management to put a
10% on the factory cost to cover administration and selling
overheads and invoice the job to the customer on a total
cost plus 20% basis what would be the invoice price of
these three jobs?
 CMA SHRINIWAS BALA
(CMA, CS, CA INTER, M.COM., BAF)

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