Job & Batch Costing

Dr. Swati Sharma

Job Costing
A Job refers to any specific assignment, contract or work order wherein work is
executed as per customer's specific requirements. The output of the job generally
consists of one unit or a manageable number of units. Ascertainment of cost of each
Job is called Job Costing.
Examples: Job Costing is applied in - Printing Press, Furniture, Hardware, Ship-
Building, Heavy Machinery, Interior Decoration, Repairs and other similar work.
Job Costing is used
1. When jobs are executed for different customers according to their specifications
2. When no two orders are alike in all respects and each order/job needs special
treatment.
3. Where WIP differs from period to period on the basis of the number of jobs in
hand at different stages of completion.
Objectives

The following are the important objectives of Job Costing:

(1) Job costing provides accurate cost information for each job or product.
(2) It enables management to reduce the cost by making comparison of each
elements of actual costs with estimated ones.
(3) It helps management to measure the operational efficiency and inefficiency for
each job or works to take effective decision making.
(4) This method enables management to providing proper valuation of work in
progress.
Batch Costing
Where the output of the job consists of homogeneous (similar) units, a lot (or)
collection of similar units may be used as a cost unit for ascertaining cost. Such lot or
collection of units is called as a Batch.
It is a form of Job Costing, wherein cost is ascertained for a collection / lot of units
called a batch.
Separate Cost Sheets are maintained for each batch of products by assigning a batch
number.
Cost per unit = Total Costs for the Batch/Number of items produced in the Batch
Batch Costing may be used in the following circumstances
1. When the output of a job consists of a number of units and it is not economical to
ascertain cost of every unit of output independently, e.g. printing of Visiting
Cards.
2. When customer's annual requirement is to be supplied in uniform quantities over
the year
• When certain features like size, colour, taste, quality etc. are required uniformly
over a collection of units, e.g. garments of the same size, pharmaceuticals, etc. 4.
When an internal manufacturing order is made out for production of components /
subparts, e.g. component parts of automobiles, radio sets, watches, etc.
• Batch Cost Ascertainment Batch Costing is an extension of Job Costing. Hence
cost is ascertained in the same manner as for jobs. Typically, cost of each batch is
ascertained as under
1. Materials: Material Requisitions are priced in the cost department. Material Cost
is thus allocated to the relevant batch for which they are issued.
2. Labour: Time Sheets or Job tickets are prepared to determine the amount of time
spent on each batch. Direct Wages are charged to batch by multiplying the time
spent at the appropriate wage rate.
3. Overhead: Overheads are absorbed on appropriate basis, e.g. Percentage of
Direct Labour, Labour Hour Rate, etc.
Economic Batch Quantity
• Economic Batch Quantity (EBQ) represents the optimum size for batch
production, at which the total of Set- Up Costs per annum, and Inventory Carrying
Costs per annum, are minimum.
• The determination of EBQ involves two types of costs. These are - Set-up Cost
(or Preparation Cost): The processing of a particular batch gives rise to clerical
and machine set up costs followed by machine disassembly costs on completion
of the batch. These costs are incurred in connection with each batch processed,
and are independent of the size of the batch.
• Carrying Cost (or Holding Cost): The larger the batch size, the greater will be
number of units in inventory. Hence the costs associated with holding/carrying the
inventory like space-occupancy, interest, etc. will also be higher.
• If Batch Size increases, there is an increase in the carrying cost but the set up cost
per unit of product is reduced, this situation is reversed when the batch size
decreases. Thus there is one particular batch size for which the total of set up and
carrying costs are minimum. This size is known as Economic or Optimum Batch
Quantity.
EBQ =
• A = Annual Demand for Finished Product (in units)
• S = Set-Up Cost per batch.
• C = Carrying Cost per unit of Finished Product per annum.
• If Rate of Interest (I) and Unit Cost of Production (C) is given, then
EBQ =