Job Costing | CMA Inter Syllabus

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Job 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. A costing method is designed to suit the way goods are processed or manufactured or the way services are provided. Each organisation’s costing method will therefore have unique features but costing methods of firms in the same line of business will more than likely have common aspects. Broadly, the costing methods are classified in the following:

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, batch costing and contract costing.

If products are identified as individual units according to the terms of the Jobs, Contracts or Batches, Specific Order Costing is followed by the organisation concerned. 

Job Costing

Job Costing is the accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods.The method is also known by various other names, such as specific order costing, production order costing, job lot costing or lot costing.

According to the terminology of CIMA London, Job Costing is “the basic costing method applicable where work consists of separate contracts, jobs or batches, each of which is authorized by a specific order or contract.”

A job is simply a product or service that can be easily (in other words, at reasonable cost) distinguished from other products or services and for which the firm desires that a specific cost be recorded for the product or service. Firms that produce jobs are often called job shops. The record of the cost of the job kept in the accounting system is called job cost sheet or job cost cards. 

A job is a ‘customer order or task of relatively short duration’. Job costing is a ‘form of specific order costing where costs are attributed to individual jobs’. CIMA Official Terminology

 

Features of Job Costing

1. Each job maintains its separate identity throughout the production stage.
2. The job is meant for a specific customer and not meant for a mass market.
3. Production pattern is not repetitive and continuous.
4. Production begins only after getting order from the customer.
5. Each job is executed as per the requirement of the customer. Each job order is considered as a separate cost unit.
6. Duration of production cycle is usually short but a large order may extend beyond one year.
7. A Job Cost Sheet is prepared and Job Register is maintained to record particulars of the job like price, date of commencement, special requirement etc. Profit or Loss is calculated on the completion of the job.

Advantages of Job Costing

Job costing offers the following advantages:

1. 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.
2. 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.
3. 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.
4. The adoption of predetermined overhead rates in job costing necessitates the application of a system of budgetary control of overhead with all its advantages.
5. 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 analysed.
6. Spoilage and defective work can be easily identified with specific job or product
7. 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.

 

Preparation of Job Cost Sheet

As discussed above, the objective of job costing is to ascertain the cost of a job that is produced as per the requirements of the customers. Hence it is necessary to identify the costs associated with the job and present it in the form of job cost sheet for showing various types of costs. The total cost of a job is recorded in the following manner.

• Direct Material Costs: Material used during the production process of a job and identified with the job is the direct material. The cost of such material consumed is the direct material cost. Direct material cost is identifiable with the job and is charged directly. The source document for ascertaining this cost is the material requisition slip from which the quantity of material consumed can be worked out. Cost of the same can be worked out according to any method of pricing of the issues like first in first out (FIFO), last in first out (LIFO) or average method as per the policy of the organisation. The actual material cost can be compared with standard cost to find out any variations between the two. However, as each job may be different from the other, standardization is difficult but efforts can be made for the same.
• Direct Labour Cost: This cost is also identifiable with a particular job and can be worked out with the help of ‘Job Time Tickets’ which is a record of time spent by a worker on a particular job. The ‘job time ticket’ has the record of starting time and completion time of the job and the time required for the job can be worked out easily from the same. Calculation of wages can be done by multiplying the time spent by the hourly rate. 
  Here also standards can be set for the time as well as the rate so that comparison between the standard cost and actual cost can be very useful.
• Direct Expenses: Direct expenses are chargeable directly to the concerned job. The invoices or any other document can be marked with the number of job and thus the amount of direct expenses can be ascertained.
• Manufacturing Overheads: This is really a challenging task as the overheads are all indirect expenses incurred for the job. Because of their nature, overheads cannot be identified with the job and so they are apportioned to a particular job on some suitable basis. Pre-determined rates of absorption of overheads are generally used for charging the overheads. This is done on the basis of the budgeted data. If the predetermined rates are used, under/over absorption of overheads is inevitable and hence rectification of the same becomes necessary. 
  
  Budgeted manufacturing overhead rate =Budgeted manufacturing overhead costs/Budgeted total quantity of cost - allocation base
  
  
• Work-in-progress: On the completion of a job, the total cost is worked out by adding the overhead expenses in the direct cost. In other word, the overheads are added to the prime cost. The cost sheet is then marked as ‘completed’ and proper entries are made in the finished goods ledger. If a job remains incomplete at the end of an accounting period, the total cost incurred on the same becomes the cost of work-in-progress. The work-in-progress at the end of the accounting period becomes the closing work-in-progress and the same becomes the opening work-in-progress at the beginning of the next accounting period. A separate account for work-in-progress is maintained.
• 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 as to ensure that the cost sheet is closed. On the completion of a particular job, total cost relating to the job as per job cost sheet is transferred to finished stock account by debiting finished stores control account and crediting work-in-progress control account.

• Job Cost Card / Sheet: Each job is dissimilar to other due to specific and customized 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: Customer’s No.: Reference No.:						Job No.: Quantity: Date of commencement: Date of delivery: Date of finishing:
Material				Labour				Overhead
Date	Dept	MR No.	Amout(₹)	Date	Dept	MR No.	Amout(₹)	Date	Dept	MR No.	Amout(₹)
Total				Total				Total
Summary									For the Job: Units Produced: Cost per Unit: Remarks: Prepared by: Checked by:
Cost				Estimated		Actuals	Variances
Direct Material
Direct Wages
Direct Expenses
Prime Cost
Factory Overhead
Works Cost
Administration Overhead
Cost of Production
Selling and Distribution Overhead
Cost of Sales

Accounting of Costs for a Job:

Entries in Control Accounts

1. For purchase of materials

Stores Ledger Control A/c

To Cost Ledger Control A/c

2. For the value of direct materials issued to job

Work-in-Progress Control A/c

To Stores Ledger Control A/c

3. For return of direct materials from jobs

Stores Ledger Control A/c

To Work-in-Progress Control A/c

4. For return of materials to suppliers

Cost Ledger Control A/c

To Stores Ledger Control A/c

5. For indirect materials

Factory Overhead Control A/c

To Stores Ledger Control A/c

6. For wages paid

Wages Control A/c

To Cost Ledger Control A/c

7. For direct wages incurred on jobs

Work-in-Progress Control A/c

To Wages Control A/c

8. For indirect wages

Factory Overhead Control A/c

To Wages Control A/c

9. For indirect expenses paid

Factory Overhead Control A/c

To Cost Ledger Control A/c

10. For charging overhead to jobs

Work-in-Progress Control A/c

To Factory Overhead Control A/c

11. For the total cost of job completed

(i) Finished Goods Ledger Control A/c

To Work-in-Progress Control A/c

(ii) Cost of Sales A/c

To Finished Goods Ledger Control A/c

12. The balance of Cost of Sales A/c is transferred to Costing Profit and Loss A/c

Costing Profit and Loss A/c

To Cost of Sales A/c

13. For the sales value of job completed

Cost Ledger Control A/c

To Costing Profit and Loss A/c

Reports in Job Costing System - Basically, two types of reports are generated after preparation of the job cost sheet.

1. 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.
2. 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 to indicate the significant differences and to carry out thorough investigation. 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:

(a) Calculate and enter the revised costs using the previous year’s figures as a basis;

(b) Draw up a Job Cost Sheet;

(c) Add to the total job cost 10% for profit and give the final selling price.

Solution: 

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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.

Solution: 

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Illustration 3

The data pertaining to Heavy Engineering Ltd. using are as follows at the end of 31.3.20X2. 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 20X1-X2, 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.

Solution: 

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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	Total
	Amount (₹)	Amount (₹)	Amount (₹)	Amount (₹)
Direct material				1,80,000
Direct labour	40,000	20,000	30,000	90,000
Indirect manufacturing costs	20,000	40,000	30,000	90,000

 

The cost of producing a particular 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.

Solution: 

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Illustration 5

A shop floor supervisor of a small factory presented the following cost for Job No. 303, to determine the selling price.

	Per unit (₹)
Materials	70
Direct wages 18 hours @ ₹ 2.50 (Deptt. X 8 hours; Deptt. Y 6 hours; Deptt. Z 4 hours)	45
Chargeable expenses	5
	120
Add : 33-1/3 % for expenses cost	40
	160

Analysis of the Profit/Loss Account

(for the year 20X2)

		(₹)		(₹)
Materials used		1,50,000	Sales less returns	2,50,000
Direct wages :
Deptt. X	10,000
Deptt. Y	12,000
Deptt. Z	8,000	30,000
Special stores items		4,000
Overheads :	5,000
Deptt. X	9,000
Deptt. Y	2,000
Deptt. Z	2,000	16,000
Works cost		2,00,000
Gross profit c/d		50,000
		2,50,000		2,50,000
Selling expenses		20,000	Gross profit b/d	50,000
Net profit		30,000
		50,000		50,000

It is also noted that average hourly rates for the three Departments X, Y and Z are similar.

You are required to :

(i) Calculate Departmental Overhead Recovery Rates;

(ii) Calculate the entire revised cost using 20X2 actual figures as basis.

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

 

Solution: 

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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.

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:

Material requisitions No.	Job no.	Cost
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:

JOB NO.	NUMBER OF HOURS
	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?

Solution: 

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Exercise

Multiple Choice Questions

1. Job costing is used in

1. Furniture making
2. Repair shops
3. Printing press
4. All of the above

Answer : d

Job costing is a costing technique used to determine the cost of producing a specific product or providing a particular service. It is commonly used in various industries, including furniture making, repair shops, and printing presses. In job costing, costs are assigned to individual jobs or projects, allowing businesses to accurately calculate the costs associated with each specific job. This information is valuable for pricing decisions, budgeting, and understanding the profitability of different projects or products.

2. In a job cost system, costs are accumulated

1. On a monthly basis
2. By specific job
3. By department or process
4. By kind of material used

Answer : b

In a job cost system, costs are accumulated and assigned to specific jobs or projects. This allows businesses to track the costs associated with each individual job, making it easier to calculate the total cost of production for each job and determine its profitability. This approach is particularly useful in industries where products or services are customized or produced in batches, as it helps allocate costs accurately to each unique job.

3. The most suitable cost system where the products differ in type of material and work performed is

1. Operating Costing
2. Job costing
3. Process costing
4. All of these.

Answer : b

Job costing is a cost accumulation system that is well-suited for situations where products or projects are distinct and unique. In job costing, costs are accumulated for each specific job, project, or order. This includes tracking the materials used, labor hours worked, and any other associated costs for that particular job. This system is particularly effective when products differ in terms of the materials used and the type of work performed because it allows for precise allocation of costs to each job.

4. In case product produced or jobs undertaken are of diverse system, the system of costing to be used should be

1. Operating Costing
2. Process Costing
3. Job Costing
4. None of the above

Answer : c

Job costing is the most suitable costing system to use when products or jobs are of diverse nature. Job costing involves allocating costs to specific individual jobs or projects, allowing for customization and differentiation of costs based on the unique characteristics of each job. This system provides detailed tracking of costs for different types of products or jobs, making it well-suited for diverse and customized production scenarios.

5. Job Costing is:  

1. Suitable where similar products are produced on mass-scale 
2. Method of costing used for non-standard and non-repetitive products
3. Technique of costing 
4. Applicable to all industries regardless of the products or services provided

Answer : b

Job costing is a costing method used for tracking and accumulating costs for individual jobs, projects, or orders that are unique and non-standard. It is particularly applicable when products or services vary significantly in terms of materials used, labor required, and other cost factors.