Job-Order and Batch Costing 186

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Tata McGraw-Hill Publishing Company Limited, Management Accounting 13-1

Job-order and Batch

Costing


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JOB-ORDER AND BATCH COSTING

JOB/ORDER COSTING

BATCH COSTING


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Job Order Costing

Such a system can be appropriately applied to accumulate costs in the followingsituations:

Auto-repair shops, where each repair job requires varying amounts of material andlabour. The mechanic will charge the cost of any replaced parts and the number oflabour-hours spent in repairing.

Automobile assembly, where each car includes a variety of different options. Printing shops, where each print order requires a different type of paper, ink,

design and so on.

Foundries, where special parts are to be manufactured as per order.

Hospitals, where the costs of services provided to each patient are billedseparately.

Contractors, shipbuilders and motion picture companies. Machine shops, tool shops and design engineers.

Public accounting firms and other similar professions, where each audit, taxreturn, or management services engagement needs varying amounts ofprofessional time and attention.

Furniture making firms, where they may produce a batch of similar chairs, tables,sofas, and so on. Each batch may be treated as a job.

Job order costing is the procedure to accumulate cost when work isperformed pursuant to an order to meet individual customers

specifications.


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Job Cost Sheet

On receipt of an order by a firm employing job costing,a job cost sheet is prepared. Every job order is given aspecific number. For identification, a job cost sheet

bearing the allotted number is maintained for each jobput into production. General information in respect ofthe job order is recorded at the top of the job sheet. Asregards specific information, the job cost sheet

enumerates the appropriate inputs required in threebasic categories: direct material, direct labour andoverhead to carry out the order.


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Exhibit 1: Job Cost Sheet

Customer name________________________

and address ________________________

Description ________________________

Quantity ________________________

Job No.

Date started __________________

Date promised __________________

Date finished __________________

Special remarks, if any __________________

Materials Labour Overheads

Quantity Rate Amount Hours Rate Amount Hours Rate Amount

Department 1

Department 2

Department 3

Cost Summary

Materials Laobur Overheads Total

Actual Estimate

Department 1

Department 2

Department 3Job order price

Profit (Loss)

Discrepancies between actual and estimated costs are explained below:

1.

2.

3.


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Recording Job Costs inAccounts

The accounting system of recording job costs will depend onwhether the general ledger records all cost transactions

or a special ledger called factory ledger is separatelymaintained for the purpose.

Modus operandi is that a factory ledger account is opened in thegeneral ledger to substitute for the accounts, which have been

recorded in the factory ledger. Likewise, a general ledger

account is provided in the factory ledger. The balancesin these accounts are kept equal at all times.


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Accounting procedure if both the factoryand general ledgers are maintained

1) Accounting for Materials

2) Accounting for Labour

3) Accounting for Overheads

4) Accounting for Completed Jobs


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Accounting for Materials

The relevant accounting entries in the factory and general ledgers torecord the (i) purchase, (ii) issue, and (iii) return of materials

would be as follows

Factory ledger:

1. Debit materials inventory/materials and supplies A/c, and Credit generalledger.

2. Debit work-in-process A/c, and Credit materials inventory/materials andsupplies A/c.

3. Reversal of entry (2).

General ledger:

1. Debit factory ledger, and Credit accounts payable/cash or bank.

2. No entry.

3. No entry.


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Accounting for Labour

The following journal entries would be recorded in respectof the labour cost:

Factory ledger:

Debit work-in-process A/c (for direct labour) and Debit factoryoverhead control (A/c (for indirect labour) and Credit generalledger.

General ledger:Debit factory ledger A/c, and Credit wages payable A/c /cash orbank.


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Accounting for Manufacturing Overheads

Manufacturing overheads can be charged to various jobs either at the

actual overhead rate or a predetermined overhead rate.

Predetermined Overhead Rate

Predetermined overhead rate is budgeted manufacturing overheadsdivided by budgeted activity. The merits of a predetermined overhead rateare:

(a) It is useful in bidding cases to determine the tender/quotation price;

(b) It enables individual jobs to be costed as soon as they are completedand, thus, helps in providing more rapid product cost information to themanagement; and

(c) Such a rate levels out the fluctuations which may be caused by

variations in actual overhead costs and actual activity.

Predetermined overhead rate = Budgeted manufacturing overheads/Budgeted activity.

Budgeted manufacturing overheads = [Total budgeted fixed overheads +Budgeted variable overhead rate] Budgeted activity.


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Example 1: Determining Predetermined Overheads Rate

Hypothetical Ltd employs job-order costing. It uses an annual

predetermined rate for applying manufacturing overheads to jobs. The

company furnishes you with the following information regarding its

overheads for the coming year at normal activity: Fixed overheads, Rs4,00,000; and Variable overheads, Rs 3,00,000.

The estimates of the direct labour cost, direct labour hours and machine-

hours at normal activity along with a set of correlation coefficients between

overheads and various measures of activity, as compiled from past

records, are also given:Normal level of activity Correlation coefficient

with overheads

Direct labour cost

Direct labour hours

Machine hours

Rs 10,00,000

2,00,000

1,00,000

0.7

0.8

0.6

Determine the predetermined (i) fixed, (ii) variable, and (iii) total overhead

rates.


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Further assume that Hypothetical Ltd during the first quarter received an

invitation from a regular customer to bid on a job. The job was estimated to

require Rs 1,00,000 of direct materials and the following: Direct labour

cost, Rs 50,000; Direct labour-hours, 15,000; and Machine-hours, 5,000

Determine the bid price the company should quote assuming its normal

practice of charging 20 per cent on factory cost to cover other

administrative overheads and profit. Assume further that the companyuses a predetermined factory overhead rate to assign factory overheads to

jobs.

Solution

Predetermined overhead rates should be based on direct labour-hours(DLH)

(i) Predetermined fixed overhead rate = Rs 4,00,000 2,00,000 = Rs 2(ii) Predetermined variable overhead rate = Rs 3,00,000 2,00,000 = Rs 1.50

(iii) Total predetermined overhead rate = Rs 7,00,000 2,00,000 = Rs 3.50


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Solution: Job Cost Sheet to Determine the Bid Price

Particulars AmountDirect materials Rs 1,00,000

Direct labour cost 50,000

Prime cost 1,50,000

Add factory overheads (15,000 direct labour-hours @Rs 3.5 per hour) 52,500

Factory cost 2,02,500

Add 20 per cent for administrative overheads andprofit 40,500

Bid price 2,43,000


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Disposition of Variance

Disposition of Variance Overhead variances may bedisposed of by following either of the two methods: (i)

They may be assigned to the income statement of thecurrent period by charging the entire amount to the costof goods sold account; or (ii) They may be considered asthe cost of production of the current period andaccordingly may be pro-rated to work-in-process,

finished goods and cost of goods sold. The treatmentwould depend on the nature of such variance.


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If the variance has been an outcome of unusual events of the currentperiod, it should be charged to the cost of goods sold. But if such avariance has been caused by errors in estimation or fundamentalchanges in cost structure, it should be pro-rated over work-in-process, finished goods and cost of goods sold. For the firm inExample 1, consider the following additional information:

JobNo.

Direct costs Overheadscharged In

quarter

Status of job at the end ofthe quarter

50 Rs 2,20,000 Rs 72,000 Cost of goods sold

51 1,80,000 45,000 Finished goods in inventory

52 1,30,000 40,500 Work-in-process inventory

5,30,000 1,57,500

Show the process of adjusting under-applied overheads.


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Solution: Manufacturing/Factory Overhead Adjustment

Account Over-

charged inquarter

Percentage of

overheadapplied inquarter

Under-

appliedoverheads(Rs 22,500)

(percentage)

Total costs

assigned tojobs afteradjustment

Cost of goods sold Rs 72,000 45.7 Rs 10,282.50 Rs 82,282.50

Finished goodsinventory 45,000 28.6 6,435.00 51,435.00

Work-in-processinventory 40,500 25.7 5,782.50 46,282.50

1,57,500 100.00 22,500.00 1,80,000.00


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The following journal entries would be required to give effect tomanufacturing overheads.

Factory ledger

1. Debit Factory Overhead Control A/c, and Credit General Ledger

(For indirect manufacturing costs incurred).

2. Debit Work-in-Process/Individual Jobs A/c, and Credit Factory OverheadControl A/c

(For charging indirect overheads to jobs).

3. Debit Cost of Goods Sold A/c, and Credit Factory Overhead Control A/c

(For charging under-applied overheads to cost of goods sold account underfirst method).

Entry number (3) would be reversed in the case of over-applied overheads.4. Debit Work-in-Process/Individual Jobs

Debit Finished Goods inventory

Debit Cost of Goods Sold, and

Credit Factory Overhead Control A/c

(For charging under-applied overheads under pro-rating method).

Entries (3) and (4) would be reversed in the case of over-applied overheads.

General ledger

1. Debit Factory Ledger A/c, and Credit Various Credits (Accounts Payable),Credit Accumulated Depreciation, and so on.

(For indirect manufacturing costs incurred).


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Example 2: (Job Costing System: Factory Ledger and General LedgerMethod)

Jay Engineering Company Ltd uses a job-order cost system. The following isa summary of its operations during January:

1. Purchases of raw materials and supplies, Rs 37,500.2. Materials and supplies were requisitioned and issued as follows:

Direct materials:

Job No. 101 Rs 6,000

102 9,000

103 1,400 Rs 16,400Indirect materials 400

3.Factory payroll sent to the general office for payment was distributed asfollows:

Direct labour:

Job No. 101 Rs 5,400102 6,000

103 600

Rs 12,000

Indirect labour 4,000


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4. Indirect miscellaneous manufacturing costs incurred, Rs 5,200.

5. Indirect manufacturing costs were applied using a rate of 70 per cent ofdirect labour cost.

6. Job No. 101 (100 units) and Job No. 102 (50 units) were completed andtransferred to finished goods.

7. Goods despatched to customers were as follows: From Job No. 101, 50units; From Job No. 102, 100 units.

Prepare the required ledger accounts to record the above transactions in thefactory ledger.

Solution: Job Ledger

Particulars Job No. 101 Job No. 102 Job No. 103

Raw materials and supplies Rs 6,000 Rs 9,000 Rs 1,400

Direct labour 5,400 6,000 600

Indirect manufacturing costsapplied 3,780 4,200 420

15,180 19,200 2,420


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Factory Ledger Accounts

Raw Materials and Supplies A/c

To general ledger(purchase of inventory) Rs 37,500By work-in-processBy factory overhead controlA/c

Rs 16,400

400

Work-in-Process A/c

To raw materials andsupplies Rs 16,400

By finished goods (costof Job Nos. 101 and 102 Rs 34,380

To general ledger (directlabour payment) 12,000

To factory overhead control(applied A/c) 8,400


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Finished Goods Inventory A/c

To work-in-process Rs 34,380 By cost of goodssold (Rs 7,590 + Rs12,800) Rs 20,390

Cost of Goods Sold A/c

To finished goods inventory Rs 20,390

Factory Overhead Control A/c

To raw materials and supplies Rs 400

To general ledger (indirect labourpayment) 4,000

To general ledger (miscellaneousexpenses) 5,200

Factory Overhead Control Applied A/c

By work-in-process Rs 8,400

General Ledger Accounts

By raw materials and supplies Rs 37,500

By work-in-process 12,000

By factory overhead control A/c 4,000

By factory overhead control A/c 5,200

Note: Ledger accounts are not balanced as the transactions pertain to only amonths period.


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General Ledger Accounts

Factory Ledger (A/c)

To accounts payable Rs 37,500

To wages payable 16,000

To miscellaneous credits 5,200

Accounts Payable* A/c

By factory ledger A/c Rs 37,500

Wages Payable* A/c


Miscellaneous Credits* A/c


*Debits in these accounts would be made when payments are made.


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Evaluation

Job order costing is useful in the following ways:

Job costing data can be utilised for estimating the production costs ofspecific jobs or lots of production.

Estimates of future job costs serve not only as a basis for bidding and

price setting but also as a standard for measuring efficiency andevaluating the performance through comparisons with the actualcosts incurred. From the point of view of accounting also, the systemis easy to operate as the costs are recorded order or job-wise.

From the point of view of accounting also, the system is easy tooperate as the costs are recorded order or job-wise.

Finally, job cost sheets which are the focal point of job order systemcan be utilised by the management to segregate jobs on the basis ofcontributions/profits made by them. This information, in turn, will helpthe management in deciding which types of jobs should be accordedpriority.


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Batch Costing

Batch costing is a variant of job costing. It is a natural type ofsystem to be utliised in situations when a firm manufactures

products in readily identifiable batches or definite lots

For identification purposes, each batch is required to benumbered in batch costing as each job is numbered

in the job costing system.

The unique feature which distinguishes job costing from batch

costing is that, while in the former production is tailoredto meet the customers specifications, in the latter, in

general, goods are produced to inventory themfor future sale to customers.


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Determination of Batch Costing

Example 4

The following details are available in respect of a small tool manufacturing firm:

Annual estimated demand per year (units)

Cost of production per unit

Carrying costs per unit for one year

Setting up cost per batch

1,600

Rs 5

1

50

Determine EBQ.

Solution

EBQ =2 1,600 Rs 50

= 400 unitsRs 1

EBQ = 2 AS/C

Where A = annual requirements of the product

S = setting-up costs per batch

C = carrying cost per unit of inventory per annum

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Job-Order and Batch Costing 186