Session 9

Job, Batch and Service

Costing
FOCUS
This session covers the following content from the ACCA Study Guide.

B. Cost Accounting Techniques

3. Cost accounting methods
a) Job and batch costing
i) Describe the characteristics of job and batch costing.
ii) Describe the situations where the use of job or batch costing would
be appropriate.
iii) Prepare cost records and accounts in job and batch costing situations.
iv) Establish job and batch costs from given information.
c) Service/operation costing
i) Identify situations where the use of service/operation costing
is appropriate.
ii) Illustrate suitable unit cost measures that may be used in different
service/operation situations.
iii) Carry out service cost analysis in simple service industry situations.

Session 9 Guidance
Read section 1—you have already encountered job costing in relation to labour costs (Session 6).
Work Example 1 to test your understanding.
Understand that in batch costing (also called "operation costing") the cost of a product will be the
average cost of the batch according to the number of homogenous items produced + any specific costs
(s.2). Attempt Example 2.

(continued on next page)

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VISUAL OVERVIEW
Objective: To describe the characteristics of the basic costing methods applicable where
work consists of separate jobs or batches.

COSTING RESOURCE OUTPUTS

JOB BATCH PROCESS

COSTING COSTING SERVICE COSTING
COSTING
• When Used • When Used (Session 10)
• Cost Records • Product Cost
• Potential
Problems

COST
MEASURES/UNITS
• Difficulties in Identifying
Cost Units
• Application to Service
Costing

SERVICE COST ANALYSIS

• Service Industry
• Situations
• Internal Service Situations

Session 9 Guidance
Note the application of service costing to service industries and internal services (s.3).
Note the difficulties in identifying cost units (s.4.2) and attempt Examples 3, 4 and 5.

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Session 9 • Job, Batch and Service Costing F2 Management Accounting

1 Job Costing

1.1 When Used Job costing—a form

of specific order
 Work is undertaken according to customers' special costing in which costs
requirements and each order is of comparatively short duration are attributed to
(as compared with, say, constructing a new office building). individual jobs.
 A wide range of products or jobs are produced, not necessarily
within a factory or workshop, and each order is unique and
requires different amounts and types of:
 labour (e.g. skilled and unskilled);
 materials;
 overheads.

 Job costing is suited to industries producing specialised or

made-to-order outputs. For example:
 accounting/legal advice;
 property maintenance/landscape gardening;
 service engineering/garage repairs.

1.2 Cost Records

 The cost of each order is calculated separately. Costs are
accumulated via a "job card" (or "job cost sheet").
 Direct costs:
 materials purchases from goods received notes (GRNs)/
suppliers' invoices;
 materials from stores requisitions;
 direct wages from time sheets;
 direct expenses from invoices.

 Indirect cost: factory overhead is usually charged at a

predetermined overhead rate, for example, on a direct labour
hour basis (see Session 7).
 Abnormal costs: these are the costs of rectification or
re-working. Depending on their cause, they may be:
 charged to a job (e.g. if the customer changed the
specification); or
 written off to a separate account (from where it may be
recharged as an overhead).

1.3 Potential Problems

Material, labour costs, etc must be collected quickly and
accurately.
The system is clerically expensive due to this data collection.

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F2 Management Accounting Session 9 • Job, Batch and Service Costing

Example 1 Job Cost

Chipboard collects cost data in a job order cost system. The following data relates
to Job 139:

Direct Material $ Direct Labour Hours Rate $

Issues Week

14 October 2,200
17 October 950 17 October 180 13.00
22 October 450 24 October 140 14.50

Overheads are charged at $9 per direct labour hour.

Required:
Calculate the cost of Job 139.
Solution
$ $
Costs:
Direct material
Direct labour

Factory overhead applied

Cost of Job 139

2 Batch Costing

2.1 When Used Batch costing—a

form of specific order
 Similar articles are manufactured in batches (either for costing in which costs
sale or use). are attributed to
 Articles may also have individual as well as batches of products;
common characteristics. it is also called
"operation cost".
 Examples of articles which involve variations of a single design
and require a sequence of standardised operations include:
 footwear;
 clothing;
 furniture.

2.2 Product Cost

Product cost =
 the sum of average costs of operations
(may be ascertained by process costing techniques)
+
 specific costs (if any) of unique operations.

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Session 9 • Job, Batch and Service Costing F2 Management Accounting

Example 2 Batch Cost

Carrie uses a batch costing system in her cuckoo clock manufacturing business. Last month the
following were used in manufacturing a batch of 120 clocks:

Direct materials of $17,800

500 labour hours in the clockworks department (Department A)
750 labour hours in the assembly and finishing department (Department B)
Direct labour costs of $10 an hour in Department A and $8 an hour in Department B.
Production overheads are absorbed at 120% of labour cost.

Required:
Prepare a batch cost card showing the total cost of the batch and the unit cost of a clock.

Solution
$ $
Costs:
Materials
Labour: Department A
Department B

Production overheads: Department A

Department B

Total factory costs

Cost of a clock =

3 Service Costing

3.1 When Used

 To ascertain the cost of providing a unit of service Service costing—
(e.g. on railway networks). the cost accounting
 In both private and public sectors. for specific services
 Applies to services for resale and provided within organisations. or functions (e.g.
service centres and
3.2 Examples departments).

Examples of service industries and internal services are as follows:

Service Industries Internal Services

 Electricity/Gas generation  Canteens
 Telephone  Training
 Transport—road, rail, sea, air  Service departments
 Television and broadcasting (e.g. stores/ maintenance)
 Hospitals  Staff welfare
 Theatres/museums  Laundry/cleaning
 Hotels and restaurants  Boiler-house

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F2 Management Accounting Session 9 • Job, Batch and Service Costing

4 Cost Measures/Units*

*Cost unit is not the

same as unit cost. Unit
cost is the cost of the
Cost units— objective output measures for comparative purposes unit; cost unit is the
(i.e. as "yardsticks"). output that is costed.

4.1 Difficulties in Identifying Cost Units

In manufacturing industries, where there are physical products,
identifying an appropriate cost unit is usually straightforward.
The most commonly used measure of output is the unit of output,
although there are some variations on this (e.g. effective or
equivalent units).
 In service industries, it is not always obvious what a cost unit
is, or should be.
 For example, the output of a hospital concerns outpatients
treated, beds occupied, operations performed, etc.
 Additionally, having identified a cost unit, each unit of
output may be slightly different. A hip replacement
operation might be expected to be a relatively standardised
procedure requiring standard inputs, but emergency
procedures for major traumas may have no standard.
 For a hotel, the cost unit might be the provision of a room
per night. Most guests might leave their rooms quite tidy,
requiring less cleaning—but occasionally a guest might
wreck a room, requiring extensive redecoration.
 In spite of these difficulties, it is necessary to identify a cost
unit so targets can be set and comparisons made between
different organisations.

4.2 Application to Service Costing

Illustration 1 Cost Measures/Units

An analyst wishes to give an example of a cost measure for each of the following services.

Solution
Service Cost Measure Example
Hospitals Patient days
Canteen Meals served
Theatres/Sports stadiums Tickets
Freight carriers Tonne-kilometres*
Electricity industry Kilowatt hours
Accountancy training/Higher education Student-hours
Hotels Guest days
Restaurants Cover

*"Two-part" units are particularly useful in service industries. For example,

a tonne-kilometre represents 1 tonne carried for 1 kilometre. Therefore, 5
tonnes carried for 3 kilometres represents 15 tonne-kilometres.

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Session 9 • Job, Batch and Service Costing F2 Management Accounting

5 Service Cost Analysis

5.1 Service Industry Situations

Example 3 Service Industry Cost Analysis

Repairs Co charges domestic and commercial customers $35 per hour worked on a job plus
consumable materials at cost plus 100% mark-up. The following information is provided for the
last quarter:

Budget Actual
$ $
Sales revenue
Chargeable hours (@ $35) 2,031,120 1,880,480
Consumable (cost + 100%) 403,200 336,000
2,434,320 2,216,480
Cost of sales
Consumable materials 201,600 168,000
Wages (plumbers, electricians, etc) 599,040 621,504
Other 1,088,000 1,206,000
1,888,640 1,995,504
Gross service hours paid 74,880 76,752
Chargeable hours to customers 58,032 53,728
Required:
(a) Calculate budget and actual:
(i) charge-out revenue per service hour paid
(ii) wage cost per chargeable hour
(b) Comment on the cost measures calculated, suggesting reasons for the differences
between actual and budget.

Solution
(a) Budget and actual cost measures

Budget Actual
(i) Charge-out revenue/service hour paid

(ii) Wage cost/chargeable hour

(b) Comment on the cost measures calculated

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F2 Management Accounting Session 9 • Job, Batch and Service Costing

5.2 Internal Service Situations

Example 4 Internal Services Cost Analysis

A technical department of a firm of certified accountants provides free advice to

the firm's partners, managers, clients and trainee accountants. The department is
staffed by the technical partner, two managers and three assistants.

Required:
(a) Identify SIX elements of cost that can be identified with or assigned
to the department.
(b) Suggest THREE cost measures for the department.

Solution

(a) Cost elements

1.

2.

3.

4.

5.

6.

(b) Cost measures

1.

2.

3.

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 Summary
 Job costing is used for products or services provided to meet customers' special
requirements, where the work is of a short duration.
 Batch costing is used when specific batches of a product are manufactured.
 For specific order costing situations, separate accounts are kept for each job or batch.
Direct costs are debited to each account. Overheads are charged (debited) using overhead
absorption rates (Session 7).
 Service costing is used to calculate the cost per unit of a service, in both private and
public sectors.
 It is necessary to choose an appropriate cost unit for a service (e.g. an hour). An overhead
absorption rate is then used to absorb overheads into the cost unit (as for physical products).

Session 9 Quiz
Estimated time: 10 minutes

1. True or false? Job costing can be used only for the costing of goods. (1.1)

2. State how abnormal costs should be charged. (1.2)

3. State ONE potential problem with job costing. (1.3)

4. True or false? Batch costing cannot be used when articles have any common
characteristics. (2.1)

5. State how product cost is calculated in a batch costing system. (2.2)

6. True or false? Service costing may be applied in the railway industry. (3)

7. Give THREE difficulties of identifying cost units in service industries. (4.1)

8. True or false? Service cost analysis is appropriate for external services provided by firms
in service industries, but is inappropriate for internal services provided within each of the
firms. (5)

Study Question Bank

Estimated time: 20 minutes

Priority Estimated Time Completed

Q32 Printing 20 minutes

Additional
Q33 Public transport

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 Session 9

EXAMPLE SOLUTIONS
Solution 1—Job Cost

Costs: $ $
Direct material ($2,200 + 950 + 450) 3,600
Direct labour
180 hours × $13.00 2,340
140 hours × $14.50 2,030 4,370
Factory overhead applied:
320 hours × $9 2,880
Cost of Job 139 10,850

Solution 2—Batch Cost

Costs: $ $
Materials 17,800
Labour: Department A (500 hours × $10) 5,000
Department B (750 hours × $8) 6,000
11,000
Production overheads: Department A ($5,000 × 120%) 6,000
Department B ($6,000 × 120%) 7,200
13,200

Total factory costs 42,000

$42,000
= $350
Cost of a clock = 120

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Solution 3—Service Industry Cost Analysis

(a) Budget and actual cost measures

Budget Actual
(i) Charge-out revenue/service hour paid $2,031,120 $1,880,480
74,880 76,752

= $27.12 = $24.50

(ii) Wage cost/chargeable hour $599,040 $621,504

58,032 53,728

= $10.32 = $11.57

(b) Comment on the cost measures calculated

Charge-out revenue per service hour paid shows the average revenue
obtained for each hour worked. In an ideal world, because the price is $35
per hour, the charge-out revenue per service hour would be $35. In practice
however, not all service hours worked will be charged to the customer—this
could be due to complaints about poor work, or because it is necessary to
perform remedial work at no additional cost to the customer.

The budgeted revenue per service hour paid is $27.12. This is based on
58,032
the assumption that 77.5% × 100% of hours worked would
74,880
be chargeable to customers.
The actual revenue per service hour paid is below the budget by 9.7%.
$24.50−27.12 This is due to the fact that the portion of
× 100%
$27.12
service hours worked which was charged to customers was only 70.0%
53,728
× 100% compared with the budgeted 77.5%.
76,752

Wage cost per chargeable hour shows the average cost of providing one
billable hour to the customer. The cost includes the cost of all labour hours
worked, whether productive or non-productive. If a higher portion of hours
worked are productive, the wage cost per chargeable hour will be lower.
The measure will also be affected by the hourly rate paid for the labour.
The actual wage cost per chargeable hour of $11.57 is above the
$11.57−10.32
budgeted $10.32 by 12.1%. × 100% .
$10.32
This is due to two factors:
1. The portion of hours worked that was actually charged was lower than
budget (as noted above).
2. The wage rate was higher than budgeted as the actual rate was
$621,504
$8.10 per hour compared to a budgeted $8.00
76,752

per hour $599,040 .

74,880

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Solution 4—Internal Services Cost Analysis

(a) Cost elements

1. Wages and salaries
2. Consumable materials - stationery, CDs, memory sticks, etc
3. Premises - rent, buildings maintenance,
insurance (apportioned)
4. Equipment - computer
- office furniture
5. Expenses - telephone
- staff training (e.g. courses)
- publications
- professional subscriptions
6. Overheads - light and heat, office cleaning (apportioned)
- share of firm's general administration costs
(b) Cost measures
1. Per employee
2. Per enquiry
3. Number of queries handled

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