CERTIFICATE LEVEL

Subject Fundamentals of Management Accounting (BA2)

K.Sivagar
Lecturer B.Sc (Hons), ACMA, CGMA

Module Tute 07 – Job, Batch and Service Costing

Code BA2/KS/07
 Job, Batch and Service Costing
Organisations are different from each other due to number of reasons.
• Legal situation
• Organisations are made up of different individuals
• Organisations engage in different activities

Different activities undertaken by organisations can be divided mainly into:

1. Job manufacturing
2. Batch manufacturing
3. Contract manufacturing
4. Process manufacturing
5. Service providers

Based on the activities undertaken, organisations can have their own basic cost accounting system.
• Job manufacturing – Job costing
• Batch costing – Batch costing
• Contract costing – Contract costing
• Process manufacturing – Process costing
• Service providers – Service costing

Note: Job costing, batch costing and contract costing are considered to be as specific order costing.

Specific order costing

Job costing
Job costing is the costing method used by organisations which are engaged in one-off job activity. Job
costing applies where work is undertaken according to specific orders from customers to meet their
own special requirements.

Eg:- Customer requests to manufacture of a single machine to the customer’s own specification, repair
of a vehicle or preparation of a set of accounts for a client.

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To collect the cost of each job, job costing system uses job card (Job cost sheet), in practice this would
probably be a file in a computer system. Job card includes the following details.
• Job number
• Description of the job
• Customer details
• Estimated cost analysed by cost element
• Selling price and hence estimated profit
• Delivery date promised
• Actual cost of date, analysed by cost element
• Actual delivery date, once the job is completed
• Sales details such as delivery note no, invoice no etc

Collecting the costs of each job

Direct materials
MRN is used to identify information about the direct materials.

Direct labour
Time sheets are used to collect the information of direct labour costs. Time sheet is a record of work
done by each employee.

Direct other expenses

Details can be collected from the different invoices related with those expenses.

Production overheads
Overhead absorption rates are used where absorption costing is the overhead cost accounting system.

Non-production overheads
Non-production overheads are charged to the job based on percentages. (Percentages applied
depends on the decision makers’ experience)

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Format for job cost calculation
Direct material XX
Direct labour XX
Direct other expenses XX
Prime cost XXX
Production overhead absorbed XX
Total production cost XXX
Administration overhead XX
Selling and distribution overhead XX
Total cost XXX

• Profit can be expressed as,

1. Mark-up: profit % is based on cost
2. Margin: profit % is based on sales

Work-in-progress
Work-in-progress are the unfinished goods which are neither raw material nor finished goods.

• Opening work-in-progress:
Closing WIP of a period becomes the opening WIP for the next period. Opening WIP of a specific
job will be added to the cost incurred during the period to cost that job.

• Closing work-in-progress:
This is the estimated goods at the end of a period. If a specific job is not completed at the end of
the period, it will be considered as closing WIP.

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Practice Question – 01
Details of Job AB24
Materials cost $ 20,000
Labour cost $ 18,000
Machine and labour hours recorded against Job AB24
Department Machine hours Labour hours
A 500 250
B 80 300
C 120 150

Budgeted information: -
Department Budgeted production Basis of production
overhead overhead absorption

A £ 300,000 30,000 machine hrs

B £ 80,000 4000 labour hrs

C £ 120,000 24,000 machine hrs

Administration and selling overheads are recorded 20% of production cost.

Profit should be 25% of the selling price.

Calculate cost and selling price of Job AB24.

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Batch Costing
The CIMA Terminology defines a batch as a “group of similar units which maintains its identity
throughout one or more stages of production and is treated as a cost unit”.

Batch costing is the costing method used by organisations which are engaged in lot/batch production
activity. Batch cost is calculated very similar to that of job costing. The only difference being cost
accumulated is not for one product or service, but for a batch of products.
Example – A batch of manufactured shoes

Assume, total cost of the batch is $59,520 and selling price of the batch is $79,360. The order given is
for 400 units of similar items. Calculate the cost and selling price of each item.
• Cost of an item = 59,520/400 = $148.8 per unit
• SP of an item = 79,360/400 = $198.4 per unit

Service Costing
Service organisations are broadly divided into;
• Profit seeking
• Not for profit

Service costing differs from product costing due to;

• Lower proportion of direct material
• Difficulties in identifying the cost unit
• Subjective cost structures

Services have four main features

1. Intangibility
2. Variability
3. Simultaneous production and consumption
4. Perishability

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Establishing a suitable cost unit
Cost units for services are usually intangible and they are often made up of two or more parts. These
are known as composite cost units.
Business Cost Unit
Bus company Passenger-mile
Hotel Bed-night
Hospital Patient-day

Establishing the cost per unit

Once a suitable cost unit has been selected, the cost for each unit is calculated as follows.
Total cost incurred in the period
Average cost per unit =
Units of service supplied in the period

Value for Money (VFM)

Value for money concept has been developed as a useful mean of assessing the performance of not-
for-profit organisations. This is also known as 3Es concept.

• Economy (Input measure): This measures the relationship between money spent and the inputs.

• Efficiency (Input to output measure): This measure whether the maximum output is being
achieved for the resources used.

• Effectiveness (Output with objectives): This measures to what extent the outputs generated
achieve the objectives of the organization.

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Performance measurement
Performance measurement is the monitoring of budgets or targets against the actual results to
establish how well the business and its employees are functioning. Management accounting plays a
major role in performance measurement.

Responsibility Centres
With decentralisation departments or units having their own decision-making powers is commonly
referred to as responsibility centres. An individual manager or management team is responsible for
that unit’s performance.

Mainly there are three types of responsibility centres.

1. Cost centre
If a manager is responsible for a [articular aspect of operating costs, the responsibility centre is a
cost centre.
Eg – R & D department, production department etc.

2. Profit centre
If a manager is responsible for revenue as well as costs, the responsibility is a profit centre.
Eg – Supermarket outlets, bank branches etc.

3. Investment centre
If a manager is responsible for investment decisions as well as for revenues and costs, the
responsibility centre is an investment centre.
Eg – strategic business units (SBU) of a large organisation

Financial Performance Measures

Common financial performance measures discussed in BA2 syllabus are as follows.
• Gross revenue
• Contribution
• Gross profit margin
• Operating (net) profit margin
• Return on capital employed (ROCE)

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Gross profit margin:
This measure shows how effective the company’s trading activity is.

Operating profit margin:

Operating profit is a useful measure in identifying how good the organisation in managing other
expenses (Administration and selling and distribution O/Hs)

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Return on capital employed (ROCE):
This measure helps to highlight the productivity of capital employed.

Suitable performance measures for each type of responsibility centres

Cost centre Profit centre Investment centre
Variance analysis X X X
Gross revenue X X
Contribution X X
Gross profit margin X X
Net profit margin X X
ROCE X

Problems of financial performance measures

• Short termism
• Manipulation of results
• Do not covey the full picture

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Non-financial performance measures
Due to problems in financial performance measures, performance of businesses and individuals
should be measured using non-financial performance measures as well.

Advantages of non-financial performance measures

• Wider view of performance
• Easy to understand
• Not distorted by inflation
• Offer motivational implications
• Focus management’s attention on potential problem areas

Disadvantages of non-financial performance measures

• Time consuming and costly
• No clear set of non-financial performance indicators
• Difficult to measure some aspects (eg – customer satisfaction)
• Overloaded information

The balanced scorecard

Financial performance indicators measure performance by only considering financial information. But
for modern organisations financial performance alone is not good enough where to get a proper
assessment of performance organisations also need to look at non-financial performance measures.
So Kaplan and Norton developed a new method of performance measure known as balance scorecard
which includes non-financial measures in addition to financial measures.

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Financial perspective
This focuses on traditional financial measures.
• Operating profit margin
• ROCE
• Gross profit margin

Customer perspective
This is an attempt to measure customers’ view of the organisation by measuring customer satisfaction.
• Number of customer complaints
• % of returning customers
• New customers as % of total customers

Internal business processes perspective

This aims to measure the organisation’s output in terms of technical excellence and consumer needs.
• Unit costs
• Capacity utilization %
• Number of units rejected

Learning and growth perspective

This is also known as innovation and learning perspective. This focusses on the need for continual
improvement of existing products and techniques and developing new ones to meet customers’
changing needs.
• Number of new products launched in the period
• Number staff training days undertaken
• % of new revenue attributable to new products

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 Objective Test Questions
Questions 1 and 2 relate to the following data.
A company uses job costing and recovers overheads on the basis of direct labour cost. Three jobs were
worked on during a period, the details of which were
Job 1 Job 2 Job 3
$ $ $
Opening work-in-progress 8,500 0 20,000
Material in period 17,150 29,025 5,000
Labour for period 12,500 23,000 4,500

The overheads for the period were $140,000, exactly as budgeted. Job 1 Job 2 were incomplete at the
end of the period.

1. What was the value of closing work-in-progress?

A. $81,900
B. $90,175
C. $140,675
D. $214,425

2. Job 3 was completed during the period and consisted of 1,500 identical components. The company
adds 25% to total production costs to arrive at a selling price.
What is the selling price of a component?
A. $21.04
B. $24.58
C. $37.71
D. $40.22

3. A retailer buys in a product for $50 per unit and wishes to achieve a gross profit % of 40%. The
selling price should be:
A. $70.00
B. $83.33
C. $90.00
D. $125.00

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Questions 4 and 5 are based on the following data.
A small management consultancy has prepared the following information:
Overhead absorption rate per consulting hour $12.50
Salary cost per consulting hour (senior) $20.00
Salary cost per consulting hour (junior) $15.00
The company adds 40% to total cost to arrive at a selling price.
Job number 652 took 86 hours of a senior consultant’s time and 220 hours of a junior consultant’s
time.

4. What price should be charged for job 652?

A. $5,355
B. $7,028
C. $8,845
D. $12,383

5. During a period 3,000 consulting hours were charged out in the ratio of 1 senior to 3 junior hours.
Overheads were exactly as budgeted.
Calculate the gross profit for the period $............................

6. The total estimated cost of a job $2,080. The company requires a profit margin of 20%. The price
to be quoted for the job is $..................................

Questions 7 and 8 are based on the following data.

PQR specialises in printing high quality business cards. The most popular requirement is for a coloured
business card printed on both sides. Form past records and budgeted figures, the following data have
been estimated for a typical batch of 100 cards:
Artwork $40
Machine setting 3 hours @ $15 per hour
Card $2 per A4 sheet (each A4 sheet will produce 10 business cards)
Ink and consumables $10
Printers’ wages 1 hour @ $10 per hour

Note: printers’ wages vary with volume.

PQR adds 20% to direct costs to cover overhead.
PQR wishes to achieve a 30% profit margin.

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7. The direct cost of producing 100 business cards is:
A. $85
B. $107
C. $115
D. $125

8. Calculate the price to be quoted for a batch of 200 cards. $........................ (to the nearest $)

9. Service industries have four main features:

o Intangibility
o Perishability
o Variability
o Inseparability
Insert the terms against the correct definition.
A. Each service is unique and cannot usually be repeated in the same way.
B. Service cannot be stored for use at a later date.
C. Services generally have simultaneous production and consumption.
D. Services often have few, if any, physical attributes.

Questions 10 and 11 are based on the following information.

A transport company has three divisions and you are given the following data.
Division A Division B Division C
Sales ($000) 200 300 250
No. of vehicles 50 20 10
Distance (‘000) 150 100 50
Identifiable fixed costs 25 30 35

Variable costs are $300,000 for the company as a whole and are estimated to be incurred in the ratio
of 1:4:5 respectively for A, B and C.
The fixed costs which are not directly identifiable are $75,000. These are shared equally between the
three divisions.

10. Calculate the contribution of division A. $.........................

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11. Calculate the contribution per kilometre of division B. $........................

12. Select the correct term to complete the following sentences:

o If a hospital compared the current waiting time for patients against the target time, this
would be a measure of economy/efficiency/effectiveness.
o If a school compared the % passes for actual exam results compared to target exam
results, this would be a measure of economy/efficiency/effectiveness.
o If a university measured the % of graduates who found full time employment within a year
of graduating, this would be a measure of economy/efficiency/effectiveness.

13. Which TWO of the following are contained in a typical job cost sheet?
A. Actual material cost
B. Actual manufacturing overheads
C. Absorbed manufacturing overheads
D. Budgeted labour cost
E. Budgeted material cost

14. Job 198 requires 380 active labour hours to complete. It is expected that there will be 5% idle
time. The wage rate is $6 per hour. The labour cost of Job 198 is:
A. $2,166
B. $2,280
C. $2,394
D. $2,400

15. The following information relates to job 2468, which is being carried out by AB Co to meet a
customer’s order.
Department A Department B
Direct materials consumed $5,000 $3,000
Direct labour hours 400 hours 200 hours
Direct labour rate per hour $4 $5
Production O/H per direct $4 $4
labour hour

Administration and other overhead 20% of full production cost

Profit margin 25% of sales price

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 What is the selling price to the customer for job 2469?
A. $16,250
B. $17,333
C. $19,500
D. $20,800

16. A company calculates the prices of jobs by adding overheads to the prime cost and adding 30% to
the total costs as profit. Job number Y256 was sold for $1,690 and incurred overheads of $694.
What was the prime cost of the job?
A. $489
B. $606
C. $996
D. $1,300

17. In which TWO of the following situation(s) will job costing normally be used?
A. Production is continuous
B. Production of the product is of a relatively short duration
C. Production relates to a single special order
D. Production is over several accounting periods

18. JW Co is planning to launch a new wall paint for bathrooms and kitchens called WR1. This will be
manufactured in batches of 100,000 cans.
The following cost estimates have been produced per batch of WR1.
Paint WR1 cost estimates $
Direct material per batch 103,000
Direct labour per batch 105,000
Variable production overheads per batch 84,000
Fixed production overheads per batch 34,000
Administration, selling and distribution costs per batch 41,000
Total costs 367,000
Calculate the estimated full absorption cost of one BATCH of WR1
$.....................
Calculate the estimated marginal production cost of one CAN of WR1 (round to 2 decimal
places). $.....................

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19. Which of the following would be appropriate cost units for a transport business?
1 Cost per tonne-kilometre
2 Fixed cost per kilometer
3 Maintenance cost of each vehicle per kilometer

A. 1 only
B. 1 and 2 only
C. 1 and 3 only
D. 1, 2 and 3

20. Which of the following organisations should NOT be advised to use service costing?
A. Distribution service
B. Hospital
C. Maintenance division of a manufacturing company
D. A light engineering company

21. Calculate the most appropriate unit cost for a distribution division of a multinational company
using the following information.
Miles travelled 636,500
Tonnes carried 2,479
Number of drivers 20
Hours worked by drivers 35,520
Tonne-miles carried 375,200
Costs incurred $562,800
A. $0.88
B. $1.50
C. $15.84
D. $28,140

22. Which THREE of the following are characteristics of service costing?

A. High levels of indirect costs as a proportion of total cost
B. Perishability
C. Use of composite cost units
D. Homogeneity

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23. Which THREE of the following would be appropriate cost units for a private taxi company?
A. Vehicle cost per passenger-kilometre
B. Maintenance cost per vehicle per kilometer
C. Fixed cost per passenger
D. Fuel cost per kilometer

24. Which THREE of the following would be suitable cost units for a hospital?
A. Patient/day
B. Operating theatre hour
C. Ward
D. X-ray department
E. Outpatient visit

25. Match up the following services with their typical cost units.
Service Cost unit
Hotels
Education
Hospitals
Catering organisations

A. Meals served
B. Patient day
C. Full-time students
D. Occupied bed-night

26. If sales are $25,500, and cost of sales are $21,250, what is the gross profit percentage?
A. 16.67%
B. 20.00%
C. 83.33%
D. 120.00

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27. Your company’s statement of profit or loss for the year ended 30 September 20X8 showed the
following:
$’000
Net profit before interest and tax 1,200
Interest 200
1,000
Corporation tax 400
Retained profit for the year 600

The statement of financial position at 30 September 20X8 showed the following capital:
$’000
Share capital 8,000
Retained earnings 1,200
9,200
10% loan stock 2,000
11,200

What is the return on capital employed for the year ended 30 September 20X8?
A. 5.88%
B. 13.04%
C. 10.71%
D. 10.87%

28. A government body uses measures based upon the “three Es” to the measure value for money
generated by a publicly funded hospital. It considers the most important performance measure to
be “cost per successfully treated patient”.
Which of the three Es best describes the above measure?
A. Economy
B. Effectiveness
C. Efficiency
D. Externality

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29. Drag the correct word from the list below to complete the table about the performance measures
used in responsibility accounting.
o Cost centre
o Profit centre
o Investment centre
Department Performance measure Type of centre
A ROCE
B Total costs
C Gross profit %

30. Which TWO of the following statements regarding the balanced scorecard are correct?
A. The learning and growth perspective focuses on the need for continual improvement of
existing products and techniques
B. The goal of reducing staff turnover would be used in the learning and growth perspective
C. The balanced scorecard uses only non-financial performance measures
D. The goal of increasing return on capital employed would be used in the financial perspective
E. The four perspectives in the balance scorecard are customer, internal effectiveness, profit and
learning and growth

31. Which of the following is NOT an example of a composite cost unit?

A. Kilowatt hours
B. Meals served
C. Patient days
D. Tonne miles

32. Which of the following would be the most appropriate cost unit for a distribution company?
A. Miles travelled
B. Tonnes carried
C. Tonne miles
D. Packages delivered per driver

33. R is the manager of production department M in a factory which has ten other production
departments. After department M, all production goes into other factory departments to be
completed prior to being dispatched to customers.

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 R receives monthly information that compares planned and actual expenditure for department
M. Decisions involving capital expenditure in department M are not taken by R.
Which of the following best describes R’s role in department M?
A. A cost centre manager
B. An investment centre manager
C. A profit centre manager
D. A revenue centre manager

Questions 34 and 35 relate to the following data:

Companies CDE and PQR operate in the same industry. Data for both companies for the last financial
year are given.
CDE PQR
$000 $000
Sales revenue 8,800 9,100
Operating profit 1,300 700
Capital employed 7,600 8,400
34. Calculate the ROCE for both companies (to 1 decimal place)
CDE………………%
PQR……………..%

35. Calculate the operating profit margin % for both companies (to 1 decimal place)
CDE………………%
PQR……………..%

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