Job Costing

Example 4.18

Ratan wood working uses normal costing and allocates manufacturing overhead to jobs
based on budgeted labour hour rate and actual direct labor hours under or over allocated
overhead if immaterial is written off to cost of goods sold

During the 2015 Ratan recorded the following

Budgeted Manufacturing overhead 4400000/-

Budgeted Direct Labour Hour 20000

Actual Manufacturing Overhead Costs 4650000/-

Actual Direct labor hours 21200

Compute budgeted manufacturing overhead rate

Compute the amount of under or over allocated manufacturing overhead. Is amount

significant enough to warrant proration of overhead costs. Or would it be permissible to
write it off to cogs?

Solution

Budgeted Manufacturing Overhead Rate

4400000/-

20000 labour hours

= Rs 220 per direct labour hour

(2) Actual Over Head incurred = 4650000/-

Acutal Hours * Budgeted Rate

21200 Hours * 220/- Rs.

= 4664000

Over allocation = 4664000- 4650000/- =14000/- Rs Over allocated

An insignificant amount of difference compared to manufacturing overhead costs allocated

= 14000/4664000 *100 = 0.3%

If the quantities of work in progress and finished goods inventories are small the difference
between proration and write off to cost of goods sold account would be very small
compared to net income.

Example 2

Raymond Ltd worked on only two jobs during may information on the jobs are given below

Particulars Job M 1` Job M2

Direct Materials` 75000/- 50000/-
Direct Manufacturing Labor 270000 210000
Direct Manufacturing Labor 6000 5000
hours
Manufacturing Overhead costs are allocated at the budgeted rate of Rs. 30/- per direct
manufacturing labour hour. Job M1 was completed in May

You are required to

Compute the total cost of Job M1

Calculate per unit cost for job m1 assuming 15000 Units
Determine the ending balance in work in process account

Solution
Compute the total cost of Job M1
Particulars Job M1
Direct Material 75000/-
Direct Manufacturing Labour 270000/-
Direct Manufacturing overhead allocated ( Rs. 30 /- * 6000 Hours) 180000/-

TOTAL 525000/-

Calculate per unit cost for job m1 assuming 15000 Units

Total Cost of Job / Number of units in the Job
=525000/- / 15000 Nos
= 35 Rs Per unit
Determine the ending balance in work in process account

JOB M 2
Direct Material 50000
Direct Manufacturing Labor 210000/-
Manufacturing labor allocation (5000 hours * Rs. 30) 150000/-
TOTAL Rs. 410000/-
 Actual Costing Normal Costing
Direct Costs Actual Direct Cost rates* Actual Direct Cost Rates *
Actual quantities of direct Actual Quantities of Direct
cost inputs Cost Inputs

Indirect Cost Actual inDirect Cost Rates* Budgeted Indirect Cost Rates
Actual quantities of cost * actual quantities of cost
allocation base allocation bases

Example
Creative Solution design s web pages for clients in the education sector. The Company’s Job
Costing system has a single direct cost category ( Web Designing labor) and single indirect
cost pool composed of all overhead costs. Overhead costs are allocated individual jobs
based on direct labour hours. The Company Employs six web designers’

budgeted and actual information regarding creative solution follows:

Budget for 2016 Actual for 2016

Direct labour Costs 2730000 2850000
Direct Labour hours 10500 11400
Overhead Costs 1575000 1596000

Compute the direct cost rate and indirect cost rate per web designing labour hours for 2016
under actual costing, normal costing and the variation from normal costing that uses
budgeted rates for direct costs

Which method would you suggest creative solution to use?

Creative solutions web designs for Greenville day school was budgeted to take 86 direct
labour hours. The actual time spent on the project was 79 hours compute the cost of
Greenville day school job using (a) Job Costing (b) normal Costing and (c) the variation from
normal costing that uses budgeted rates for direct cost.

Solutions

Working
Actual direct labor hour rate = 2850000/- / 11400 Hours =250 per direct labour hour rate
Actual indirect cost Rate = 1596000/- / 11400 = 140 per direct labour hour
Budgeted Labor Hour Rate = 2730000 /- / 10500 Hours = 260 Rs Per Direct Labour hour
Budgeted Indirect Cost Rate = 1575000/- / 10500 = Rs. 150 Per labour hour
 Actual Costing Normal Costing Variation of Normal
Costing
Direct Cost Rate Rs.250 250 Rs Rs 260

Indirect Cost Rate Rs. 140 150 Rs. ( Budgeted 150 Rs. ( Budgeted
Rate) Rate)

2
Creative solution should choose a job costing system based on direct cost information
available to them if creative solutions knows direct costs as the jobs being done i would
recommend creative solutions use normal costing over actual costing by calculating
budgeted indirect cost to cost jobs.
If Creative solutions does not know direct costs as the jobs are being completed i would
recommend that creative solutions use the variation of normal costing that calculates
budgeted direct cost rate

3.
Particulars Actual Costing Normal Costing Variation of Normal
Costing
Direct Costs 79*250/- =19750/- 79*250/- =19750 260*79=20540
Indirect Costs 79*140/-=11060/- 79*150/-= 11850/- 150*79=11850/-

All three costing systems use the actual direct labour hours of 79 hours. The Budgeted 86
hours for the Greenville day job is not used in job costing. However creative solutions may
have used the budgeted number of hours in bidding the job