JOB COSTING

Job costing is a form of specific order costing and it is used when a

customer orders a specific job to be done. Each job is priced separately
and each job is unique.

Definitions

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.

 The main aim of job costing is to identify the costs associated with
completing the order and to record them carefully.
 Individual jobs are given a unique job number and the costs involved in
completing the job are recorded on a job cost sheet or job card.
 The selling prices of jobs are calculated by adding a certain amount of
profit to the cost of the job.

To determine the cost involves the following:

 identifying the cost of materials used for the job

 identifying the cost of labour used on the job
 absorbing overheads

Features of industries where job costing is suitable:

 Production is against customer’s order and not for stocks.

 Each job has its own characteristics and requires special attention.

 The flow of production from one department to another is not

uniform. It is the nature of job which determines the department
through which it is to be processed.

It is used in printing press, automobile repair shop, machine tools,

interior decoration etc
Objectives of job costing
The following are the main objectives of job costing:

 Cost of each job is ascertained separately. This helps in finding out the
profit or loss on each individual job.

 It enables the management to know those jobs which are more

profitable and those which are unprofitable.

 It provides a basis for determining the cost of similar jobs undertaken

in future.

 It helps the management in controlling costs by comparing actual costs

with estimated costs.

Procedure for the performance of jobs

The normal procedure which is adopted in companies involved in contract
work involves the following:

 The prospective customer approaches the supplier and indicates the

requirements of the job.

 A responsible official sees the prospective customer and agrees with

him the precise details of the items to be supplied, for example, the
quantity, quality, size and colour of the goods, the date of delivery
and any special requirements.

 The estimating department of the organisation then prepares an

estimate for the job. This will include the cost of the materials to be
used, the wages expected to be paid, the appropriate amount for
factory, administration, selling and distribution overhead, the cost
where appropriate of additional equipment needed specially for the
job, and finally the supplier's profit margin. The total of these items
will represent the quoted selling price.

 At the appropriate time, the job will be 'loaded' on to the factory

floor. This means that as soon as all materials, labour and equipment
are available and subject to the scheduling of other orders, the job
will be started.
Recording job costs
A separate record must be maintained to show the details of individual
jobs. In manual systems, these are known as job cost cards or job cost
sheets. In computerised systems, job costs will be collected in job
accounts.

Job accounts
Inputs to a job are recorded on the left-hand side of the account, outputs
on the right-hand side.

Collecting job costs

Key points on the process of collecting job costs are as follows:

 Some labour costs, such as an overtime premium, might be charged

either directly to a job or else as an overhead cost, depending on the
circumstances in which the costs have arisen.

 The relevant costs of materials issued, direct labour performed and

direct expenses incurred are charged to a job account in the work in
process ledger, the work in process ledger recording the cost of all
WIP.

 The job account is allocated with the job's share of the factory
overhead, based on the absorption rate(s) in operation. If the job is
incomplete at the end of an accounting period, it is valued at factory
cost in the closing statement of financial position, where a system of
absorption costing is in operation.

 On completion of the job, the job account is charged with the

appropriate administration, selling and distribution overhead, after
which the total cost of the job can be ascertained. The job is then
transferred to finished goods.

 The difference between the agreed selling price and the total actual
cost will be the supplier's profit (or loss).

 When delivery is made to the customer, the costs become a cost of

sale.
Advantages of job order costing

 Profitability assessment. Job costing system is essential in assigning

costs separately to individual operations hence it is possible to
ascertain the profit to be generated on each job.

 Job order costing enables a firm to assess the performance of

employees and hence it is possible to identify employees who fail to
meet their expectations.

 Accessibility. The system provides access to the expenses incurred on

each job and this information can be used to develop specific
strategies to control costs in future.

 Accuracy. Job order costing allocates specific costs to appropriate

accounts.

 Flexibility. Job order costing is flexible enough to aid in calculation of

indirect costs.

Disadvantages of job order costing

 Job order costing needs great deal of clerical work in recording

transactions related to it.

 Job order costing is less accurate since overheads are allocated on

estimation and hence this method may not yield 100 percent accurate
results.

 Job order costing requires documentation of each job

 Complexity of work. The record keeping for different jobs may prove
to be more complicated.
PAST PAPER QUESTION – CPA PAPER 7
a) Explain any two procedures of job costing.

b) Furniture World Limited produces modern wooden doors for customers

in Kampala .the type of timber used depends on the specifications of
the job. For purposes of providing job cost estimates, each door are
identified by the type of shutter used which can be either single
glazed(S) or double glazed (D).

The following information relates to job AJ 100:

S D
Shs “000” Shs “000”
Direct materials per door 68 612
Direct labour per door 144 172
Variable costs per door 140 180

In order to produce 500 doors of S and 480 doors of D, fixed costs of Shs
2.2 million for S and 2.4 for D are incurred.

Required:

Prepare a job costs sheet for a client whose order comprises of 450 doors
of S and doors of D.

BATCH COSTING

Batch costing is a form of specific order costing. It is very similar to job

costing.

 Within each batch are a number of identical units but each batch will
be different.
 Each batch is a separately identifiable cost unit which is given a batch
number in the same way that each job is given a job number.
 Costs can then be identified against each batch number. For example
materials requisitions will be coded to a batch number to ensure that
the cost of materials used is charged to the correct batch.
 When the batch is completed the unit cost of individual items in the
batch is found by dividing the total batch cost by the number of items
in the batch.
 Batch costing is very common in the engineering component industry,
footwear and clothing manufacturing industries.
 The selling prices of batches are calculated in the same ways as the
selling prices of jobs, i.e. by adding a profit to the cost of the batch.

In general, the procedures for costing batches are very similar to those
for costing jobs.

 The batch is treated as a job during production and the costs are
collected in the manner already described in this chapter.

 Once the batch has been completed, the cost per unit can be
calculated as the total batch cost divided into the number of units in
the batch.
Example: Batch costing

Rio manufactures Brazils to order and has the following budgeted

overheads for the year, based on normal activity levels.

Production departments Budgeted Budgeted activity

Overheads
Shs
Welding 12,000 3,000 labour hours
Assembly 20,000 2,000 labour hours

Selling and administrative overheads are 25% of factory cost. An order for
500 Brazils, made as Batch 38, incurred the following costs.

Materials Shs 24,000

Labour 200 hours in the Welding Department at Shs 5 per hour
400 hours in the Assembly Department at Shs 10 per hour

Shs 1,000 was paid for the hire of x-ray equipment for testing the
accuracy of the welds.

Required

Calculate the cost per unit for Batch 38.