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METHODS OF COSTING  

The term ‘costing’ refers to the techniques and processes of determining costs of a product manufactured
or services rendered. The first stage in cost accounting is to ascertain the cost of the product offered or the

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services provided. In order to do the same, it is necessary to follow a particular method of ascertaining
the cost. The methods of costing are applied in various business units to ascertain the cost of product or
service offered. Different methods of costing are required to be used in different types of businesses. For
example, costing methods used in a manufacturing business will differ from the methods used in a

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 business that is offering services. Even in a manufacturing business, some business units may have
production in a continuous process, i.e. output of a process is an input of the subsequent process and so
on, while in some businesses production is done according to the requirements of customers and hence
each job is different from the other one. Different methods of costing are used to suit these diverse
requirements. These methods of costing are discussed in detail in this chapter. 
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Methods of Costing 

As mentioned in the above paragraph, the methods of costing are used to ascertain the cost of product or
service offered by a business organization. There are two principle methods of costing. These methods are
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as follows 
I] Job Costing 
II] Process Costing 
Other methods of costing are the variations of these two principle methods. The variations of these
methods of costing are as follows. 
I] Job Costing: Batch Costing, Contract Costing, Multiple Costing. 
II] Process Costing: Unit or Single Output Costing, Operating Costing, Operation Costing 
The Job Costing and its variations are discussed in detail in the following paragraphs. 
IsI] this content
Job Costing: This inappropriate? Report
method of costing is used this
in Job Order Document
Industries where the production is as per
the requirements of the customer. In Job Order industries, the production is not on continuous basis,
rather it is only when order from customers is received and that too as per the specifications of the
customers. Consequently, each job can be different from the other one. Method used in such type of
 business organizations is the Job Costing or Job Order Costing. The objective of this method of costing
is to work out the cost of each job by preparing the Job Cost Sheet. A job may be a product, unit, batch,
sales order, project, contract, service, specific program or any other cost objective that is distinguishable
clearly and unique in terms of materials and other services used. The cost of completed job will be the
materials used for the job, the direct labor employed for the same and the production overheads and
other overheads if any charged to the job. The following are the features of job costing. 
!  It is a specific order costing 
!  A job is carried out or a product is produced is produced to meet the specific requirements of the
order 
!   Job costing enables a business to ascertain the cost of a job on the basis of which quotation for the
 job may be given. 

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! While computing the cost, direct costs are charged to the j ob directly as they are traceable to the j ob. 
 
Indirect expenses i.e. overheads are charged to the job on some suitable basis. 
!  Each job completed may be different from other jobs and hence it is difficult to have standardization
of controls and therefore more detailed supervision and control is necessary. 
! At the end of the accounting period, work in progress may or may not exist. 

Methodology used in Job Costing 

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As discussed above, the objective of job costing is to ascertain the cost of a job that is produced as per
the requirements of the customers. Hence it is necessary to identify the costs associated with the job and
present it in the form of job cost sheet for showing various types of costs. Various costs are recorded in the
following manner. 
!
!  Direct Material Costs: Material used during the production process of a job and identified with the
!
cost
While
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 job is the direct material. The cost of such material consumed
is computing
identifiable the
with the direct
cost, job and is charged
costs are charged
 
directly. Thej ob
to the
is the direct material cost. Direct material
source document
directly as they for
areascertaining thisjcost
traceable to the ob. 
is the material
Indirect requisition
expenses slip from
i.e. overheads arewhich thetoquantity
charged of material
the job on consumed
some suitable basis.can
  be worked out. Cost
! of the same can be worked out according to any method of pricing of the issues like first in first out,
  Each job completed may be different from other jobs and hence it is difficult to have standardization
last in first out or average method as per the policy of the organization. The actual material cost can be
of controls and therefore more detailed supervision and control is necessary. 
compared with standard cost to find out any variations between the two. However, as each  job may

! 
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the end offrthe
om accounting
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the other, staperiod,
ndardization
work inisprogress
difficult may
but eforforts
maycannotbe
exist.
made  for the same. 
Direct Labor Cost: This cost is also identifiable with a particular job and can be worked out with the
help of ‘Job Time Tickets’ which is a record of time spent by a worker on a particular job. The ‘job
Methodology
time ticket’
As discussed
used
has
above, the Job Costing
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  the standard cost and actual cost can be very useful. 
!  Direct Expenses:Costs:
Direct Material DirectMaterial
expenses are during
used chargeable
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roduction concerned
process of a jobjob.
andThe invoiceswith
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aterial. with
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of such materialof job and thus
consumed thdirect
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Direct material

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cost
Become a Scribd member to read and
ascertained.
Overheads:
 
is identifiable
is the materialThis
with the job and is charged directly. The source document for ascertaining this cost
requisition
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asquantity of material
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Cost: Start Your 30 Day FREE Trial
ry.This
  cost is also identifiable with a particular job and can be worked out with the
!  help
Work ofin‘Job Time
Progress: Tickets’
On which is a record
the completion of the
of a job, timetotal
spent byisaworked
cost worker out on abyparticular
adding the job.overhead
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  becomes the closing
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!
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number ofprogress is maintained.
job and thus   of direct expenses can be
th e amount
ascertained. 
  Overheads: This is really a challenging task as the overheads are all indirect expenses incurred for121the 
 job. Because of their nature, overheads cannot be identified with the job and so they are apportioned to
a particular job on some suitable basis. Pre determined rates of absorption of overheads are generally
 
! used for charging the overheads. This is done on the basis of the budgeted data. If the predetermined
rates are used, under/over absorption of overheads is inevitable and hence rectification of the same
 becomes necessary. 
  Work in Progress: On the completion of a job, the total cost is worked out by adding the overhead
 
expenses in the direct cost. In other word, the overheads are added to the prime cost. The cost sheet is
then marked as ‘completed’ and proper entries are made in the finished goods ledger. If a job remains
Advantages the Costing
incompleteofatJob end of an  accounting period, the total cost incurred on the same becomes the cost
 
of work in progress. The work in progress at the end of the accounting period becomes the closing
The following are the advantages of job costing. 
work in progress and the same becomes the opening work in progress at the beginning of the next
!  Accurate
accounting information is available
period. A separate regarding
account thein
for work cost of the is
progress jobmaintained.
completed  and the profits generated
from the same. 
121 
!  Proper records are maintained regarding the material, labor and overheads so that a costing system
is built up 
! Useful cost data is generated from the point of view of management for proper control and analysis.  
! 
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Performance analysis with other jobs is possible by comparing the data of various jobs. However it
should be remembered that each job completed may be different from the other.  
!  If standard costing system is in use, the actual cost of job can be compared with the standard to find
out any deviation between the t wo. 
!  Upload your documents
  to download.
Some jobs are priced on the basis of cost plus basis. In such cases, a profit margin is added in the cost
! of the job. In such situation, a customer will be willing to pay the price if the cost data is reliable. Job
costing helps
Advantages in maintaining
of Job Costing  this reliability and the data made available becomes credible. 
The following are the advantages of job costing. 
!
  Accurate information
Limitations of Job Costing  
is available regarding the cost of the job completed and the profits generated

 Job
from the same. 
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! costing suffers from certain limitations.
  Proper records are maintained regarding the material, labor and overheads so that a costing system
These
!
is are
builtasup
follows.
   
!  It is said that it isistoo time consuming and requires
of view detailed
record keeping. This makes the method 
Useful cost data generated from the point of management for proper control and analysis.
! more expensive. 
  Performance analysis with other jobs is possible by comparing the data of various jobs. However it
! Record keeping for different jobs may prove complicated. 
! OR
should be remembered that each job completed may be different from the other.  
!  Inefficiencies of the organization may be charged to a job though it may not be responsible for the
If standard costing system is in use, the actual cost of job can be compared with the standard to find
same.
out any   deviation between the t wo. 
In spite
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Some jobsabove
of the limitations,
on theitbasis
can be
ofsaid that job costing
is an extremely useful method for computation
are priced . In such cases, a profit margin is added in the cost
of the
ofcost
the of a jIn
job. ob.such
Thesituation, timecost
limitationaofcustomer plus basis
consuming can be removed
will be willing to pay thebyprice
computerizat
if the costion and
data is this can also
reliable. Job
reduce the complexity of the record keeping.  
costing helps in maintaining this reliability and the data made available becomes credible. 
download
Format of Job Cost Sheet   full documents.
Limitations
The
!
 Job costing of of
job Job
format suffers cost Costing
sheet
from
 limitations.
isingiven
certa below. 

These are as follows. 

!
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XYZ LTD. 
  It is said that it is too time consuming and requires
 JOB ORDER COST SHEET
detailed  
record keeping. This makes the method
!
more expensive.
Customer  
Invoice No. Selling Price Per Unit: Cost Per Unit:
Date:Record
  keeping for different jobs may
 Job prove No: 
Order complicated.  Total Cost 
  Inefficiencies
Product of  the organization may be charged to a job though it may not be responsible for the
Description
same. 
In spite of the above limitations, it can be said that job costing is an extremely useful method for computation
of the cost of a j ob. The limitation of time consuming can be removed by computerization and this can also
122 
reduce the complexity of the record keeping. 

  Format of Job Cost Sheetis  given below. 

The format of job cost sheet
XYZ LTD. 
  SHEET 
 JOB ORDER COST
Customer Invoice No. Selling Price Per Unit: Cost Per Unit:
Date:Particulars
    Dates No: No. 
and Ref.
 Job Order Total Amount [ Rs]
Total Cost  Per Unit [Rs] 
 
  Direct Materials: Dept I
Product Description 
Dept II
Dept III 
122 
Total 
Direct Labor 
Overheads 
Total Costs 

Solved Problems 
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1. A factory uses a job costing system. The following data are available from the books at the year ending

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on 31st March 2007. 
  to download.
Particulars    Total[Rs]
Dates and Ref. No. Amount  
Amount [ Rs]  Per Unit [Rs] 
Direct Materials:
Direct Materials  Dept I 180,0000 
Direct Wages  Dept II 150,0000 
Profit  121,8000 

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Dept III 
Selling and Distribution Overheads  105,0000 
Total   
Administrative Overheads 84,0000 
Direct Labor 
Factory Overheads  90,0000 
Overheads 
Required: 
Total Costs 
A. Prepare a job cost sheet showing the prime cost, works cost, production cost, cost of sales and sales 
value. 
OR
B. In theProblems
Solved year 2007-08, the factory has received an order for a number of jobs. It is estimated that the
  costing
1. A factory
direct uses a job
materials system. Theand
would be Rs.240,0000 following
direct data are
labor available
would costfrom the books
Rs.150,0000. at thewould
What year ending
be the
on 31st March 2007.  
price for these jobs if the factory intends to earn the same rate of profit on sales, assuming that the
selling Become a Scribd member to read and
and distribution overheads have gone up by 15%.
Particulars  
The [Rs]
Amount factory recovers factory overhead as a
 
percentage of direct wages and administrative and selling and distribution overhead as a percentage
Direct Materials  180,0000 
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of works cost, based on the cost rates prevalent in the previous year. 
Direct Wages  150,0000 
Solution: The Job Cost Sheet is shown below 
Profit  121,8000 
 JOB COST
Selling and Distribution Overheads   SHEET OF XYZ LTD.  
105,0000
Administrative
For the year ended Start Your 30 Day FREE Trial
Overheads   2007  
31st March, 84,0000 
Factory Overheads
Particulars     Amount90,0000
[Rs.]    Amount [Rs.] 
Required: 
Direct Costs: - Direct Materials  18,00,000  
A. Prepare a job costDirect
sheet Labor
showing
  the prime cost, works 15,00,000
cost, production
  cost, cost of sales and sales 
value. 
Prime Cost [Direct Materials + Direct Labor]  33,00,000  
B. In the year
Factory 2007-08,  the factory has received an order for a number of jobs.9,00,000
Overheads It is estim
  ated that the
direct materials would be Rs.240,0000 and direct labor would cost Rs.150,0000. What would be the
price for these jobs if the factory intends to earn the same rate of profit on sales, assuming that the
selling and distribution overheads have gone up by 15%. The factory recovers factory overhead as a
percentage of direct wages and administrative and selling and distribution overhead as a percentage 123 
of works cost, based on the cost rates prevalent in the previous year. 
Solution: The Job Cost Sheet is shown below 
 

 JOB COST SHEET OF XYZ LTD. 

For the year ended 31st March, 2007  

Particulars    Amount [Rs.] Amount [Rs.] 

 
Direct Costs: - Direct Materials  18,00,000  
Direct
Factory/Works Cost LaborCost
[Prime   + Factory  15,00,000   42,00,000 
 
Prime Cost [Direct
Overheads]   Materials + Direct Labor]  33,00,000  
Factory Overheads
Administrative  
Overheads   9,00,000  
8,40,000
Cost of Production [Factory Cost + Adminis-  50,40,000 
trative Overheads]  123 
Selling and Distribution Overheads  10,50,000 
Cost of Sales [Cost of Production + Selling   60,90,000 

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and Distribution Overheads ] 
Profit [As Given ]  12,18,000 
Sales [Cost of Sales + Profit ]  73,08,000 
% of Factory Overheads to Direct Wages: Rs.9,00,000/15,00,000 X 100 = 60% 

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% of Administrative Overheads to Works Cost: Rs.840,000
100 = 20%    /420,0000 X

% of Selling and Distribution

Factory/Works Cost [Prime Overheads to Works
Cost + Factory   Cost: Rs.10,50,000/42,00,000
42,00,000   =25% 
X 100

B Statement showing
Overheads]   Price Quotation for a Job 
Administrative
Particulars   Overheads  8,40,000
Amount [Rs]    
Amount [Rs.] 

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Cost
DirectofCosts:
Production [Factory
Direct Cost
Materials  + Adminis-  50,40,000
24,00,000    
trative Overheads]    
Direct Labor  15,00,000 
Selling and Distribution Overheads  10,50,000 
Prime Cost [Direct Materials + Direct Labor] 
Cost of Sales [Cost of Production + Selling   60,90,000 
X 39,00,000 
and Distribution Overheads ] 
Factory Overheads – 60% of Direct Labor   X 9,00,000 

OR
Profit [As Given ]  12,18,000 
Works Cost [Prime Cost + Factory Overheads]  48,00,000 
X
Sales [Cost of Sales + Profit ]  73,08,000 
Administrative Overheads – 20% of Works Cost  9,60,000 
% of Factory Overheads to Direct
Cost of Productio n [Works Cost +Wages: Rs.9,00,0
Administr 00/15,00,000
ative Overheads]   100 = 60% 
57,60,000 
% of Administra
Selling tive Overheads to Works Cost:ofRs.840,000/420,0000 100 = 20% 
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and Distribution Overheads 28.75% Works Cost   16,56,000 
[25%
% + 15%
of Selling = 28.75%]
and   Overheads to Works Cost: Rs.10,50,000/42,00,000
Distribution 100 =25% 
Cost of Sales [CostPrice
of Production
Quotation+for
Selling
a Job and Distribu-  
74,16,000 
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B Statement showing
tion Overheads] 
Particulars   Amount [Rs]  Amount [Rs.] 
Profit 16.67 % of Sales [20% on cost]  14,83,200 
Direct Costs: Direct Materials  24,00,000 
Sales [Cost of Sales + Profit ]  88,99,200 
Start Your 30 Day FREE 15,00,000
Direct Labor  
Trial 
Prime Cost [Direct Materials + Direct Labor] 
2. The following information for the year ended on 31st March 2007 is obtained from the books and
39,00,000 
records of a manufacturing company 
Factory Overheads – 60% of Direct Labor   9,00,000 
Works Cost [Prime Cost + Factory Overheads]  48,00,000 
Administrative Overheads – 20% of Works Cost  9,60,000 
Cost of Production [Works Cost + Administrative Overheads]  57,60,000 
Selling and Distribution Overheads 28.75% of Works Cost  16,56,000 
[25% + 15% = 28.75%]  124 
Cost of Sales [Cost of Production + Selling and Distribu-   74,16,000 
tion Overheads] 
Profit 16.67 % of Sales [20% on cost]  14,83,200 
Sales [Cost of Sales + Profit ]  88,99,200 

2. The following information for the year ended on 31st March 2007 is obtained from the books and

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records of a manufacturing company 
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