CHAPTER 7: JOB, BATCH, SERVICE AND PROCESS COSTING

Introduction
This chapter looks at how products are costed, depending on whether they are unique
products or one of many identical products.

Job Costing
Job costing is where a unique item is being made and costs can be specifically traced into
that item.
The job could be large (such as building a house or a ship) or small (such as constructing a
set of shelving for a room).
Often jobs are given identifying numbers, such as contract numbers or simply job numbers.
All relevant costs are labelled with that number and the total costs can be accumulated.
The total cost is made up of the following:
 Material costs:
 Labour costs:
 Other expenses:

Example 1
Job 555 required 20 kgs of a material in stores which cost $15/kg, and also a special
component had to be bought at a cost of $150. 30 hours labour were spent on the job where
the employees were paid at $9/hour. In addition, 3 hours was spent by a supervisor who is
paid at $15/hour. Overheads are absorbed at the rate of $4/labour hour.
Calculate the total absorption cost of the job.
Solution:
Material cost = (20kg*15) + 150 = 450
Labour cost = (30hrs*9) + (3hrs*15) = 315
Overheads = (30 + 3)*4 = 132
Total job cost = $897

Batch Costing
In batch costing several identical items are produced as a batch. Each batch will be given a
number so that costs can be traced into the batch. The batch costs can be averaged over the
units produced.
Example 2
Batch 7777 used 2,000 kgs of a material in stores which cost $10/kg, and also 500 kgs of
special material that was bought in at $4/kg. 90 hours labour were spent in Department A
where the employees were paid at $12/hour, and 40 hours were spent in department B where
employees are paid at 10/hour. Overheads are absorbed at the rate of $3/labour hour.
900 units were produced.
Calculate the total absorption cost of the batch and each unit produced.
Solution:
Material cost = (2,000kg*10) + (500kg*4) = 22,000
Labour cost = (90hrs*12) + (40hrs* 10) = 1,480
Overheads = (90 + 40) * 3 = 390
Total batch cost $23,870

Cost for each unit produced = 23,870/900 = $26.52 per unit

Process Costing - Introduction

Process costing deals with manufacturing that takes place as a continuous process.
Examples of industries using process costing are:
 Oil refining
 Chemical works

Because work carries on continuously, there are no batches as creating a batch implies that
you know when it starts and stops, and therefore what costs have gone into it.

In process costing, costs are worked out for periods: measure the costs that are used in a
period and the output produced in the period and you have a way of working out the cost per
unit.
Example 3: (An example of process costing without losses i.e. input units = output units)
Costs for July:
• Material costs = 100,000 units costing $20,000
• Labour costs = $10,000
• Overheads = $5,000
• Output produced in July = 100,000 units
Cost per unit = Input cost/Output = ($20,000 + $10,000 + $5,000)/100,000 = $0.35/unit
In a process account this would be:
Process Costing – With Normal Losses
Many processes incur losses which are inevitable. For example, liquids evaporate or solids
are filtered out. Therefore, the units of GOOD OUTPUT are often not the same as the units
INPUT.
If you can’t make units without some losses, then the cost of that loss is spread over (or
absorbed) into the good units produced. The loss is just another cost on the way to good
production.
Formula:
Cost/unit = costs for the period (or the input cost)
expected good output for the period
N/B: Expected good output = Input units – normal loss
Normal loss is a.k.a expected loss

Example 4: (When not selling the normal loss/Wastage):

1,000 units at $3.60/unit were input to a process and there was a 10% loss due to
evaporation. 900 good units should result and their cost per unit would be:
Solution:
Cost/unit = costs for the period (or the input cost)
expected good output for the period
Costs for the period (or the input cost) = 1,000u * 3.6 = 3,600
Expected good output = Input units – normal loss = 1,000u – (10%*1,000) = 900u
Cost/unit = 3,600
900 = $4 per unit

Sometimes the ‘lost’ material or waste can be sold as scrap. For example, in a saw-mill,
sawdust can be sold for various uses.

Example 5: (When selling the normal loss as scrap)

For example: 1,000 units at $4.00/unit were input to a process and there was a 20% loss
due to filtration. The materials filtered out could be sold for $0.50/unit.
800 good units should result and their cost per unit would be:
Solution:
Cost/unit = costs for the period (or the input cost) – scrap value
expected good output for the period
Costs for the period (or the input cost) = 1,000u * 4 = 4,000
Scrap value = normal loss * selling price of the normal loss
= (20% * 1,000) * $0.50 = $100
Expected good output for the period = Input – normal loss = 1,000 – 200u = 800u
Cost/unit = 4,000 – 100
800 = $4.875 per unit

In a ‘T’ account this would be shown as:

Example 6
3,000 units are input to a process and total costs amount to $9,000. 100 units are expected to
be lost and can be sold for $1 each.
What is the cost per unit of good output?
A £2.97
B $3.00
C $3.10
D $3.07
Workings:
Cost/unit = costs for the period (or the input cost) – scrap value
expected good output for the period
Costs for the period (or the input cost) = 9,000
Scrap value = normal loss * selling price of the normal loss
= (100u) * $1 = $100
Expected good output for the period = Input – normal loss = 3,000 – 100u = 2,900u
Cost/unit = 9,000 – 100
2,900 = $3.07 per unit

Example 7
In August, 2,000 kgs of a material were introduced to a process at a cost of $5/kg, and
200 hours labour were spent at a cost of $12/hour. Overheads are absorbed at the rate of $3/
labour hour. Normal losses are incurred at the rate of 5% of input and lost units can be sold for
$0.8 per kilogram 1,900 units were produced.
Calculate the total absorption cost of the good output and also show the process account.
Solution:
Cost/unit = costs for the period (or the input cost) – scrap value
expected good output for the period
Cost for the period = (2,000kg*5)+(200hrs*12)+(200hrs*3) = $13,000
Scrap value = normal loss * selling price of the normal loss
= (5%*2,000kg) * 0.8 = $80
Expected good output for the period = Input – normal loss
= 2,000kg – (5%*2,000) = 1,900kg
Cost/unit = 13,000 – 80
1,900 = $6.8 per unit i.e. total absorption cost of the good output.
Dr. Process account Cr.

Material cost = 2,000*5 = 10,000.00 Normal loss = 100*0.80 = 80.00

Labour cost = 200*12 = 2,400.00

Overheads = 200*3 = 600.00 To finished goods = 1,900*6.8 12,920.00

13,000.00 13,000.00

Process Costing – With Abnormal Losses and Gains

In terms of normal loss (i.e. normal loss being the benchmark):
 When actual loss > normal loss (or expected loss) = abnormal loss
 When actual loss < normal (or expected loss) = abnormal gain
Alternatively:
In terms of normal output or expected output (i.e. normal output being the benchmark):
 When actual output > normal output (or expected output) = abnormal gain
 When actual output < normal output (or expected output) = abnormal loss

Example 8
In August, 2,000 kgs of a material were introduced to a process at a cost of $6/kg, and 200
hours labour were spent at a cost of $15/hour. Overheads are absorbed at the rate of $4/
labour hour. Normal losses are incurred at the rate of 5% of input and lost units can be sold for
$0.9 per Kilogram. 1,800 kgs were produced.
Calculate the total absorption cost of the good output, the treatment of any abnormally
lost or gained units, and also show the process account.
Solution:
Cost/unit = costs for the period (or the input cost) – scrap value
expected good output for the period
Cost/unit = (2,000*6)+(200*15)+(200*4) – (5%*2,000*0.9)
2,000 – (5%*2,000) = $8.268 per unit
Expected output = 2,000 – (5%*2,000) = 1,900kg
Actual output = 1,800kg
Abnormal loss = 1,900 – 1,800 = 100kg
The abnormal loss is valued at cost per unit of the good output i.e. 100kg * 8.268 = $826.8
Dr. Process account Cr.

Material cost = 2,000*6 = 12,000.00 Normal loss = 100*0.90 = 90.00

Labour cost = 200*15 = 3,000.00 Abnormal loss = 100*8.268 = 826.80

Overheads = 200*4 = 800.00 To finished goods = 1,800*8.268 14,882.40

15,800.00 15,799.20

Example 9: (Assignment)
In May, 5,000 kgs of a material were introduced to a process at a cost of $9/kg, and labour and
overheads amounting to $25,000 were also contributed.
Normal losses are incurred at the rate of 10% of input and lost units can be sold for $1 per
Kilogram. 4,700 kgs were produced.
Calculate the total absorption cost of the good output and also show the process account.
Solution:
Cost/unit = costs for the period (or the input cost) – scrap value
expected good output for the period
Cost/unit = (5,000*9)+(25,000) – (10%*5,000*1)
5,000 – (10%*5,000) = $15.444 per unit

Expected good output = 5,000 – (10%*5,000) = 4,500kg

Actual output = 4,700kg
Abnormal gain = 200kg, Valued at 200kg * 15.444 = $3,088.80

Dr. Process account Cr.

Material cost = 5,000*9 = 45,000.00 Normal loss = 500*1 = 500.00

Labour cost & overheads 25,000.00

Abnormal gain 3,088.80 To finished goods = 4,700*15.444 72,586.80

73,088.80 73,086.80

Example 10
Input costs to a process amount to $120,000. It is expected that 1,000 units of good output
will be produced and that normal losses will be 200 units. In fact, only 900 units of good
output were produced. All losses, whether normal or abnormal can be sold for $5/unit.
What is the cost per unit of good output and what is its inventory value?
A Cost per unit = $131.67; inventory value = $118,500
B Cost per unit = $132.22; inventory value = $118,000
C Cost per unit = $119; inventory value = $107,100
D Cost per unit = $100; inventory value = $90,000
WORKINGS
Cost/unit = costs for the period (or the input cost) – scrap value
expected good output for the period
Cost/unit = 120,000 – (200*5)
1,000 = $119 per unit
Inventory value = value of actual output = 900u * 119 = $107,100
Example 11
Which one of the following statements is true?
A. The number of units abnormally lost does not affect inventory value
B. The number of units abnormally lost or gained does not affect the cost per unit of
good inventory.
C. The number of units abnormally lost or gained does affect the cost per unit of good
inventory.
D. Abnormally gained production is valued at scrap value.

Example 12
Normal losses are 10% of input.
400 units are produced.
There are 50 abnormally lost units
Lost units have no sales value.
Input costs = $120 per unit input
What is the cost per unit produced?
A $150.00
B $120.00
C $133.33
D $118.52
WORKINGS
Actual output = 400u
Expected output = 400 + 50 = 450u = 90%
? = 100%
Input = 100% = 100/90 * 450 = 500u
Input cost = 500u * 120 = 60,000
Cost/unit = costs for the period (or the input cost) – scrap value
expected good output for the period
Cost/unit = 60,000 – 0
450 = $133.33

Process Costing – with closing work-in-progress

As explained above, in process costing discrete batches are not produced and instead costs
and output are measured for periods. This can mean that at the end of the period some items
are not completed and remain partially finished i.e. work-in-progress.
Costs will have gone into both completed units and the work-in-progress and therefore have
to be averaged over all of those units.
To account for partially completed units i.e. the WIP, the concept of equivalent units is used.

Example 13
The concept of equivalent units says, for example, that 100 units 60% complete is equivalent
to: 100 x 60% = 60 units completely produced.

For example, in a month, resources enough for 1,100 units and amounting to $12,360 have
been used in production and have resulted in 1,000 completed units plus 100 units in work-in-
progress 30% complete.
Production in equivalent unit terms =
1,000 wholly done + the equivalent of 100units x 30% wholly done = 1,030 units.

Cost/unit = Input cost/ Production in equivalent unit terms

Cost/unit = $12,360/1,030 = $12.

In a ‘T’ account this would be represented as:

Example 14
In a month, 4,600 units are input. Total costs are $10,000. At the end of the month, 4,000
complete units are output and 600 units are 35% complete.
What is the cost per equivalent unit?
A $2.17
B $2.38
C $2.28
D $2.50
Workings:
Cost/unit = Input cost
Production in equivalent unit terms
Cost/unit = 10,000
4,000 + (35%*600) = $2.38

Example 15
In December 23,000 kgs of a material were introduced to a process at a cost of $6/kg, and 300
hours labour were spent at a cost of $10/hour. Overheads are absorbed at the rate of
$5/labour hour. 21,000 units were completed and 2,000 units were in closing inventory 40%
complete. Calculate the total absorption cost of the completed output and the work-in-
progress and also show the process account.
Solution:
Cost/unit = Input cost
Production in equivalent unit terms
Cost/unit = (23,000*6)+(300*10)+(300*5)
21,000 + (40% * 2,000) = $6.54 per unit

Service Costing
This looks at costing services, such as providing transport or haulage.
A particular characteristic of service costing is that it often requires the use of composite cost
units. For example, if costing a bus service, you would be interested in the cost per passenger
kilometre; if costing haulage you would be interested in cost per tonne kilometre.
Composite units are essential because if you wanted to estimate, say a haulage cost that
should be charged, it will depend on both weight and distance.
The costs are mostly overheads i.e. indirect costs

Example 16
Total annual cost of running a lorry fleet = $80,000
Jobs:

Required: What is the cost per kg-km of transport?

Solution:
 Job Weight(kg) Distance(km) kg-km

1 5,000.00 200 1,000,000.00

2 10,000.00 500 5,000,000.00

3 7,000.00 400 2,800,000.00

4 12,000.00 600 7,200,000.00

Total kg-km 16,000,000.00

Cost per kg-km of transport = Total cost/Total kg-km

= 80,000/16,000,000 = $0.005 per kg-km