Job costing

Unit-V
 Introduction
• Job Costing refers to the method of ascertaining
costs where product is manufactured or service is
provided against specific order, as distinct from
continuous production for stock and sale.
• Under this method, costs are collected and
recorded for each job, or a batch of similar jobs,
under a separate production order number.
• Each job has its own characteristics and needs
special treatment
• The special features relating to production and cost
ascertainment in industries where job costing can be applied
are:
• i) Each job is unique, specific and dissimilar.
• ii) Each job is undertaken to customer’s special requirements
and not for stock.
• iii) Each job is comparatively of a short duration.
• iv) Each job is capable of identification at all stages of
production.
• v) Each job order is separately identified by a job order number.
• vi) There is no uniformity in the flow of production from
department to department.
• vii) Direct costs of labour, materials and expenses are booked
directly against the job order.
• viii) Overheads are charged on the basis of predetermined
rates.
Definition of Job Costing
Principles of Job Costing

SUITABILITY OF JOB COSTING

 Applicability
Keeping in view the above features, job costing may be usefully
employed in the following organisations:
• Printing Press: Each item to be printed, whether it is a handout, a
book or an advertising flyer, is a separate job.
• Garage : Each car to be repaired or tuned up becomes a separate
job.
• Furniture Manufacturer: Each order for furniture is treated as an
individual job. For example, several units of one style of chairs will
be produced in one batch.
• Service Organisation stations : A firm of Chartered Accountants is
an example of a service Organisation. Each work-order assigned
by the client is treated as a separate job and fees charged
accordingly.
• Construction Companies: Each building is a separate job because
each building has different covered area and a different design.
 Procedure
• Job Costing involves considerable amount of recording and analysis. It
requires reliable production control records which must show material
issued to various jobs, labour time spent on different jobs and the
appropriate allocation of overheads as work on each job passes through
production cost centres.
• A concern using job costing usually adopts the following procedure for
costing purposes.
1) Estimating the job costs: Estimating is an essential requirement of a job
costing procedure. It is useful for submission of tenders and price
quotations. The Costing Department has to prepare an estimate of the
total cost for each job before it is undertaken. This forms the basis for
quoting the price to the customer.
2) Allocating job order number: As soon as an order is received and
accepted, it must be assigned a separate job order number. This
facilitates reference for production as well as for costing purposes.
3) Preparing production order: If the job is accepted, a
production order is made out by the Planning Department in the
form as shown in Figure
Form of production order

A production order refers to the work order or job order that

constitutes a written authority to factory proceed with a job. It
stipulates all essential details of the order to be executed. In fact,
it serves as the authority for accounting costs assigned to a job.
4) Collecting and recording costs : The costs are
collected and recorded for separately. A job cost
sheet as shown in Figure , is used for recording
and summarising the cost of materials, labour and
overheads applicable to each job.
A job cost sheet is often referred to as the basic
document of job costing. It is used the Work-in-
progress Control Account when a job is completed
and also to the profit or loss on each job.
The sources for collection of job costs are:
a) Materials : Material Requisition Slip, Materials
Abstract or Materials Issue Analysis Sheet.
b) Wages: Job Card or Labour Abstract (Wages
Analysis Sheet)
c) Direct Expenses: Vouchers pertaining to direct
expenses
d) Overheads : Charged on the basis of pre-
determined rates based on the method of
absorption used.
5) Comparing actual costs with estimated costs:
On completion of a job, a completion report is
sent by the Production Shop to the Costing
Department. The Costing Department, then,
prepares the job cost sheet and ascertains the
actual cost and profit on the job. Thereafter, a
comparison is made with estimates to find out
any variance and suggest future course of action.
 Evaluation
• The main purpose of job costing is to determine the profit or loss on
each job.
• This serves as a check on the accuracy of the estimates on the basis of
which the prices are quoted. Comparison of actual costs with the
estimated costs, or with the cost of similar jobs completed in the past,
helps to bring to light any inefficiencies that might have occurred in
the course of production. Thus, job costing separates profitable jobs
from unprofitable ones, provides a check on past estimates, and
serves as a basis for estimating costs for similar work in future.
• This method is also used when contracts are accepted on a ‘cost plus’
basis i.e., actual costs plus an agreed percentage of profit.
• The main drawback of job costing relates to the expenditure involved
in the paper work in estimating costs, and designing and scheduling of
production. It should, therefore, be used when absolutely necessary.
 Illustration 1:
• The estimated material cost of job D-2 is Rs. 5,000 and direct
labour cost is likely to be Rs. 1,000.
In the machine shop it will require machining by Machine No.
8 for 20 hours and by Machine No. 11 for 6 hours. Machine
hour rates for Machine No. 8 and Machine No. 11 are Rs. 10
and Rs. 15 respectively.
Last year, the direct wages amounted to Rs. 80,000 and
factory overheads (excluding those related to Machine No. 8
and 11) amounted to Rs. 48,000. Similarly, the factory cost of
all jobs last year amounted to Rs. 2,50,000 and office
expenses Rs. 37,500.
Prepare a statement of quotation which provides for 20%
profit used on selling price.
Illustration 2

• A shop floor supervisor of a small factory

presented the following cost data for job No.
42.
Illustration 3
• A factory uses job costing. The following data is obtained from its books for
the year ended 31st December, 2018:
– Direct Materials Rs. 90,000
– Selling and Distribution Overheads Rs. 52,500 Direct Wages Rs. 75,000
– Administration Overheads Rs. 42,000
– Profit Rs. 60,900
– Factory Overheads Rs. 45,000
• a) Prepare a Job Cost Sheet indicating the Prime Cost, Works Cost, Cost of
Production, Cost of Sales and Sales Value.
• b) In 2018, the factory received an order for a number of jobs. It was
estimated that direct materials required would be for Rs. 1,20,000 and direct
labour would cost Rs. 75,000.
What should be the price for these jobs if factory intends to earn the same
rate of profit on sales as in 2018, assuming that the selling and distribution
overheads had gone up by 15%?
The factory recovers factory overheads as a percentage of direct wages and
administration and selling and distribution overheads as a percentage of
works cost.