Cost Accounting
Job Costing and Batch Costing
Part A: Discussion of basic theories in terms of
understanding what is Job Costing, what is Batch Costing, what are the features
of and differences between Job Costing and Batch Costing and how Economic Batch
Quantity (EBQ) is calculated.
Part B: Nine Illustrations with Solutions.
Part A
Introduction
Many costs are incurred in
the process of business operations. The costs of producing any service or product
in an organization must be ascertained for smooth business operations, a
technique referred to as Costing. This entails recording expenses in terms of each
process or product, classifying expenses and allocating overheads and direct
expenses to each product for the purpose of determining the cost per unit of
the production of a product or process. Various techniques are used to measure
the cost of a process or product, including job costing and batch costing.
What is Job Costing?
[A car repairing workshop where job costing method is applied for pricing and billing of jobs]
This is a costing technique
used to determine the cost of a job which can be a contract, specific work or assignment
that should be performed in accordance with customers’ set specifications and requirements.
In other words, job costing may be described as a costing method,
wherein customized goods are produced or customized services are rendered. This
method of costing is used when jobs are performed for different customers as
per their orders. Each job differs from another job in respect of:
1.
Direct materials- It accounts for costs incurred
by assigning costs to a project or product;
2.
Direct labour- Specific time spent on jobs is
assigned to the jobs based on labour costs;
3.
Overheads- Overhead costs are accumulated and
allocated to jobs done; and
4.
Special customer needs.
It is best
suited for industries which manufacture products or provide services as per
customers’ demands and needs such as shipbuilding, decoration, interior design,
furniture making, car servicing, advertising agency, event management and press
printing, just to name a few.
What is Batch Costing?
[A factory where production is carried out in batches and where batch costing method is applied for pricing and billing of products]
This is a costing technique
involving identical units that are produced in batches and each batch is assigned
a separate batch number. The cost per unit of a batch is derived by dividing
the total cost of the batch by the number of units in the batch. A profit mark-up
is then added to the cost per unit of the batch to arrive at the sale price per
unit.
Batch Costing may be
understood as a variant of job costing. In this system, a group of identical
units, comprising of a batch is used as a cost unit, to estimate cost. To
ascertain the cost per unit, the total cost of the batch is divided by the
number of units produced in a batch, as represented below:
|
Cost per unit = |
|
Total Batch Cost ÷ Total units
in a batch |
For each batch, a cost sheet
is prepared and maintained by allotting a batch number. Material requisition
notes are prepared, wages are recorded and overheads are recovered batch wise.
Batch costing
technique is best suited for industries which manufacture products in batches such
as clothing and garments, radio and television sets, confectioneries,
pharmaceuticals, etc. as well as fast-moving consumer goods industries.
Differences between Job Costing and
Batch Costing:
1.
Definition
Job costing refers to a
costing method used to determine the cost of a job which can be a contract, specific
work or assignment that should be performed in accordance with customers’ set
specifications and requirements. On the other hand, batch costing refers to a
costing technique involving identical units that are produced in batches and
each batch is assigned a separate batch number.
2.
Ideal
Industries
While job costing is best
suited for industries which manufacture products as per customers’ demands and
needs such as shipbuilding, decoration, interior design, furniture and press
printing, batch costing is best suited for industries which manufacture
products in batches such as clothing manufacturers, engineering manufacturers
as well as fast-moving consumer goods industries.
3.
Terms of
production
While job costing accounts
for goods manufactured as per customers specifications, batch costing accounts
for mass production goods.
4.
Cost unit
While the cost unit in job
costing is the executed job, the cost unit in batch costing is a particular batch.
5.
Cost derivation
In job costing, the cost of
each unit is derived after the completion of each job. On the other hand, in batch
costing, the cost per unit is derived by dividing the total cost of the batch
buy the number of items in the batch.
Job Costing vs. Batch Costing:
Comparison Table
|
|
Job Costing |
Batch Costing |
|
1 |
Definition |
|
|
|
Refers to costing
technique used to determine the cost of a job which can be a contract,
specific work or assignment that should be performed in accordance with customers’
set specifications and requirements. |
Refers to a costing
technique involving identical units that are produced in batches whereby each
batch is assigned a batch number, number of units and the unit costs. |
|
2 |
Ideal Industries |
|
|
|
Best suited for industries
which manufacture products as per customers’ demands and needs, such as shipbuilding, decoration,
interior design, furniture, car servicing, advertising agency, and press
printing. |
Best suited for
industries which manufacture products in batches such as clothing and garments,
radio and television sets, confectioneries, pharmaceuticals, etc. as well as
fast-moving consumer goods industries. |
|
3 |
Terms of Production |
|
|
|
Goods are manufactured
or jobs are done as per customers’ specifications and requirements. |
Goods are manufactured
on mass production basis. |
|
4 |
Product |
|
|
|
Each job has an
independent identity, as each job is distinct from other jobs. |
Products do not have
any independent identity, as they are manufactured in continuum. |
|
5 |
Cost Unit |
|
|
|
The cost unit is the
executed job |
The cost unit is a
particular batch |
|
6 |
Cost Ascertainment |
|
|
|
The cost of each unit
is derived after the completion of each job. |
The cost per unit is
derived by dividing the total cost of the batch by the number of items in the
batch. |
|
7 |
Nature of Industry |
|
|
|
Job costing applies to
both product and service industry. |
Batch costing is
applicable only to product industry. |
Economic Batch Quantity (EBQ)
What will be the number of units in a batch is an important factor to decide. That number of units should constitute a batch which gives the greatest economy in production. Economic
Batch Quantity (EBQ) is worked out in the same line as Economic Order Quantity
(EOQ). EBQ can be calculated by using the following formula:
|
EBQ = |
(2US/C)^(1/2) |
Where,
|
U = |
Total number of units to be produced per year |
|
S = |
Set-up cost per batch/run |
|
C = |
Carrying cost per unit per year (It is actually certain %-age of manufacturing cost
per unit) |
What is
Set-up Cost?
Set-up cost means cost of setting up of machines and
tools for production before the start of production run of a batch. Set-up cost
per batch is of fixed in nature. It does not change due to change in the
quantity in the batch i.e. batch size. Total set-up cost per year, however, varies
directly with the number of batches. Therefore, there is an inverse
relationship between the batch size and the total set-up cost per year.
What is
Carrying Cost?
Carrying cost includes several variable factors like –
cost of manufacture, cost of storage, interest on capital employed,
depreciation, etc.
Part B
Cost Accounting
Job Costing and Batch Costing
Selected Problems
Illustration: 1
As
newly appointed Cost Accountant, you find that the selling price of Job No.
9669 has been calculated on the following basis:
|
Particulars |
Rs |
Rs |
|
Materials |
|
12.08 |
|
Direct Wages (@ 25 paise per hour): |
|
|
|
Department A (10 hours) |
2.5 |
|
|
Department B (4 hours) |
1.0 |
|
|
Department C (8 hours) |
2.0 |
5.50 |
|
PRIME COST |
|
17.58 |
|
Add: 33 1/3
% on Prime Cost |
|
5.86 |
|
Selling Price |
|
23.44 |
An analysis of the previous year’s profit and loss account
shows the following:
|
Particulars |
Rs |
Particulars |
Rs |
|
D/Material |
77,500 |
Factory OH: |
|
|
D/Wages: |
|
A |
2,500 |
|
A |
5,000 |
B |
4,000 |
|
B |
6,000 |
C |
1,000 |
|
C |
4,000 |
Selling costs |
30,000 |
You are
required to:
(a)
Calculate and enter the revised costs using the previous year’s figures
as a basis;
(b)
Draw up a Job Cost Sheet;
(c)
Add to the total job cost 10% for profit and give the final selling
price.
Illustration: 2
A work
order for 100 units of a commodity has to pass through four different machines
of which the machine hour rates are: Machine P – Rs 1.25, Machine Q – Rs 2.50,
Machine R – Rs 3 and Machine S – Rs 2.25
Following
expenses have been incurred on the work order – Materials Rs 8,000 and Wages Rs
500.
Machine
- P has been engaged for 200 hours. Machine - Q for 160 hours, Machine - R for
240 hours and Machine - S for 132 hours.
After
the work order has been completed, materials worth Rs 400 are found to be
surplus and are returned to stores.
Office
overhead used to be 40% of works costs, but on account of all-round rise in the
cost of administration, distribution and sale, there has been a 50% rise in the
office overhead expenditure.
Moreover,
it is known that 10% of production will have to be scrapped as not being up to
the specification and the sale proceeds of the scrapped output will be only 5%
of the cost of sale.
If the
manufacturer wants to make a profit of 20% on the total cost of the work order,
find out the selling price of a unit of commodity ready for sale.
Illustration: 3
The data pertaining to Heavy Engineering Ltd for the
year ending 31.3.2018 are as follows:
Direct materials Rs 9,00,000; Direct wages Rs 7,50,000;
Selling and distribution overheads Rs 5,25,000; Administrative overheads Rs 4,20,000,
Factory overheads Rs 4,50,000 and Profit Rs 6,09,000.
(a)
Prepare a cost sheet showing all the details.
(b)
For 2018-19, the factory has received a work order. It is estimated that
the direct materials would be Rs 12, 00,000 and direct labour costs Rs 7,
50,000. What would be the price of work order if the factory intends to earn
the same rate of profit on sales, assuming that the selling and distribution
overhead has gone up by 15%? The factory recovers factory overhead as a
percentage of direct wages and administrative and selling and distribution overheads
as a percentage of works cost.
Illustration:
4
A manufacturing company is divided into three
production departments – A, B and C. All production is to customers’ orders.
All orders are dissimilar and they go through all the three departments.
Manufacturing Costs for a given period were as
follows:
(Rs
in ’000)
|
|
Department |
|
||
|
Particulars |
A |
B |
C |
Total |
|
Direct material |
|
|
|
180 |
|
Direct labour |
40 |
20 |
30 |
90 |
|
Ind. Mfg Cost |
20 |
40 |
30 |
90 |
The
cost of producing a particular order was determined as follows:
|
Particulars |
Rs |
Rs |
|
Direct material |
|
1,000 |
|
Direct labour: |
|
|
|
Department A |
120 |
|
|
Department B |
280 |
|
|
Department C |
200 |
600 |
|
Indirect manufacturing costs |
|
600 |
|
|
|
2,200 |
The General
Manager had a hazy idea that the jobs executed on orders of this nature are
under-priced. So, the services of a firm of cost accountants, of which you are
a member, have been acquired for a thorough investigation.
Can you detect, after a careful perusal of the limited
available information, the fundamental fallacy of the company’s method assuming
that the direct labour cost is an acceptable basis for distributing indirect
manufacturing costs?
Prepare a revised cost sheet for the order
distributing indirect manufacturing costs in a manner you consider more correct
than the company’s procedure.
Illustration:
5
A shop floor
supervisor of a small factory presented the following cost sheet for Job No.
555:
|
Particulars |
Rs |
Rs |
|
Materials |
|
70 |
|
Direct Wages (@ Rs 2.50 per hour): |
|
|
|
Department X (8 hours) |
20 |
|
|
Department Y (6 hours) |
15 |
|
|
Department Z (4 hours) |
10 |
45 |
|
Chargeable expenses |
|
5 |
|
PRIME COST |
|
120 |
|
Add: 33 1/3
% on Prime Cost |
|
40 |
|
Selling Price |
|
160 |
Analysis of the
Profit/Loss Account for 2016 shows the following:
(Rs in ’000)
|
Particulars |
Rs |
Rs |
Particulars |
Rs |
|
Materials |
|
150 |
Sales |
250 |
|
D/wages: |
|
|
|
|
|
Dept
X |
10 |
|
|
|
|
Dept
Y |
12 |
|
|
|
|
Dept
Z |
8 |
30 |
|
|
|
Chargeable
exp. |
|
4 |
|
|
|
Overheads: |
|
|
|
|
|
Dept
X |
5 |
|
|
|
|
Dept
Y |
9 |
|
|
|
|
Dept
Z |
2 |
16 |
|
|
|
G/P
c/d |
|
50 |
|
|
|
|
|
250 |
|
250 |
|
Selling
exp |
|
20 |
G/P
b/d |
50 |
|
N/P
(taken to B/S) |
|
30 |
|
|
|
|
|
50 |
|
50 |
It is also
noted that average hourly rates for the 3 departments X, Y and Z are similar.
You are required to draw up a revised job cost sheet using
2016 actual figures as the basis and adding 20% to total cost to determine the selling
price.
Illustration:
6
In a factory
following the Job Costing Method, an abstract prepared from the work in process
as at 30th September was as under.
|
Job
No. |
D/Mat (Rs) |
D/Lab (Rs) |
Factory
OH (Rs) |
|
115 |
1,325 |
800
(400 hrs) |
640 |
|
118 |
810 |
500
(250 hrs) |
400 |
|
120 |
765 |
475
(300 hrs) |
380 |
|
|
2,900 |
1,775 |
1,420 |
Materials
used in October were as follows:
|
Material
requisition No. |
Job
no. |
Cost
(Rs) |
|
54 |
118 |
300
|
|
55 |
118 |
425
|
|
56 |
118 |
515
|
|
57 |
120 |
665
|
|
58 |
121 |
910
|
|
59 |
124 |
720
|
|
|
|
3,535 |
A summary of
Labour Hours deployed during October is as under:
|
JOB NO. |
NUMBER OF HOURS |
|
|
SHOP A |
SHOP B |
|
|
115 |
25 |
25 |
|
118 |
90 |
30 |
|
120 |
75 |
10 |
|
121 |
65 |
- |
|
124 |
20 |
10 |
|
|
275 |
75 |
|
Indirect Labour: |
|
|
|
Waiting for mat. |
20 |
10 |
|
M/c breakdown |
10 |
5 |
|
Idle time |
5 |
6 |
|
Overtime prem. |
6 |
5 |
|
|
316 |
101 |
A shop credit
slip, issued in October, shows that material issued under requisition No.54 was
returned back to stores as being not suitable. A material transfer note, issued
in October, indicated that material issued under requisition No.55 for Job 118
was directed to Job 124.
The rate of
wages in shop A is Rs 3
per hour while in shop B it is Rs 2 per hour. The factory overheads are applied
at the same rate as in September. Jobs 115, 118 and 120 were completed in
October.
You are asked to compute the factory cost of the completed
jobs. If it is the practice of the management to put a 10% on the factory cost
to cover administration and selling overheads and invoice the job to the
customer on a total cost plus 20% basis, what would be the invoice price of
these three jobs?
Illustration:
7
From the following information, calculate Economic Batch
Quantity for a company using batch costing:
|
Annual
production |
2,400
units |
|
Setting
up cost per batch |
Rs
100 |
|
Manufacturing
cost per unit |
Rs
200 |
|
Carrying cost per unit |
6% p.a. |
Illustration:
8
A customer
has been ordering 90,000 specially designed metal columns at the rate of 18,000
per order during the past years. The production cost comprises Rs 120 for material,
Rs 60 for labour and Rs 20 for fixed overheads. It costs Rs 1,500 to set up for
one run of 18,000 columns and inventory carrying cost is 15%. Since this
customer may buy at least 5000 columns this year, the company would like to
avoid making five different production runs. Find the most economic production
run.
Illustration:
9
AB Ltd. is committed to supply 24,000 bearings per
annum to CD Ltd. on a steady basis. It is estimated that it costs 10 paise as
inventory holding cost per bearing per month and that the set-up cost per run
of bearing manufacture is Rs 324.
(a)
What
would be the optimum run size for bearing manufacture?
(b)
What
is the minimum inventory holding cost at optimum run size?
(c) Assuming that the company has a policy of manufacturing 6000 bearing per run, how much extra costs would the company be incurring as compared to the optimum run suggested in (a)?
Click here for Solution: 9(a)(b) in PDF
Click here for Solution: 9(c) in PDF
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