Job order costing LESSON 7 JOB ORDER COSTING (3).pptx

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1. Job Order Cost Accounting Lesson

2. Learning Objectives When you have finished studying this chapter, you should be able to ; Understand the meaning and distinctive features of Job and Batch costing methods Understand the accounting procedures to be applied in the above-mentioned different methods of Costing.

3. Introduction An important feature of a cost accounting system is the use of a perpetual inventory system that provides information immediately on the cost of a product. There are two basics types of cost accounting systems: a job order cost system, and a process cost system.

4. Meaning and features a) Job Costing: In this system the cost of each job is ascertained separately which is suitable in all cases where work is undertaken on receiving a customer’s order. Like a printing press, motor work shop etc. b) Batch Costing: It is considered as the extension of job costing. It represents a number of small orders passed through the factory in batch. Each batch here is treated as a separate unit of cost.

5. Under a job order cost system, costs are assigned to each job or batch of goods. An important feature of job order costing is that each job (or batch) has its own distinguishing characteristics . The objective of job order costing is to calculate the cost per job, rather than for a time period. Job costing or job order costing also called specific order costing. Job costing is applicable to printing, furniture, hardware, ship-building, heavy machinery, foundry general engineering works, machine tools, interior decoration, repairs and other similar work.

6. Job costing is employed in the following cases Where the production is against the order of the customer or jobs are executed for different customers according to their specifications. Where each job needs special treatment and no two orders are necessarily alike. Where there is no uniformity in the flow of production from one department to another. Where the work-in-progress differs from period to period on the basis of the number of jobs in hand.

7. Job Order Cost Flow The flow of costs (direct materials, direct labor, and manufacturing overhead) in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods. As jobs are worked on, manufacturing costs are assigned to the Work in Process Inventory account. When a job is completed, the cost of the job is transferred to Finished Goods Inventory . When the goods are sold, their cost is transferred to Cost of Goods Sold .

8. Flow of Costs in Job Order Cost Accounting Manufacturing Costs Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Materials Labor Overhead Assigned to Completed Sold

9. The job costing method essentially involves; Prepare a separate cost sheet for each job Disclosed Cost of material issued for the job Labour charges incurred(on the basis of bill of material and time cards respectively) When job is completed, overhead charges are added for ascertaining total expenditure

10. JOB COSTING PROCEDURE Job Number : When an order has been accepted, an individual work order number must be assigned to each such job so that separate orders are capable of being identified at all stages of production. Production order : The Production Control Department then makes out a production order thereby authorising to start work on the job. Job Cost Sheet : Job cost sheet is the most important document used in the job costing system. A separate cost sheet or card is maintained for each job in which all expenses regarding materials, labour and overheads are recorded directly from costing records.

11. Costs for various jobs are collected on the following basis : Cost of materials : Materials requisition slips, bills of materials or materials issue analysis sheet. Cost of wages : Job cards, labour cost cards or wages analysis sheet. Direct expenses : Direct expense vouchers. Overheads : Overheads may be charged to each job on the basis of any of the methods of overhead absorption.

12. 4. Completion Report : A completion report is sent to the costing department after the completion of job. The actual cost recorded in the job cost sheet is compared with the estimated cost. It will reveal the efficiency or inefficiency in operation. It is a guide to the future course of action. 5. Profit or Loss : Profit or loss on each job can be determined by comparing the actual cost with the price obtained.

13. Illustration 1 The following given below has been taken from the cost records of an engineering works in respect of the Job No. 333. Material : Shs 4,010 Wages : Department A- 60 hours @ Shs. 3 per hour Department B- 40 hours @ Shs. 2 per hour Department C- 20 hours @Shs. 5 per hour. The overhead expenses are as follows : Variable : Department A- Shs. 5000 for 5000 hour Department B- Shs. 3000 for 1500 hour Department C- Shs. 2000 for 500 hour Fixed expenses Shs. 20,000 for 10,000 working hours. Calculate the cost of the job no. 333 and the price for the job to give a profit of 25 per cent on the selling price.

14. Solution Job cost sheet(job no. 333) Particulars Shs Shs Material 4,010 Wages : Dept. A 60hrs*shs3 180 Dept. B 40hrs* shs2 80 Dept. C 20hrs * shs 5 100 360 Overhead expenses: Dept. A Shs 5000/5000 =1*60 60 Dept. B Shs3000/1500hrs = 2*40 80 Dept. C Shs 2,000/500hrs = shs4 *20 80 220 Fixed expenses: Shs 20,000/10,000hr = shs 2 *120 240 Total cost 4,830 Profit 25% of selling price 1,610 Selling price 6,440

15. Work in-progress in Job Costing The cost of an incomplete job, that is, a job on which some manufacturing operation is still due is termed work-in-progress. If a production order has not been duly completed by the end of an accounting period, it is essential that the closing stock of the work-in-progress be determined. Unless this is correctly done, the profits for the period will be distorted. Determination of work-in progress is frequently essential where periodic Profit and Loss Account is required to be prepared for control purposes without reference to the closure of the accounting period.

16. The account in respect of such jobs may be maintained in the following ways : 1. A composite work-in-progress account for all the jobs. 2. A work-in-progress account for each job. In the case of the composite work-in-progress account, it is debited with all costs, direct and indirect, incurred on various jobs and credited with the cost of completed jobs. The balance in the account at any time represents the cost of jobs yet to be completed.

17. The following information for the last year is obtained from the books and records of a factory:     Completed Jobs shs Work-in progress shs Raw materials supplied from stores 900,000 300,000 Wages 1,000,000 400,000 Chargeable expenses 100,000 40,000 Materials returned to stores Shs. 10,000 Factory overheads are 80% of wages and office and selling overheads 25% of the factory cost. The sale value of completed jobs during the year is Shs. 4,100,000. You are required to prepare: A consolidated work-in-progress account, and A cost of sales account showing profit made or loss incurred on the completed jobs. Illustration 2:

18. Consolidated completed job account,000 Particulars Shs shs Supplies from stores 900,000 Less: work in progress 300,000 600,000 Less: material returned stores 10,000 590,000 Wages 1,000,000 Less: work in progress 400,000 600,000 Chargeable expenses 100,000 Less: work in progress 40,000 60,000 Factory O/H – 80%*1,000,000 800,000 2,050,000 Office &selling exp. 25%*2,050,000 512,500 Total cost 2,562,500 Net profit 1,537,500 Sales 4,100,000

19. BATCH COSTING

20. Introduction Batch costing is a modification of job costing. It is used where articles are manufactured in definite batches and help in stock for assembly of components to produce finished product or for sales to customers. A batch, in fact, is a cost unit consisting of a group of identical items which maintain their identity throughout one or more stages of production. Batch costing is generally followed in toy making, aircraft manufacturing, bakeries, biscuit factories, radio-sets and watches manufacturing factories, where manufacture of products or components can be done more conveniently in batches of a definite number.

21. Costing procedure The costing procedure for batch costing is similar to that under job costing except with the difference that a batch becomes the cost unit instead of a job. Separate job cost sheets are maintained for each batch of products. Each batch is allotted a number. Material requisitions are prepared batch wise, the direct labour is engaged batch wise and the overheads are also recovered batch wise. Cost per unit is ascertained by dividing the total cost of a batch by number of items produced in that batch.

22. Determination of Economic Batch Quantity To determine economic batch quantity, the general principles of inventory control with regard to economic order quantity are followed. The determination of the economic (optimum) batch quantity or lot size requires that the following factors be considered: The demand for the components in a given period, generally a year. The cost of setting up tools on the machines for each batch. The cost of manufacturing the components in each batch. The cost of capital blocked in the stock of components. The cost of storage.

23. The following formula may be used to determine the economic or optimum batch quantity (EBQ) : EBQ = Where, EBQ = Economic batch quantity D = Demand of the component in a year S = Setting up cost per batch C = Cost of capital and storage (carrying cost) per unit per annum.  

24. Illustration A firm requires 12,000 units of component X per annum. The setting up cost per batch amounts to shs.600. The annual cost of capital and storage comes to 24% per annum and manufacturing cost per unit of the component is estimated at shs.60. You are required to determine the economic batch quantity. Calculate also the number of batches to be processed per annum

25. Solution EBQ = 2DS/C – under-root D = 12,000 S = 600 C = 24%*60 = 14.4 2* 12,000*600/14,4 = 1,000 UNITS No. of batches to be processed per annum = demand p.a /EBQ = 12,000UNITS /1,000 =12 batches.

26. Batch Cost Sheet Having determined the economic batch quantity, the batch cost sheet can be prepared. The batch cost sheet will show the setting up cost as well as production cost under distinct headings. Depending on the availability of data, it may also show the selling price and profit.

27. Illustration Following information relates to the manufacturing of a component X-101 in a cost centre: Cost of materials 6 cents per component Operator’s wages 72 cents an hour Machine-hour rate Shs. 1.50 Setting uptime of the machine 2 hours and 20 minutes Manufacturing time 10 minutes per component. Prepare a cost sheet showing both production and setting up costs total and per unit, when the batch consists of 100 components.

28. Solution Batch cost sheet for 100 components Particulars Total cost Per unit Fixed cost : setting up cost 2hrs 20min * .72 1.68 .72 Operators cost 16.67hrs *. 72 12.00 .72 Machine overheads 10mix*100 =1000min/60 =16.67hrs *1.50 25.00 1.50 Cost of material 100*0.06 6.00 0.06 Total cost 44.68 3.00

29. End Thank you