Job Costing

Code/ SKS: AKT6303

Semester 3 / Bachelor of Accounting
Session on: October 20th, 2020

Learning Objectives
After studying this unit, you will be able to:
• Explain the meaning and definition of job costing
• Understand the procedure of job costing
• Know the batch costing
• Explain the economic order quantity

CIMA job costing is “that form of specific order costing which applies where work is undertaken
to customers’ special requirements and each order is of comparatively short duration (compared
with those to which contract costing applies). The work is usually carried out within a factory or
workshop and moved through processes and operations as a continuously identifiable unit. Job
costing is used in engineering jobs, construction companies, printing jobs, automobile servicing,
ship building, furniture making, fabrication jobs etc. A job is a cost unit which consists of a
single order or contract.

Principles of Job Costing

The job costing method may be regarded as the principal method of costing since the basic object
and purpose of all costing is to
• Analysis and ascertainment of cost of each unit of production
• Control and regulate cost
• Determine the profitability.

Characteristics of Job Costing:

1. The production is always against customer's orders and not for stock.
2. Each job has its own characteristics and needs special treatment.
3. There is no uniformity in the flow of production from department to department.
4. The department through which the job has to be processed depends purely on the nature
of each job.
5. The work-in-progress differs from period to period according to the number of jobs on
hand. Therefore, cost is ascertained for each job.
6. Job costing is applicable to engineering concerns, printing presses, repair shops,
automobile garages.
7. There is no uniformity in the flow of production from one department to another.8.It is
the nature of each job which determines the departments through which it is to be
processed.
8. The main purpose of job costing is to determine the profit or loss made on each job.
9. Job costing is applicable to repair shops, printing press, engineering companies, etc.

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Advantages:
1. It gives a detailed analysis of costs of materials, labour and overheads.
2. It enables the management to detect which jobs are more profitable than others, which are
less profitable and which are incurring losses.
3. It provides a basis for estimating the cost of similar jobs taken upon future.
4. It also helps in future production planning.
5. Spoilage and defective work can be easily identified and responsibility may be fixed on
departments.
6. It estimates have been prepared in advance, actual can be compared with estimates for
controlling costs.
7. In case of Government contracts on cost-plus basis, it gives cost data which determines
contract price.

Limitations:
1. It involves more clerical work. This leads to more expensive.
2. With the increase in clerical work, the chances of errors also increase.
3. Job costing is an actual costing method. It does not give for the control of cost unless it is
used with standard costing system.
4. Determination of predetermined overhead rates may involve budgeting of overhead
expenses.

Procedure for Job order costing system:

The procedure for job order costing system may be summarized as follows:
1. Receiving an enquiry from the customer regarding price, quality etc.
2. Make an estimation of the price of the job after considering the cost incurred for the
execution of similar job in the previous year
3. Receiving an order, if the customer is satisfied with the quotation price and other terms of
execution.
4. If the job is accepted, a production order is made by the Planning department.5.The costs
are collected and recorded for each job under separate production order Number, and a
Job Cost Sheet is maintained for that purpose.
5. On completion of job, a completion report is sent to costing department.

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Example 1

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Solution:

Batch Costing:
CIMA defines Batch Costing as, that form of specific order costing which applies where similar
articles are manufactured in batches either for sale or for use within the undertaking. It is also a
variation of job costing. In this method, orders for identical products, are arranged in convenient
groups or batches. Each batch is treated as a cost unit and costs are accumulated for each batch
separately. It is used in the production of:
• Ready-made Garments
• Shoes
• Toys
• Bicycle parts
• Biscuits and Confectionary
• Drug industries
• Watches

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ECONOMIC BATCH QUANTITY (EBQ)
As the product is produced in batches or lots, the lot size chosen will be critical in achieving least
cost operation. Primarily the total production cost under Batch production comprises two main
costs namely:
1. Machine Set Up Costs
2. Inventory Holding Costs

If the size is higher, the setup cost may decline due to lesser set ups required but units in
inventory will go up leading to higher holding costs. If the lot size is lower, lower inventory
holding costs are accomplished but only with higher set up costs. Economic Batch quantity is the
size of a batch where total cost of set-up and holding costs are at minimum.

The economic Batch Size or Economic Batch Quantity may be determined by calculating the
total cost for a series of possible batch sizes and checking which batch size that gives the
minimum cost. Alternatively, a formula can be derived which is similar to determination of
Economic Order Quantity (EOQ). The objective here being to determine the production lot
(Batch size) that optimizes on both set up and inventory holding cots formula. The mathematical
formula usually used for its determination is as follows:

Example 2

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Review Questions:
1. Define job costing. What are the main features of job costing? Give a proforma of cost
sheet under such a system.
2. What is the concept of job costing? Discuss its advantages and limitations.
3. What is a job cost sheet? What kind of data generally appear on job cost sheet?
4. What is batch costing? What are its salient features?
5. What is meant by Economic Batch Quantity? How is it computed?

References:
• Management and Cost Accounting: Students Manual- Colin Drury
• Cost Accounting: A Managerial Emphasis- Charles T. Hongren, George Foster

Course Writers
Dr. D. Ayub Khan Dawood Mrs. Mimin Nur Aisyah
Prof and Dean Lecturer
School of Social Sciences and Faculty of Economics
Humanities. University Negeri
B.S.A. Crescent Institute of Science and Technology Yogyakarta, Indonesia.
Chennai. India