Chapter
JOB COSTING
I. Introduction
Industries which manufacture products or render services against specific orders as distinct from
continuous production for stock or sales use the job costing or job order method of cost accounting. The
method is also known under various other names, such as specific order costing, production order
costing, job lot costing or lot costing. Every order in job costing is separate and it is not essential that the
same manufacturing operations be carried out or the same materials be utilized in respect of each.
However, a number of identical orders or identical products may be combined together to form lots or
batches, each such lot or batch constituting a job order. In the job costing system, an order or a unit, lot, or
batch of a product is taken as a cost unit, i.e, a job.
II. Process of Job costing
1. Prepare a separate cost sheet for each job
2. Disclose cost of materials issued for the job - On receipt of a production order, the shop draws the
requisite materials from the stores. Surplus, excess or incorrect materials are returned from the shops
to the stores on materials return notes. Scrap and waste arising in the course of manufacture are
returned in a similar manner. The materials requisitions, materials return notes and materials
transfer notes are ‘costed’ in accordance with the methods of pricing adopted by the concern.
3. Employee costs incurred (on the basis time cards)
4. When job is completed, overhead charges are added for ascertaining total expenditure - Overhead
costs are accumulated against standing order numbers and against cost centres. Overhead rates,
predetermined or actual as the case may be, are worked out for each such centre. The overhead
applied to each job is obtained by multiplying the overhead rate by the actual base variable spent on
the job.
III. Suitability of Job Costing
a. When jobs are executed for different customers according to their specifications.
b. when no two orders are alike and each order/job needs special treatment.
c. Where the work-in-progress differs from period to period on the basis of the number of jobs in hand.
Prepared by: Raman Luthra
Chartered Accountant
IV. Advantages and Disadvantages of Job Costing
Advantages Disadvantages
The details of Cost of material, labour and overhead for Job Costing is costly and laborious method
all job is available to control.
Profitability of each job can be derived As lot of clerical process is involved the chances of
error is more.
It facilitates production planning. This method is not suitable in inflationary condition.
Spoilage and defective can be identified and Previous records of costs will be meaningless if there
responsibilities can be fixed accordingly. is any change in market condition.
Illustration 1
The RIL company uses job order costing system and provides you the following data for the current period:
Direct materials issued to production: 180,000
Indirect materials issued to production: 16,000
Direct labor cost: 214,000
Manufacturing overhead cost – applied: 226,000
Manufacturing overhead cost – actual: 250,000
There was no beginning and ending work in process and finished goods inventory. The company uses a
predetermined overhead rate to apply manufacturing overhead to work in process (WIP) inventory.
Based on the above information, what is the cost of goods manufactured of RIL Company?
Answer
Direct Material Cost - 180,000/-
Direct Labour Cost - 214,000/-
Manufacturing Overheads - 226,000/-
Gross Works Cost/Factory cost - 6,20,000/-
Add: Opening WIP -0
Less: Closing WIP -0
Factory Cost - 6,20,000/-
Admin overheads -0
Cost of production - 6,20,000/-
Prepared by: Raman Luthra
Chartered Accountant
Illustration 2
The Adani manufacturing company computes predetermined overhead rate on the basis of machine hours
in the machining department and direct labor cost in the assembly department. The following estimates
were made at the beginning of the year?
Particular Machining Assembly
Direct labor hours 1,000 500
Direct Labor Cost INR 100,000 INR 25,000/-
Machine Hours 2,000 1500
Manufacturing Overheads 20,000 12,500
Based on the above information, what are the predetermined overhead rates for machining department and
assembly department?
Answer:
Manufacturing overhead rate for Machining = Manufacturing overhead/machine hours
= 20,000/2000 = 10/-
Manufacturing overhead rate for Assembly =Manufacturing overhead/direct labour cost
=12,500/25000 = 0.5/- per ₹ of Labour cost or 50% of labour cost
Prepared by: Raman Luthra
Chartered Accountant
Multiple Choice Questions
1. [Question] Which of the following costs is recorded on the job cost sheet?
a) Direct materials cost
b) Direct labor cost
c) Manufacturing overhead cost
d) Administration overhead cost
e) All of the above
Answer: e.
2. [Question] Which of the following journal entries is correct for the issuance of direct materials to
production?
a) Materials Dr. & Work in process Cr.
b) Work in process Dr. & Materials Cr.
c) Work in process Dr. & Accounts payable Cr.
d) Materials Dr. & Accounts payable Cr.
e) Finished goods Dr. & Work in progress Cr.
Answer: b.
3. [Question] Under job order costing system, which of the following costs would be recorded as debit to
manufacturing overhead account?
a) Direct materials cost
b) Indirect materials cost
c) Direct labor cost
d) Direct expense cost
e) None of the above
Answer: b.
Prepared by: Raman Luthra
Chartered Accountant
4. [Question] A Company uses a job order costing system and computes its predetermined overhead rate at
the beginning of each period on the basis of direct labor cost. The cost sheet related to a job shows that the
following direct materials and direct labor costs were incurred during the period:
Direct materials cost: 250,000
Direct labor cost: 1,00,000
The work in process inventory account shows a balance of 4,00,000 at the end of current period.
One the basis of above information, what is the predetermined overhead rate as a percentage of direct labor
cost?
a) 200%
b) 100%
c) 50%
d) 20%
e) 14.28%
Answer: c.
Prepared by: Raman Luthra
Chartered Accountant
