University of Limpopo
School of Accountancy
Department of Financial Management
BACHELOR OF ACCOUNTANCY
(B ACC)
MANAGEMENT ACCOUNTING AND FINANCE
(MACN 350)
MODULE 3 JOB COSTING
Compiler: Ms MJ Seanego CA(SA) RA
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2
BACKGROUND
Determination of an accurate product cost is very important, especially when it is used for the
purpose of calculating a selling price. Up until now we have focused on industries where multiple
products are produced using similar material and labour. However, a product cost needs to be
calculated even under a scenario where each service or product is unique and requires unique
material and/or labour. The calculation of a product cost under this kind of scenario is covered in
this module.
ASSUMED PRIOR KNOWLEDGE
Students in Managerial Accounting and Finance 350 are expected to have an understanding cost
classification and behaviour principles, as a foundation.
LEARNING OUTCOMES
By the end of this module you should be able to:
• Explain the nature of a job-costing system and the type of organisation for which its use is
appropriate
• Describe the procedure for recording cost of materials issued for a job, including the
weighted average, FIFO and LIFO methods of pricing raw material issues and inventory
• Explain how to determine total cost and the hourly rate of labour and how these costs
are accounted for
• Calculate the cost of a job by assigning and allocating the various cost elements
• Prepare journal entries and general ledger accounts for a job-costing system
• Explain the difference between an integrated and an interlocking accounting system
3
WHAT IS JOB COSTING
Let’s look at the car repair process.
What costs are involved in this repair process?
How are they accounted/accumulated?
How are estimates obtained for the purpose of providing a quotation?
How is the selling price determined? What do you think?
4
WHEN IS JOB COSTING APPROPRIATE?
Job costing is appropriate when production is not highly repetitive and, in addition
consists of distinct jobs or lots
Each product produced in the job are identified by order number
This method is followed by these concerns when work is carried on by customer
request
For example, interior designers, architecture, construction of brides/ houses etc. Take
a look at the costs involved in building a house below, you will notice that all costs are
included from site development. Since each house is unique the costs involved will
also differ from house to house and thereby influencing the selling price. It is therefore
important to track the costs of each house(job) through job costing. Hence the need to
open a job card for each project and accumulation/recording of all costs per
project/job.
5
JOB COSTING COSTS ACCUMULATION PROCESS
The diagram below depicts a typical job cost accumulation process, from the time a booking is
made to when the customer is invoiced.
PRODUCT COSTS CONSISTS OF:
The product cost consists of all direct and indirect production costs
Allocated
Overheads
Other
Production
costs
6
JOB COST CALCULATION
The job cost consists of 3 components:
(i) Direct Material
(ii) Direct Labour
(iii) Allocated Overheads ( i.e Refer to Module 4 for methods of allocating indirect
costs/overheads to products)
(i) Direct Material
The cost of direct material depends on whether the company uses Just in
Time (JIT) system or orders material in advance and stores it.
(a) Just In Time System
[The Just-in-Time or JIT is an inventory management system wherein the
material, or the products are produced and acquired just a few hours before
they are put to use. The Just-in-time system is adopted by the firms, to reduce
the unnecessary burden of inventory management, in case the demand is less
than the inventory raised.]
Where JIT method is used then the cost of direct material for a specific cost is
simply actual cost per invoice plus any other costs incurred in bringing the
inventory to its present location and condition (e.g delivery charge, customs,
clearing costs etc)
(b) Material Ordered in Advance
Where material is ordered in advance, there are different methods that may be
used: FIFO, LIFO, Weighted average, Standard cost, Specific Unit
Identification etc.
7
(ii) Direct Labour
The direct labour cost is calculated per hour as:
Includes ALL costs incurred by the employer
even if paid on behalf of the employee e.g.
PAYE. Therefore, basic salary, employer and
employee contributions to pension fund,
medical aid, UIF etc.
Take note of some employee contributions
already included in “Basic Salary”, to avoid
duplications
Cost to Company
Productive hours equals total available hours
(i.e hours to be worked by employees) less
non- productive hours e.g annual leave, sick
leave, any other leave, holidays, lunch or
breaks
Take note of the treatment of idle time, it can
either be treated as a period cost or deducted
from the available hours
Productive Hours
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(iii) Allocated Overheads
Refer to Module 4 – Overhead allocation on methods of allocating/ absorbing
indirect costs/overheads to products. Three methods were covered in detail
therein, i.e
(i) Blanket-wide rate absorption/ allocation method
(ii) Departmental rate allocation absorption/ allocation method
(iii) Activity Based Costing method
SUMMARY: JOB COST
JOB COST
Allocated
Direct Material Direct Labour
Overheads
Cost to
Ordered in
JIT – Actual cost Company
advance
/Productive Hours
Specific Unit
FIFO LIFO Weighted average Standard Cost
Identification
