Name : _________________
Chapter 21
Serial No: _____
Job Costing
A
What is job costing?
1
Job costing is the process of accounting for the costs of a job order.
2
A job order is a customer order for an individual unit or multiple units of a distinct product or
service. It is usually custom-made.
3
Once a job order is identified, a costing system is designed to trace the costs to that particular job.
4
A costing system refers to a set of rules, procedures and methods used for measuring and recording
costs in a specific manner.
B
Job costing process
5
The steps of calculating job costs are:
Step 1: Identify the job order
↓
Step 2: Identify the direct manufacturing costs of the job
↓
Step 3: Determine the manufacturing overhead absorption rate
↓
Step 4: Compute the manufacturing overheads absorbed into the job
↓
Step 5: Compute the total manufacturing costs of the job
6
The manufacturing overhead absorption rate is computed as:
Total value of the cost pool ÷ Total quantity of the absorption base
a
A cost pool is a group of individual cost items. There can be one cost pool or several different cost
pools.
b
Absorption base is the basis on which manufacturing overheads are absorbed into different
products.
7
Manufacturing overheads are absorbed as follows:
Job’s actual quantity of the absorption base  Manufacturing overhead absorption rate
8
Total manufacturing costs are calculated as follows:
Direct manufacturing costs + Manufacturing overheads absorbed
C
Absorption of manufacturing overheads
9
Management usually prefers computing manufacturing overhead absorption rates annually because:
a
Some overheads cannot be ascertained until the end of a year.
b
Some overheads are incurred in a particular month but their benefits will last several months.
c
There are usually seasonal fluctuations in output during a year.
10
A firm may use actual or predetermined overhead absorption rate for its cost pools. The two
approaches are compared as follows:
Computation
(Overhead
absorption rate)
Computation
(Overheads)
Timeliness
Actual overhead
Predetermined overhead absorption
absorption rate
rate
Total value of the cost pool  Total
Budgeted total value of the cost pool 
quantity of the absorption base
Budgeted total quantity of the absorption
base
Actual quantity of the absorption
Actual quantity of the absorption base 
base  Actual overhead absorption
Predetermined overhead absorption rate
rate
Need to wait until all the overheads
Overheads can be absorbed on a timely
are ascertained at the end of a period
basis.
The costing information obtained is
The problem of over- or under-absorption
accurate.
may arise.

Over-absorption:
Overheads absorbed > Overheads
Accuracy
incurred

Under-absorption:
Overheads absorbed < Overheads
incurred
D
There are service departments and more than one production departments
11
The steps of computing overhead absorption rates under the following situations are:
More than one production departments
There are service departments
Step 1
Select an appropriate basis of apportionment for each type of overhead
Step 2
Allocate and apportion the manufacturing overheads to the production and service
departments
Step 3
Re-apportion service departments’ overheads
to production departments
Step 3/4 Compute an overhead absorption rate for each of the production departments
12
The method of re-apportionment under the following situations:
If (i) there is only one service department; or
No inter-service
work done
(ii) there is more than one service department, but the service departments do
not provide reciprocal services among themselves,
the service departments’ overheads are directly re-apportioned to the
production departments.
If (i) there is more than one service department; and
Inter-service work
(ii) the service departments provide reciprocal services among themselves,
done
we can re-apportion the overheads of service departments using three methods:
direct method; repeated distribution method; and algebraic method.
13
a
Under the direct method, the overheads of each service department are directly apportioned to
the production departments in the ratio that each production department shares in the overheads of
that service department.
b
The work done for other service departments is ignored in the re-apportionment.
c
This method is simple to use, but the result is not as accurate as those generated by the other two
methods.
14
a
Under the repeated distribution method, the overheads of the first service department are
re-apportioned to the second service department and other production departments, and then
the overheads of the second service department are re-apportioned to the first service
department and other production departments.
b
The process is repeated until the overheads of the service departments are too small to be
re-apportioned.
15
Under the algebraic method, the overheads of service departments are re-apportioned with the use
of simultaneous equations.
E
16
How a job costing system works
The following diagram shows how direct and indirect manufacturing costs are accounted for in a
job costing system.
Cost object
Direct
manufacturing costs
Job A
Direct
materials
Job B
Direct
labour
Direct
materials
Direct
labour
Absorption
Production
department A
Production
department B
Cost centres
Re-apportionment
Service
department C
Service
department D
Allocation and / or
apportionment
Indirect
manufacturing costs
Manufacturing
overheads