Chapter 6
Job Order Costing System
The term ‘costing’ refers to the techniques and processes of determining costs
of a product manufactured or services rendered. The first stage in cost
accounting is to ascertain the cost of the product offered or the services
provided. In order to do the same, it is necessary to follow a particular method
of ascertaining the cost. The methods of costing are applied in various business
units to ascertain the cost of product or service offered. Different methods of
costing are required to be used in different types of businesses. For example,
costing methods used in a manufacturing business will differ from the methods
used in a business that is offering services. Even in a manufacturing business,
some business units may have production in a continuous process, i.e. output of
a process is an input of the subsequent process and so on, while in some
businesses production is done according to the requirements of customers and
hence each job is different from the other one. Different methods of costing are
used to suit these diverse requirements. These methods of costing are discussed
in detail in this chapter.
Methods of Costing
As mentioned in the above paragraph, the methods of costing are used to
ascertain the cost of product or service offered by a business organization. There
are two principle methods of costing. These methods are as follows
I. Job Costing
II. Process Costing
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Q.1. What do you mean by methods of costing?
Ans.1. Methods of costing are used to ascertain the cost of product or service
offered by a business organization.
Q.2. There are two principle methods of costing.
I. Job Costing
II. Process Costing
(True)
Other methods of costing are the variations of these two principle methods. The
variations of these methods of costing are as follows.
I. Job Costing: Batch Costing, Contract Costing, Multiple Costing.
II. Process Costing: Unit or Single Output Costing, Operating Costing, Operation
Costing.
The Job Costing and its variations are discussed in detail in the following
paragraphs.
I. Job Costing: This method of costing is used in Job Order Industries where the
production is as per the requirements of the customer. In Job Order industries,
the production is not on continuous basis, rather it is only when order from
customers is received and that too as per the specifications of the customers.
Consequently, each job can be different from the other one. Method used in
such type of business organizations is the Job Costing or Job Order Costing. The
objective of this method of costing is to work out the cost of each job by
preparing the Job Cost Sheet. A job may be a product, unit, batch, sales order,
project, contract, service, specific program or any other cost objective that is
distinguishable clearly and unique in terms of materials and other services used.
The cost of completed job will be the materials used for the job, the direct labor
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employed for the same and the production overheads and other overheads if
any charged to the job. The following are the features of job costing.
 It is a specific order costing
 A job is carried out or a product is produced to meet the specific requirements
of the order
 Job costing enables a business to ascertain the cost of a job on the basis of which
quotation for the job may be given.
 While computing the cost, direct costs are charged to the job directly as they are
traceable to the job. Indirect expenses i.e. overheads are charged to the job on
some suitable basis.
 Each job completed may be different from other jobs and hence it is difficult to
have standardization of controls and therefore more detailed supervision and
control is necessary.
 At the end of the accounting period, work in progress may or may not exist.
Q.3. Job costing is used in Job Order Industries where the production is as per
the requirements of the____________.
Ans.3. Customer
Q.4. In Job Order industries, the production is on continuous basis, rather
it is only when order from customers is received and that too as per the
specifications of the customers. (False)
Ans.4. In Job Order industries, the production is not on continuous basis, rather
it is only when order from customers is received and that too as per the
specifications of the customers. (True)
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Methodology used in Job Costing
As discussed above, the objective of job costing is to ascertain the cost of a job
that is produced as per the requirements of the customers. Hence it is necessary
to identify the costs associated with the job and present it in the form of job cost
sheet for showing various types of costs. Various costs are recorded in the
following manner.
Direct Material Costs: Material used during the production process of a job and
identified with the job is the direct material. The cost of such material consumed
is the direct material cost. Direct material cost is identifiable with the job and is
charged directly. The source document for ascertaining this cost is the material
requisition slip from which the quantity of material consumed can be worked
out. Cost of the same can be worked out according to any method of pricing of
the issues like first in first out, last in first out or average method as per the
policy of the organization. The actual material cost can be compared with
standard cost to find out any variations between the two. However, as each job
may be different from the other, standardization is difficult but efforts can be
made for the same.
Direct Labor Cost: This cost is also identifiable with a particular job and can be
worked out with the help of ‘Job Time Tickets’ which is a record of time spent by
a worker on a particular job. The ‘job time ticket’ has the record of starting time
and completion time of the job and the time required for the job can be worked
out easily from the same. Calculation of wages can be done by multiplying the
time spent by the hourly rate. Here also standards can be set for the time as well
as the rate so that comparison between the standard cost and actual cost can be
very useful.
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Direct Expenses: Direct expenses are chargeable directly to the concerned job.
The invoices or any other document can be marked with the number of job and
thus the amount of direct expenses can be ascertained.
Overheads: This is really a challenging task as the overheads are all indirect
expenses incurred for the job. Because of their nature, overheads cannot be
identified with the job and so they are apportioned to a particular job on some
suitable basis. Predetermined rates of absorption of overheads are generally
used for charging the overheads. This is done on the basis of the budgeted data.
If the predetermined rates are used, under/over absorption of overheads is
inevitable and hence rectification of the same becomes necessary.
Work in Progress: On the completion of a job, the total cost is worked out by
adding the overhead expenses in the direct cost. In other word, the overheads
are added to the prime cost. The cost sheet is then marked as ‘completed’ and
proper entries are made in the finished goods ledger. If a job remains
incomplete at the end of an accounting period, the total cost incurred on the
same becomes the cost of work in progress. The work in progress at the end of
the accounting period becomes the closing work in progress and the same
becomes the opening work in progress at the beginning of the next accounting
period. A separate account for work in progress is maintained.
Q.5. The source document for ascertaining direct material cost is the
___________________from which the quantity of material consumed can be
worked out.
Ans.5. Material requisition slip
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Q.6.Direct labor cost is identifiable with a particular job and can be worked out
with the help of ________________which is a record of time spent by a worker
on a particular job.
Ans.6. ‘Job Time Tickets’
Q.7. If a job remains incomplete at the end of an accounting period, the total
cost incurred on the same becomes the cost of work in progress. (True)
Advantages of Job Costing
The following are the advantages of job costing.
 Accurate information is available regarding the cost of the job completed and
the profits generated from the same.
 Proper records are maintained regarding the material, labor and overheads so
that a costing system is built up.
 Useful cost data is generated from the point of view of management for proper
control and analysis.
 Performance analysis with other jobs is possible by comparing the data of
various jobs. However it should be remembered that each job completed may be
different from the other.
 If standard costing system is in use, the actual cost of job can be compared with
the standard to find out any deviation between the two.
 Some jobs are priced on the basis of cost plus basis. In such cases, a profit
margin is added in the cost of the job. In such situation, a customer will be
willing to pay the price if the cost data is reliable. Job costing helps in
maintaining this reliability and the data made available becomes credible.
Limitations of Job Costing
Job costing suffers from certain limitations.
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These are as follows.
 It is said that it is too time consuming and requires detailed record keeping. This
makes the method more expensive.
 Record keeping for different jobs may prove complicated.
 Inefficiencies of the organization may be charged to a job though it may not be
responsible for the same.
In spite of the above limitations, it can be said that job costing is an extremely
useful method for computation of the cost of a job. The limitation of time
consuming can be removed by computerization and this can also reduce the
complexity of the record keeping.
Q.8. What are the limitations of the job costing?
Ans.8. Limitations of Job costing are as follows.
 It is said that it is too time consuming and requires detailed record keeping. This
makes the method more expensive.
 Record keeping for different jobs may prove complicated.
 Inefficiencies of the organization may be charged to a job though it may not be
responsible for the same.
Q.9. Write the advantages of job costing.
Ans.9. Following are the advantages of job costing.
 Accurate information is available regarding the cost of the job completed and
the profits generated from the same.
 Proper records are maintained regarding the material, labor and overheads so
that a costing system is built up.
 Useful cost data is generated from the point of view of management for proper
control and analysis.
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 Performance analysis with other jobs is possible by comparing the data of
various jobs. However it should be remembered that each job completed may be
different from the other.
 If standard costing system is in use, the actual cost of job can be compared with
the standard to find out any deviation between the two.
 Some jobs are priced on the basis of cost plus basis. In such cases, a profit
margin is added in the cost of the job. In such situation, a customer will be
willing to pay the price if the cost data is reliable. Job costing helps in
maintaining this reliability and the data made available becomes credible.
Format of Job Cost Sheet
The format of job cost sheet is given below.
XYZ LTD.
JOB ORDER COST SHEET
Customer Invoice No.
Selling Price Per Unit:
Cost Per Unit:
Date:
Job Order No:
Total Cost
Product Description
Particulars
Direct Materials: Dept I
Dept II
Dept III
Total
Direct Labor
Overheads
Total Costs
Dates and Ref. No.
8
Total Amount [SR ]
Per Unit [SR]
Example 6.1
A factory uses a job costing system. The following data are available from the
books at the year ending on 31st March 2014.
Particulars
Amount [SR]
Direct Materials
Direct Wages
Profit
Selling and Distribution Overheads
Administrative Overheads
Factory Overheads
1800000
1500000
1218000
1050000
840000
900000
Required:
A. Prepare a job cost sheet showing the prime cost, works cost, production cost,
cost of sales and sales value.
B. In the year 2014-15, the factory has received an order for a number of jobs. It
is estimated that the direct materials would be SR2400000 and direct labor
would cost SR1500000. What would be the price for these jobs if the factory
intends to earn the same rate of profit on sales, assuming that the selling and
distribution overheads have gone up by 15%. The factory recovers factory
overhead as a percentage of direct wages and administrative and selling and
distribution overhead as a percentage of works cost, based on the cost rates
prevalent in the previous year.
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Solution: The Job Cost Sheet is shown below
Particulars
Total Amount [SR ] Total Amount [SR ]
Direct Costs: - Direct Materials
1800000
Direct Labor
1500000
3300000
Prime Cost [Direct Materials + Direct Labor]
Factory Overheads
900000
Factory/Works Cost [Prime Cost + Factory
4200000
Overheads]
Administrative Overheads
840000
Cost of Production [Factory Cost + Administrative
5040000
Overheads]
Selling and Distribution Overheads
1050000
Cost of Sales [Cost of Production + Selling
6090000
and Distribution Overheads
Profit [As Given ]
1218000
Sales [Cost of Sales + Profit ]
7308000
% of Factory Overheads to Direct Wages: SR900000/1500000*100 = 60%
% of Administrative Overheads to Works Cost: SR840000/4200000 *100 = 20%
% of Selling and Distribution Overheads to Works Cost:
SR1050000/4200000*100 =25%
B. Statement showing Price Quotation for a Job
Particulars
Direct Costs: - Direct Materials
Direct Labor
Prime Cost [Direct Materials + Direct Labor]
Factory Overheads– 60% of Direct Labor
Factory/Works Cost [Prime Cost + Factory
Overheads]
Administrative Overheads –20% of Works Cost
Cost of Production [Factory Cost + Administrative
Overheads]
Selling and Distribution Overheads
28.75% of Works Cost
[25% + 15% = 28.75%]
Cost of Sales [Cost of Production + Selling
and Distribution Overheads
Profit 16.67 % of Sales [20% on cost]
Sales [Cost of Sales + Profit ]
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Total Amount [SR ]
2400000
1500000
Total Amount [SR ]
3900000
900000
4800000
960000
5760000
1380000
7140000
1428000
8568000
Example 6.2
The following information for the year ended on 31st March 20014 is obtained
from the books and records of a manufacturing company.
Particulars
Raw material supplied from stores
Wages
Chargeable expenses
Material returned to stores
Completed Jobs SR.
88000
100000
10000
1000
Work In Progress SR.
32000
40000
4000
---------------
Factory overheads are 80% of wages. Office overheads are 25% of factory cost
and selling and distribution overheads are 10% of cost of production. The
completed jobs realized SR410000.
Prepare: Work in Progress Ledger Control Account, Completed Job Ledger
Control Account and Cost of Sales Account.
Solution:
Consolidated Work-in-Progress Account
Dr.
Particulars
Raw materials consumed
Wages
Chargeable expenses
Factory overheads
[80% of wages]
Factory cost
Administrative overheads
[25% of SR 108 000]
Total
Amount (SR)
32 000
40 000
4000
32000
Particulars
Cr.
Amount (SR)
108 000
27 000
135000
Note: In the above account, selling and distribution overheads are not charged.
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Consolidated Completed Job Account
Dr.
Particulars
Raw Materials: SR88 000
Less: Returns
1 000
Wages
Chargeable Expenses
Factory overheads [80% of direct wages]
Factory Cost
Administration overheads [25% of
SR 277 000]
Cost of production
Selling and distribution expenses
Net profit transferred to Profit and Loss
A/c
Total
Amount (SR)
Particulars
87000 Customer’s
Account
100000
10000
80000
277 000
69250
Cr.
Amount (SR)
410000
346 250
34 625
29 125
410 000
410 000
Cost of Sales Account
Dr.
Particulars
Materials consumed
Wages
Direct charges
Factory overheads [80% of wages]
Factory cost
Administrative overheads
[25% of SR277 000]
Cost of production
Selling and distribution
10% of Cost of production
Cost of sales
Amount (SR)
Particulars
87 000 Balance c/d
100 000
10000
80 000
277 000
69250
Cr.
Amount (SR)
380875
346250
34625
380875
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380875
Example 6.3
A company has two manufacturing shops. The shop floor supervisor presented
the following cost for Job No. A to determine the selling price.
Particulars
Material
Direct wages Department X–8 hours, Department Y – 6
hours = 14 hours @ SR.2.50 per hour
Chargeable expenses [stores]
Amount SR. Per Unit
70
35
5
110
37
Add: 33 1/3 % for overheads
147
Analysis of the Profit and Loss A/c shows the following
Dr.
Profit and Loss Account
Particulars
To Materials used
To Direct wages
Department X
Department Y
To Stores expenses
To Overheads
Department X
Department Y
To Gross profit c/d
Total
Amount SR.
Particulars
1,50,000 By Sales less returns
Cr.
Amount SR.
2,50,000
10,000
12,000
4,000
5,000
9,000
60,000
2,50, 000
Total
2,50, 000
It is noted that average hourly rates for the two departments, X and Y are
similar.
You are required to
[a] Draw up a job cost sheet
[b] Calculate the revised cost using overheads figures as shown in the profit and
loss account as the basis of charging overheads to department X and Y.
[c] Add 20% of total cost to determine selling price.
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Solution:
Calculation of Overhead Absorption Rates Based on Direct Labor Hour Rate
Particulars
I] Direct wages as per Profit and Loss A/c
II] Direct wage rate per hour
III] Direct labor hours [I /II]
IV] Overheads
V] Overheads rate per labor hour [IV / III]
Department X
SR10, 000
SR2.50
4, 000 hours
SR5000
SR1.25
Department Y
SR12, 000
SR2.50
4, 800 hours
SR9000
SR1.875
Calculation of Overhead Absorption Rates Based on Percentage of Direct Wages
Particulars
Department X
SR5000
SR10, 000
50%
Overheads
Direct wages
% of overheads to direct wages
Department Y
SR9000
SR12, 000
75%
Job Cost Sheet [Overheads absorption on the basis of Direct Labor Hour Rate]
Particulars
Material
Direct wages:
Department X: SR2.50 * 8 hours = SR20.00
Department Y: SR2.50 * 6 hours = SR15.00
Chargeable expenses
Prime Cost [Material + Labor + Chargeable expenses]
Overheads:
Department X: SR1.25 * 8 hours = SR10.00
Department Y: SR1.875 * 6 hours = SR11.25
Total Cost
Add: Profit 20% on cost
Value of Job A
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Amount SR. Per Unit
70.00
35.00
5.00
110.00
21.25
131.25
26.25
157.50
Job cost sheet [overhead absorption rate based on percentage of direct wages]
Particulars
Material
Direct wages:
Department X: SR2.50 * 8 hours = SR20.00
Department Y: SR2.50 * 6 hours = SR15.00
Chargeable expenses
Prime Cost [Material + Labor + Chargeable expenses]
Overheads:
Department X: 50% of SR.20 = SR.10.00
Department Y: 75% of SR.15 = SR.11.25
Total Cost
Add: Profit 20% on cost
Value of Job A
Amount SR. Per Unit
70.00
35.00
5.00
110.00
21.25
131.25
26.25
157.50
Example 6.4
From the following details, you are required to calculate the cost of Job No.215
and find out the price to give a profit of 25% on total cost
Materials SR 2000
Wages
Dept. - A -30 hours @ SR3 per hour
B -20 hours @ SR2 per hour
C- 10 hours @ SR5 per hour
Overhead expenses for these three departments were estimated as follows:
Variable Overheads
Dept. - A- SR 1,000 for 1,000 labour hours
B- SR 6,000 for 3,000 labour hours
C- SR 2,000 for 400 labour hours
Fixed Overheads
Estimated at SR l0000 for 5000 normal working hours
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Solution:
Job Cost Sheet (Job. No.2I5)
Amounts
SR
Direct Materials
Wages
Dept. A =30hrs x SR 3 = 90
B =20hrs x SR 2 = 40
C =10 hrs x SR 5= 50
Amounts
SR
2000
180
Variable Overheads
Dept. A = 30 x (SR 1,000 /1,000 hrs) = 30
Dept. B = 20 x (SR 6,000 /3,000 hrs) = 40
Dept. C = l0 x (SR 2,000 /400 hrs) = 50
Fixed Overheads
60 hrs x (SR 10,000 /5,000 hrs) =
Total Cost
Profit 25% on total cost [(25/100) x 2,420] =
Selling Price
120
120
2,420
605
SR 3,025
Example 6.5
The information given below has been taken from the records of an engineering
works in respect of Job. No. 111 and Job. No. 222.
Job. No.111
Job. No.222
SR
SR
Materials Supplied
5,000
3,000
Wages Paid
1,100
800
Direct Expenses
400
200
Material transferred from 222 to 111
300
300
Materials return to stores
200
You are required to find out the cost of each of Job and calculate profit or loss if
any assuming that Job No. 222 is completed and invoiced to the customer at
SR 4000/-.
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Solution:
Job. No. 111
Particulars
To Materials
To Wages
To Direct Expenses
To Material transferred
From Job. No. 222
To Balance b/d
Amount SR
Particulars
5,000 By Balance c/d
1,100
400
300
6,800
6,800
Amount SR
6,800
6,800
Job. No. 222
Particulars
To Materials
To Wages
To Direct Expenses
To P & L a/c
(Profit transferred)
Amount SR
Particulars
3,000 By Materials transferred
800 to Job. No. III
200 By Materials return to stores
By Sales
500
4,500
Amount SR
300
200
4,000
4,500
Question 1
The accounts of the RR Engineering Company Ltd. show the following cost figures for
2013:
SR
Materials consumed
350000
Direct manual and machine labour wages
270000
Works overhead expenses
810000
General overhead expenses
56000
Show the work cost and the total cost of manufacture, the percentages that the works
overheads bear to the direct manual and machine labour cost and the percentage
that the general overheads bear to the works cost.
What price should the company quote to manufacture a refrigerator which is
estimated to require on expenditure of SR 7200 in materials and SR 6000 in wages so
that it will yield a profit of 20% on the selling price?
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