METHODS OF COSTINGJOB AND PROCESS COSTING

DR. ALOK DIXIT

IIM LUCKNOW

METHODS OF COSTING Cost accounting aims at ascertaining the costs of goods

manufactured (sold during the period and carried forward to the next period in the form of inventory) and services offered;

In an organisation, one or more methods of costing need to be followed to ascertain cost of goods & services;

The choice of method depends on the nature of business you are in;

Different costing methods are used to suit the requirement of business;

Job Costing (Contract costing, Batch costing)

Process Costing

COSTING SYSTEMS/ METHODS USED TO DETERMINE PRODUCT COSTS

ProcessCosting

Job-orderCosting

Different jobs are carried out during each period. Products manufactured are Customised/ Tailor-made. Unit costs are computed by job.JOB COST SHEET is used to determine cost of Job. Cost records need to be maintained for each product or job. (JOB ORDER SHEET)Each job assigned with a distinct number.

Costing Methods/ Systems

COSTING SYSTEMS USED TO DETERMINE PRODUCT COSTS

ProcessCosting

Job-orderCosting

Costing Systems

Mass production of identical or similar products (at process-level). For example, Sugar, food processing, chemical industry, Oil refineries, etc.

Many units of a single, homogeneous product flow evenly through continuous production process(s).

One unit of product is indistinguishable (at process-level) from any other unit of product.

Each unit of product is assigned the same average cost.

Mass production of identical or similar products (at process-level). For example, Sugar, food processing, chemical industry, Oil refineries, etc.

Many units of a single, homogeneous product flow evenly through continuous production process(s).

One unit of product is indistinguishable (at process-level) from any other unit of product.

Each unit of product is assigned the same average cost.

COMPARISON OF JOB-ORDER ANDPROCESS COSTING

S. No.

Job Costing Process Costing

1 Wide variety of distinct products.

Homogeneous (at process-level) products.

2 Costs are typically computed when a job is complete.

Costs are calculated at the end of a specific period.

3 Cost is accumulated by Job or department.

Cost is accumulated by process.

4 Unit cost is determined by dividing total cost of job by number of units produced (Batch Costing).

Unit cost is ascertained (at process-level) by dividing total cost at process-level by total number of units produced.

Batch costing is applied to the firms wherein customized order are supplied in bulk (large number of same units as per order). For example, pharmaceuticals, printing jobs, Laptops supplied by Dell / Lenovo to institutions or corporates (Bulk orders), e.g., Dell Latitude series, ThinkPad T series etc.

TYPES OF ORGANISATIONS USING JOB COSTING

A cost accounting system where costs are assigned to each job or batch of goods produced.

Audit engagement (PWC, KPMG etc.)

I-Banks & Project Advisory Firms (Avendus Capital, SBI Caps, etc.)

Management Consulting Firms (Bain & Co., McKinsey & Co., BCG, etc.)

Building construction (L&T Construction)

Hospitals

Law firms

Event Management Companies

Special-order printing

Production of movie (RK Studio, Pixar, 20th Century Fox, Paramount Pictures, Colombia Pictures, etc. )

SECTOR-WISE EXAMPLES

EXAMPLES OF PROCESS AND JOB COSTING

I. Shell oil refinery

II. A manufacturer of sugar (Bajaj Hindusthan Ltd,)

III. A manufacturer of luxury yachts

IV. A professional services firm (McKinsey & Co)

V. Maruti Suzuki Service centre

VI. Lenovo notebooks (Laptops supplied to IIML)

VII. A manufacturer of chemicals

VIII. An infrastructure advisory company (e.g., Feedback Infra, Avendus Capital, etc.)

IX. Construction of buildings by a construction firm (e.g., L&T construction)

process costing

job costing

job costing

job costing

process costing

Job/ batch costing

job costing

process costing

contract costing

Flow Of Cost

COST FLOW FOR JOB COST COMPONENTSTHE JOB’S COST BECOMES THE BASIS FOR VALUING INVENTORY AND COST OF GOODS SOLD

Work in Process

Cost of GoodsSold

Labor

Material

Ind

irect

FinishedGoods

FactoryOverhead

s

Direct

Direct

Allocate

Ind

irect

FLOW OF OVERHEADS COST

EmployeeTime Ticket

Job Cost Sheets

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

AppliedOverheadWithPOHR

Manufacturing Overhead Account

JOB COST SHEET

JOB COST RECORD

Job Cost RecordJob No.Customer Name and AddressJob DescriptionDate Promised Date Started Date Completed

Direct Materials Direct Labor Overhead Costs Applied

DateRequisi-tion No. Amount

Time Ticket

No. Amount Date Rate Amount

Overall Cost SummaryMaterialsLaborOverhead

Totals Total Job Cost

562Happy Campers

2,000 backpacks

8/03 8966 63,280

Western Textile & Manufacturing Inc

JOB COST RECORD HEAVY ENGINEERING CORPORATION LTD.

Exercise: Rathi Engineering Company

SOLUTION

(A) Overhead Rate: = Total Overheads/ Direct Labour Cost

(for the month )

Total Overheads (for January) : = 15000 (indirect labour**) + 50000 (Depreciation) + 10000 (Supplies) + 60000 (Utilities) + 12000 (Misc. Exp) = `147000

Direct Wages (for January) = 25000+30000+20000+10000+20000 = Rs. 105000

**Indirect wages= Wages accrued for the month – Direct wages accrued for the month

=120000-105000

Overheads absorption rate= 147000/105000 = ` 1.40 per rupee of direct labour.

SOLUTION

(D) Calculation of Profit Job 100 Job

101WIP cost 67200

71650

Additional Direct Labour 10000 20000

Additional Overheads (140% of DL) 14000 28000

Total Cost 91,200 1,19,650

Profit (Balancing figure) 18,800 50,350

Price 1,10,000 1,70,000

SOLUTION: E STATEMENT OF COST OF GOODS

MANUFACTURED

Refer to excel sheet. Job Costing