job-order and batch costing 186
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Job-order and Batch
Costing
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JOB-ORDER AND BATCH COSTING
JOB/ORDER COSTING
BATCH COSTING
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Job Order Costing
Such a system can be appropriately applied to accumulate costs in the followingsituations:
Auto-repair shops, where each repair job requires varying amounts of material andlabour. The mechanic will charge the cost of any replaced parts and the number oflabour-hours spent in repairing.
Automobile assembly, where each car includes a variety of different options. Printing shops, where each print order requires a different type of paper, ink,
design and so on.
Foundries, where special parts are to be manufactured as per order.
Hospitals, where the costs of services provided to each patient are billedseparately.
Contractors, shipbuilders and motion picture companies. Machine shops, tool shops and design engineers.
Public accounting firms and other similar professions, where each audit, taxreturn, or management services engagement needs varying amounts ofprofessional time and attention.
Furniture making firms, where they may produce a batch of similar chairs, tables,sofas, and so on. Each batch may be treated as a job.
Job order costing is the procedure to accumulate cost when work isperformed pursuant to an order to meet individual customers
specifications.
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Job Cost Sheet
On receipt of an order by a firm employing job costing,a job cost sheet is prepared. Every job order is given aspecific number. For identification, a job cost sheet
bearing the allotted number is maintained for each jobput into production. General information in respect ofthe job order is recorded at the top of the job sheet. Asregards specific information, the job cost sheet
enumerates the appropriate inputs required in threebasic categories: direct material, direct labour andoverhead to carry out the order.
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Exhibit 1: Job Cost Sheet
Customer name________________________
and address ________________________
Description ________________________
Quantity ________________________
Job No.
Date started __________________
Date promised __________________
Date finished __________________
Special remarks, if any __________________
Materials Labour Overheads
Quantity Rate Amount Hours Rate Amount Hours Rate Amount
Department 1
Department 2
Department 3
Cost Summary
Materials Laobur Overheads Total
Actual Estimate
Department 1
Department 2
Department 3Job order price
Profit (Loss)
Discrepancies between actual and estimated costs are explained below:
1.
2.
3.
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Recording Job Costs inAccounts
The accounting system of recording job costs will depend onwhether the general ledger records all cost transactions
or a special ledger called factory ledger is separatelymaintained for the purpose.
Modus operandi is that a factory ledger account is opened in thegeneral ledger to substitute for the accounts, which have been
recorded in the factory ledger. Likewise, a general ledger
account is provided in the factory ledger. The balancesin these accounts are kept equal at all times.
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Accounting procedure if both the factoryand general ledgers are maintained
1) Accounting for Materials
2) Accounting for Labour
3) Accounting for Overheads
4) Accounting for Completed Jobs
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Accounting for Materials
The relevant accounting entries in the factory and general ledgers torecord the (i) purchase, (ii) issue, and (iii) return of materials
would be as follows
Factory ledger:
1. Debit materials inventory/materials and supplies A/c, and Credit generalledger.
2. Debit work-in-process A/c, and Credit materials inventory/materials andsupplies A/c.
3. Reversal of entry (2).
General ledger:
1. Debit factory ledger, and Credit accounts payable/cash or bank.
2. No entry.
3. No entry.
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Accounting for Labour
The following journal entries would be recorded in respectof the labour cost:
Factory ledger:
Debit work-in-process A/c (for direct labour) and Debit factoryoverhead control (A/c (for indirect labour) and Credit generalledger.
General ledger:Debit factory ledger A/c, and Credit wages payable A/c /cash orbank.
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Accounting for Manufacturing Overheads
Manufacturing overheads can be charged to various jobs either at the
actual overhead rate or a predetermined overhead rate.
Predetermined Overhead Rate
Predetermined overhead rate is budgeted manufacturing overheadsdivided by budgeted activity. The merits of a predetermined overhead rateare:
(a) It is useful in bidding cases to determine the tender/quotation price;
(b) It enables individual jobs to be costed as soon as they are completedand, thus, helps in providing more rapid product cost information to themanagement; and
(c) Such a rate levels out the fluctuations which may be caused by
variations in actual overhead costs and actual activity.
Predetermined overhead rate = Budgeted manufacturing overheads/Budgeted activity.
Budgeted manufacturing overheads = [Total budgeted fixed overheads +Budgeted variable overhead rate] Budgeted activity.
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Example 1: Determining Predetermined Overheads Rate
Hypothetical Ltd employs job-order costing. It uses an annual
predetermined rate for applying manufacturing overheads to jobs. The
company furnishes you with the following information regarding its
overheads for the coming year at normal activity: Fixed overheads, Rs4,00,000; and Variable overheads, Rs 3,00,000.
The estimates of the direct labour cost, direct labour hours and machine-
hours at normal activity along with a set of correlation coefficients between
overheads and various measures of activity, as compiled from past
records, are also given:Normal level of activity Correlation coefficient
with overheads
Direct labour cost
Direct labour hours
Machine hours
Rs 10,00,000
2,00,000
1,00,000
0.7
0.8
0.6
Determine the predetermined (i) fixed, (ii) variable, and (iii) total overhead
rates.
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Further assume that Hypothetical Ltd during the first quarter received an
invitation from a regular customer to bid on a job. The job was estimated to
require Rs 1,00,000 of direct materials and the following: Direct labour
cost, Rs 50,000; Direct labour-hours, 15,000; and Machine-hours, 5,000
Determine the bid price the company should quote assuming its normal
practice of charging 20 per cent on factory cost to cover other
administrative overheads and profit. Assume further that the companyuses a predetermined factory overhead rate to assign factory overheads to
jobs.
Solution
Predetermined overhead rates should be based on direct labour-hours(DLH)
(i) Predetermined fixed overhead rate = Rs 4,00,000 2,00,000 = Rs 2(ii) Predetermined variable overhead rate = Rs 3,00,000 2,00,000 = Rs 1.50
(iii) Total predetermined overhead rate = Rs 7,00,000 2,00,000 = Rs 3.50
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Solution: Job Cost Sheet to Determine the Bid Price
Particulars AmountDirect materials Rs 1,00,000
Direct labour cost 50,000
Prime cost 1,50,000
Add factory overheads (15,000 direct labour-hours @Rs 3.5 per hour) 52,500
Factory cost 2,02,500
Add 20 per cent for administrative overheads andprofit 40,500
Bid price 2,43,000
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Disposition of Variance
Disposition of Variance Overhead variances may bedisposed of by following either of the two methods: (i)
They may be assigned to the income statement of thecurrent period by charging the entire amount to the costof goods sold account; or (ii) They may be considered asthe cost of production of the current period andaccordingly may be pro-rated to work-in-process,
finished goods and cost of goods sold. The treatmentwould depend on the nature of such variance.
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If the variance has been an outcome of unusual events of the currentperiod, it should be charged to the cost of goods sold. But if such avariance has been caused by errors in estimation or fundamentalchanges in cost structure, it should be pro-rated over work-in-process, finished goods and cost of goods sold. For the firm inExample 1, consider the following additional information:
JobNo.
Direct costs Overheadscharged In
quarter
Status of job at the end ofthe quarter
50 Rs 2,20,000 Rs 72,000 Cost of goods sold
51 1,80,000 45,000 Finished goods in inventory
52 1,30,000 40,500 Work-in-process inventory
5,30,000 1,57,500
Show the process of adjusting under-applied overheads.
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Solution: Manufacturing/Factory Overhead Adjustment
Account Over-
charged inquarter
Percentage of
overheadapplied inquarter
Under-
appliedoverheads(Rs 22,500)
(percentage)
Total costs
assigned tojobs afteradjustment
Cost of goods sold Rs 72,000 45.7 Rs 10,282.50 Rs 82,282.50
Finished goodsinventory 45,000 28.6 6,435.00 51,435.00
Work-in-processinventory 40,500 25.7 5,782.50 46,282.50
1,57,500 100.00 22,500.00 1,80,000.00
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The following journal entries would be required to give effect tomanufacturing overheads.
Factory ledger
1. Debit Factory Overhead Control A/c, and Credit General Ledger
(For indirect manufacturing costs incurred).
2. Debit Work-in-Process/Individual Jobs A/c, and Credit Factory OverheadControl A/c
(For charging indirect overheads to jobs).
3. Debit Cost of Goods Sold A/c, and Credit Factory Overhead Control A/c
(For charging under-applied overheads to cost of goods sold account underfirst method).
Entry number (3) would be reversed in the case of over-applied overheads.4. Debit Work-in-Process/Individual Jobs
Debit Finished Goods inventory
Debit Cost of Goods Sold, and
Credit Factory Overhead Control A/c
(For charging under-applied overheads under pro-rating method).
Entries (3) and (4) would be reversed in the case of over-applied overheads.
General ledger
1. Debit Factory Ledger A/c, and Credit Various Credits (Accounts Payable),Credit Accumulated Depreciation, and so on.
(For indirect manufacturing costs incurred).
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Example 2: (Job Costing System: Factory Ledger and General LedgerMethod)
Jay Engineering Company Ltd uses a job-order cost system. The following isa summary of its operations during January:
1. Purchases of raw materials and supplies, Rs 37,500.2. Materials and supplies were requisitioned and issued as follows:
Direct materials:
Job No. 101 Rs 6,000
102 9,000
103 1,400 Rs 16,400Indirect materials 400
3.Factory payroll sent to the general office for payment was distributed asfollows:
Direct labour:
Job No. 101 Rs 5,400102 6,000
103 600
Rs 12,000
Indirect labour 4,000
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4. Indirect miscellaneous manufacturing costs incurred, Rs 5,200.
5. Indirect manufacturing costs were applied using a rate of 70 per cent ofdirect labour cost.
6. Job No. 101 (100 units) and Job No. 102 (50 units) were completed andtransferred to finished goods.
7. Goods despatched to customers were as follows: From Job No. 101, 50units; From Job No. 102, 100 units.
Prepare the required ledger accounts to record the above transactions in thefactory ledger.
Solution: Job Ledger
Particulars Job No. 101 Job No. 102 Job No. 103
Raw materials and supplies Rs 6,000 Rs 9,000 Rs 1,400
Direct labour 5,400 6,000 600
Indirect manufacturing costsapplied 3,780 4,200 420
15,180 19,200 2,420
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Factory Ledger Accounts
Raw Materials and Supplies A/c
To general ledger(purchase of inventory) Rs 37,500By work-in-processBy factory overhead controlA/c
Rs 16,400
400
Work-in-Process A/c
To raw materials andsupplies Rs 16,400
By finished goods (costof Job Nos. 101 and 102 Rs 34,380
To general ledger (directlabour payment) 12,000
To factory overhead control(applied A/c) 8,400
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Finished Goods Inventory A/c
To work-in-process Rs 34,380 By cost of goodssold (Rs 7,590 + Rs12,800) Rs 20,390
Cost of Goods Sold A/c
To finished goods inventory Rs 20,390
Factory Overhead Control A/c
To raw materials and supplies Rs 400
To general ledger (indirect labourpayment) 4,000
To general ledger (miscellaneousexpenses) 5,200
Factory Overhead Control Applied A/c
By work-in-process Rs 8,400
General Ledger Accounts
By raw materials and supplies Rs 37,500
By work-in-process 12,000
By factory overhead control A/c 4,000
By factory overhead control A/c 5,200
Note: Ledger accounts are not balanced as the transactions pertain to only amonths period.
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General Ledger Accounts
Factory Ledger (A/c)
To accounts payable Rs 37,500
To wages payable 16,000
To miscellaneous credits 5,200
Accounts Payable* A/c
By factory ledger A/c Rs 37,500
Wages Payable* A/c
By factory ledger A/c Rs 16,000
Miscellaneous Credits* A/c
By factory ledger A/c Rs 5,200
*Debits in these accounts would be made when payments are made.
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Evaluation
Job order costing is useful in the following ways:
Job costing data can be utilised for estimating the production costs ofspecific jobs or lots of production.
Estimates of future job costs serve not only as a basis for bidding and
price setting but also as a standard for measuring efficiency andevaluating the performance through comparisons with the actualcosts incurred. From the point of view of accounting also, the systemis easy to operate as the costs are recorded order or job-wise.
From the point of view of accounting also, the system is easy tooperate as the costs are recorded order or job-wise.
Finally, job cost sheets which are the focal point of job order systemcan be utilised by the management to segregate jobs on the basis ofcontributions/profits made by them. This information, in turn, will helpthe management in deciding which types of jobs should be accordedpriority.
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Batch Costing
Batch costing is a variant of job costing. It is a natural type ofsystem to be utliised in situations when a firm manufactures
products in readily identifiable batches or definite lots
For identification purposes, each batch is required to benumbered in batch costing as each job is numbered
in the job costing system.
The unique feature which distinguishes job costing from batch
costing is that, while in the former production is tailoredto meet the customers specifications, in the latter, in
general, goods are produced to inventory themfor future sale to customers.
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Determination of Batch Costing
Example 4
The following details are available in respect of a small tool manufacturing firm:
Annual estimated demand per year (units)
Cost of production per unit
Carrying costs per unit for one year
Setting up cost per batch
1,600
Rs 5
1
50
Determine EBQ.
Solution
EBQ =2 1,600 Rs 50
= 400 unitsRs 1
EBQ = 2 AS/C
Where A = annual requirements of the product
S = setting-up costs per batch
C = carrying cost per unit of inventory per annum