METHODS OF COSTING

JOB 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

Costing Methods/ Systems Process Job-order Costing Costing

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 SYSTEMS USED TO DETERMINE PRODUCT COSTS

Costing Systems

Job-order
Costing

Process Costing

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 average cost. of product is assigned the same

COMPARISON OF JOB-ORDER AND PROCESS COSTING

S. No. 1 2 Job Costing Wide variety products. of Process Costing distinct Homogeneous level) products. (at process-

3
4

Costs are typically computed when a job is complete. Cost is accumulated by Job or department.

Costs are calculated at the end of a specific period. Cost is accumulated by process.

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

process costing process costing

II.

A manufacturer of sugar (Bajaj Hindusthan Ltd,) A manufacturer of luxury yachts

III.

job costing
IV.

A professional services firm (McKinsey & Co)

job costing
V.

Maruti Suzuki Service centre

job costing
VI.

Lenovo notebooks (Laptops supplied to IIML)

Job/ batch costing

VII.

A manufacturer of chemicals

process costing
VIII.

An infrastructure advisory company (e.g., Feedback Infra, Avendus Capital, etc.) job costing Construction of buildings by a construction firm (e.g., L&T construction) contract costing

IX.

Flow Of Cost

COST FLOW FOR JOB COST COMPONENTS

THE JOBS COST BECOMES THE BASIS FOR VALUING INVENTORY AND COST OF
GOODS SOLD

Material
Indirect

Direct

Factory Overheads
Indirect

Allocate

Work in Process

Finished Goods

Labor

Direct

Cost of Goods Sold

FLOW OF OVERHEADS COST

Employee Time Ticket

Indirect Labor

Other Actual OH Charges

Manufacturing Overhead Account

Applied Overhead With POHR

Job Cost Sheets

Materials Requisition

Indirect Material

JOB COST SHEET

JOB COST RECORD

Western Textile & Manufacturing Inc
Job Cost Record Job No. 562 Customer Name and Address Happy Campers Job Description 2,000 backpacks Date Promised Date Started Direct Materials Direct Labor Time RequisiTicket Date tion No. Amount No. Amount

Date Completed Overhead Costs Applied

Date

Rate

Amount

8/03

8966

63,280

Totals

Overall Cost Summary Materials Labor Overhead Total Job Cost

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
WIP cost 67200 Additional Direct Labour 10000 Additional Overheads (140% of DL) 14000 Total Cost 91,200 Profit (Balancing figure) 18,800 Price 1,10,000

Job 101
71650 20000 28000 1,19,650 50,350 1,70,000

SOLUTION: E STATEMENT OF COST OF GOODS MANUFACTURED

Refer to excel sheet. Job Costing