Job

Batch

Contract
costing

Job costing or job order costing also called specific order

costing is a method of costing which is used when
work is undertaken as per the customers special
requirement
Job costing is employed in the following cases :
1. Where the production is against the order of the
customer or jobs are executed for different customers
according to their specifications.
2 Where each job needs special treatment and no two
orders are necessarily alike.
3. Where there is no uniformity in the flow of production
from one department to another.

Job costing serves the following objectives :

1. It helps in finding out the cost of production of every order
and thus helps in ascertaining profit or loss made out on its
execution.
2. It helps management in making more accurate estimates
about the costs of similar jobs to be executed in future on the
basis of past records. The management can conveniently and
accurately determine and quote
prices for orders of a similar nature which are in prospect.
3. It enables management to control operational inefficiency by
comparing actual costs with the estimated ones.

Illustration 1 :
The following given below has been taken from the cost
records of an engineering works in respect of the Job
No. 333.
Material : Rs. 4010
Wages : Department A-60 hours @ Rs. 3 per hour
Department B-40 hours @ Rs. 2 per hour
Department C-20 hours @Rs. 5 per hour.
The overhead expenses are as follows :
Variable : Department A-Rs. 5000 for 5000 hour
Department B-Rs. 3000 for 1500 hour
Department C-Rs. 2000 for 500 hour
Fixed expenses Rs. 20,000 for 10,000 working hours.
Calculate the cost of the job no. 333 and the price for the
job to give a profit of 25 per cent on the selling price.

Work in-progress in Job Costing

The cost of an incomplete job, that is, a job on which
some manufacturing operation is still due is termed
work-in-progress. If a production order has not been
duly completed by the end of an accounting period, it
is essential that the closing stock of the work-inprogress be determined.
The account is respect of such jobs may be maintained in
the following ways :
1. A composite work-in-progress account for all the jobs.
2. A work-in-progress account for each job.

Illustration :
The following information for the last year is obtained from the books and records of
a factory :

Completed Jobs
Raw materials supplied
9,00,000
from stores
Wages
10,00,000
Chargeable expenses
1,00,000

Work-in progress
3,00,000
4,00,000
40,000

Materials returned to stores

10,000
Factory overheads are 80% of wages and office overheads
25% of the factory cost. Selling overheads are 10% of cost of production
The sale value of completed jobs during the year is Rs. 41,00,000.
You are required to prepare:
(i) A consolidated work-in-progress account, and
(ii) A cost of sales account showing profit made or loss incurred on
the completed jobs.

Batch costing is a modification of job costing. It is

used where articles are manufactured in definite
batches and these articles are kept in stock for
selling to customers.
A batch, in fact, is a cost unit consisting of a group of
identical items which maintain their identity
throughout one or more stages of production.
Batch costing is generally followed in toy making,
aircraft manufacturing, bakeries, biscuit factories,
radio-sets and watches manufacturing factories

Since production is done in batches, and each batch

can contain any number of items, the
determination of the optimum batch quantity is
very significant.
The following formula may be used to determine the
economic or optimum batch quantity (EBQ) :
EBQ = 2AO/c
A= annual consumption
O = setting up or order processing cost per batch
C = storage or carrying cost per annum

Illustration 3 :
A firm requires 12,000 units of component X per
annum. The setting up cost per batch amounts
to Rs.600. The annual cost of capital and
storage comes to 24% per annum and
manufacturing cost per unit of the component
is estimated at Rs.60. You are required to
determine the economic batch quantity.

Illustration 4 :
Following information relates to the manufacturing of a
component X-101 in a cost centre :
Cost of materials
6 paisa per component
Operators wages
72 paisa an hour
Machine-hour rate
1.50
Setting uptime of the machine 2 hrs and 20 mins
Manufacturing time
10 mins per component.
Prepare a cost sheet showing both production and setting up
costs total and per unit, when the batch consists of
a) 10 components.
b) 100 components

Contract costing is a special form of job

costing. The difference between these two is
that in job costing a job is relatively small,
whereas in contract costing contract is big.
Contract costing is employed in business
undertakings engaged in building
construction, road construction, bridge
construction and other civil engineering
works.

Certain special aspects of contract costing and

treatment of some important items of expenses in
contract account is discussed below:
1) Materials : All materials purchased directly for the
contract or supplied
from the stores are debited to the concerned
contract account.
2) Labour or Wages : All labour employed at the
contracts site should be regarded as direct labour
and charged direct to the contract concerned
3) Direct Expenses : All expenses other than material
and wages are charged to individual contract as and
when they are incurred.
4) Indirect expenses : Such expense may be distributed
on several contracts on some suitable basis as a
percentile of material or labour

5) Plant and Machinery : When some plant and

machinery is used for a contract, the following
methods are generally in use for charging the
contract ;
a) when plant is specifically purchased, the
contract account should e debited with the cost
of plant. At the end of accounting period the
depreciated value of plant is posted on credit
side of contract account
b) when plant is for short period, the contract
account is debited with usual depreciation

6) Extra Work : Sometimes additional work upon

the work originally contracted for is required by
the contractee. If the additional work is quite
significant, it should be treated as a separate
contract and a separate account should be opened
for it. If it is not significant, expenses incurred
upon extra work should be debited to the
contract account
7) Sub-Contracts : Many a times, work of a
specialised character such as special flooring,
grilling etc. is entrusted to other contractors
(subcontractors) by the main contractor. Such
cost is debited to the concerned contract account

Cost Plus Contracts When it is not possible to

estimate the cost of work with a reasonable
degree of accuracy at the time of entering into
the contract, a cost-plus-contract is generally
adopted. Cost plus contracts are advantageous
both to the contractor and the contractee. The
contractee knows well how much he is paying
for elements of cost and how much as profit to
the contractor. He can ensure a fair price of the
contract by being entitled to verify the books
and documents of the contractor. The
contractor also receives a reasonable profit in
addition to his cost.

Work Certified It is generally agreed between

the contractor and the contractee that on
accounts payment will be made by the
contractee at stages of progress in the work.
An architect or a surveyor is appointed by the
contractee to certify the extent of the work
completed.
Retention money The contractee generally does
not make full payment of the work certified by
the surveyor. He retains some amount, (say
10% to 20% of the amount due) to be paid
within a reasonable period when it is ensured
that there is no fault in the work done. The
amount held back is called retention money.

Cash Received Cash received is ascertained by

deducting the retention money from the value
of work certified,
Cash received = Value of work certified
Retention money.
Cost of work certified The cost of work certified
represents the total expenditure incurred on
the contract to date, less cost of work
uncertified, materials in hand, plant at site

Work uncertified Work uncertified (or work not

yet certified) represents the cost of the work
which has been carried out by the contractor but
has not been certified by the contractee architect.
It is always shown at cost price.
Work in progress Incomplete contracts are
referred to as work-in-progress. This should be
shown on the assets side of the balance sheet
under the heading work-in progress. From the
viewpoint of the contractor, work-in-progress
represents the net expenditure incurred on the
contract, irrespective of whether any cash for it
has been received or not. While showing the
work-in-progress in the balance sheet, any
notional profit held back (profit in reserve) and
cash received are deducted.

Escalation Clause This clause is often provided

in contracts to cover any likely changes in the
price of utilisation of materials and labour.
Thus a contractor is entitled to suitably
enhance the contract price if the cost rise
beyond a given percentage. The object of this
clause is to safeguard the interest of the
contractor against unfavourable changes in
cost.

Notional Profit Notional profit represents the

difference between the value of work certified
and cost of work certified.
Profits on incomplete: At the end of accounting
period it may be found that certain contract
are complete while others are still in process.
The total profits may safely be taken to credit
of profit and loss account but in case of
incomplete contract there are possibility of
profits being turned into losses. Therefore
profits on incomplete contacts should be
considered after providing adequate sum for
meeting unknown contingencies. Following
rules may be followed :

Profits should be considered in respect of work

certified only, work uncertified is always valued
at cost
2) No profits should be considered if the value of
work certified is less than of contract price
3) If work certified is or more but less than of
the contract price, 1/3 of profit, as reduced by
the percentage of cash received should be taken
to Profit & Loss account and the balance to be
treated as reserve i.e.
1/3 x notional profit x cash received
work certified
1)

4) If work certified is or more of the contract

price, 2/3 of profit, as reduced by the
percentage of cash received i.e. should be taken
to Profit & Loss account and the balance to be
treated as reserve i.e.
2/3 x notional profit x cash received
work certified
5) In case if the contact is very much near to
completion, the total cost of completing the
contract should be estimated if possible, the
total estimated profit should be transferred to
profit & loss on cash basis, which the value of
work certified bears to contract price
estimated profit x value of work certified x %age of cash received
contract price

Utkal construction Ltd. took a contract for road

construction in 1994. the contract price was
10,00,000 and it is estimated that cost of
completion would be 9,20,000. at the end co,.
Received 3,60,000 representing 90% of work
certified. Work not certified was 10,000
expenditure incurred on contract during 1994 was
as follows:
Material 50,000 : labour 3,00,000 :
plant 20,000 : material costing 5,000 were damaged
and was disposed off for 1,000. plant is
considered having depreciated by 25%.
Prepare contract account in the books of utkal
construction ltd.

Illustration Nikhil Limited undertook a contact for Rs. 5,00,000 on 1st July
1994. On 30th June 1995 when the accounts were closed, the following
details about the contract were gathered :

Materials purchased
1,00,000
Wages paid
45,000
General expenses
10,000
Plant purchased
50,000
Materials in hand 30.6.1995
25,000
Wages accrued 30.6.1995
5,000
Work certified
2,00,000
Cash received
1,50,000
Work uncertified
15,000
Depreciation of plant
5,000

The contract contained an escalation clause which read as In the event of

increase(s) of prices of materials and rates of wages by more than 5% the
contract price would be increased accordingly by 25% of the rise of the
cost of materials and wages beyond 5% in each case. It was found that
since the date of signing the agreement, the prices of materials and wage
rates increased by 25%. The value of the work certified does not take into
account the effect of the above clause.

The Hindustan construction ltd. has undertaken a construction

of bridge over river Yamuna. The value of contract is
12,50,000, subject to retention of 20% until one year the
certified completion of contract. The following are the details:
Labour
4,05,000
Material direct to site less returns
4,20,000
Material from store
81,200
Hire and use of plant
12,100
Direct expenses
23,000
General overhead
37,100
Material in hand on 30th June 95
6,300
Wages accrued on 30th June 95
7,800
Direct expenses accrued on 30th June 95
1,600
Work not yet certified at cost
16,500
Amount certified
11,00,000
Cash received on account
8,80,000
Prepare contract account and show how relevant items appear
in balance sheet