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SPECIFIC ORDER COSTING METHOD

This covers approaches used in ascertaining the cost of products services


which are unique in nature and produced to meet customers’ The
approach is designed to establish the cost of single units which are made
to meet customers’ specific requirements. This costing it applied where
the work consists of separate contracts, jobs or batches main
subdivisions of specific order costing are;
a) Job costing method.
b) Batch costing method
a). Job costing method.
This represents a form of specific order costing method that specializes
in ascertaining the cost of the single and unique job that takes short
period of time to manufacture.
Job costing is a costing method applied to determine the cost of specific
jobs or lots of production generally manufactured according to
customers’ specifications. This approach is adopted in industries and
companies which have heterogeneous outputs w number of products are
produced in a discontinuous manner, one different from the other. A job
in this case may be a product, batch, unit, contract among others.
The approach is used in industries like printer, carpentry garages for
motor repairs among others.
Advantages of job costing
 More accurate costing is possible because all the costs are
compiled and specifically identified with a specific order or
product.
 It helps in identifying profitable and un-profitable jobs since each
job specific.
 It provides a basis for comparing one job cost to another or for
comparing a job cost sheet to a cost estimates.
 It helps in preparation of estimates when submitting quotations for
similar jobs.
 Job cost sheets can be used to control efficiency and estimate
future work.
Disadvantages of Job costing
 It requires a detailed record of documents and accounts because
each job requires a separate record
 The record keeping for different jobs may prove to be more
complicated
 The job may be charged for efficiencies although it has not caused
it.
A job cost sheet is maintained to record all the cost details regarding
each job. A cost sheet provides a summary of material costs,labour and
factory overheads for each job processed. Each job is given for easy
identification and control purposes. The job cost sheet is shown in the
figure below
Job cost sheet /card
Name of the client……………………………….Date of commencement…………………………….

Job Number ………………………………………………………Date of completion……………………..

Materials Labo Overhea


ur ds
costs
Date Re Qty amou Date dept. Hours amount Date
f nt worked Dept hrs amount
No
.

Total X Y Z

The sum of material costs (X), Labour costs (y) and overheads costs (z)
represents the amount of costs incurred in carrying out the job.
Costing method to be put in place by the firm may therefore be mu costs
involved.
Example one
Arc Company manufactures timber products and most of them pass
through two distinct departments A&B. the company has just received
an order from one of its customers who has ordered for a dining table. In
attempt to meet his order, a Management Accountant managed to
estimate the following costs that are expected to be incurred.
Department A Department B
Materials 1,500 units at 250/= 1,200 units at
each 3,000/=each
Labor costs 1000 hours at 200/= 5000 hours at 150/= @
each

Factory overheads incurred include the following


Variable overheads costs 150.000/= 200.000/=
Total fixed overhead costs charged to the whole factory amount to
24,000,000/= based on 80,000 labor hours worked for in the factory in
the period. The company has a policy of absorbing fixed overheads to
cost units on the basis of labor hours worked.
Advise the company on the following matters.
a) Cost of the dining table
b) What the company can charge the clients if the company targets a
profit of 20% profit on sales.
Suggested solutions
Overheads absorption rate = 24,000,000/80.000= 300/= per labor hour.
Job order costs
Details Department A Department B Totals
Direct material =1,500 units X 1,200/= units x 735,000/=
costs 250/= 375,000 300/= =36,000
Direct labor 1000 hrs X 5000hrs X 950,000/=
costs 150/= =200,000 150/= =200,000
Prime costs 1,685,000/=
Overheads 150,000/= 200,000/=
Fixed 1,000hrs X 5,000/= X 2,150,000/=
overheads 300/= 300/=
Total 3,835,000
production Cost

The amount that can be charged to the client can be calculated as under;
Selling Price = Cost + Mark-up
Margin = 1/5, therefore Markup=1/4
Selling price = 3,835,000 +1/4 x 3,835,000
Selling price = 3,835,000 + 958,750
Selling price = UGX 4,793,750
Batch costing method
This is a form of a specific order costing used where identical items or
articles are manufactures as a batch or in a group. Instead of one unit
been made in response of a customer’s responses , a batch of identifiable
units is produced.
A batch is treated as a job during the process when batch is being
processed.
A batch in this case is treated as a cost unit and the cost of each
identical unit that constitutes a batch is determined by dividing total
batch cost by the number of units in a batch as shown below;
Unit Cost = Total Batch Cost
Number of Units in a batch
In attempting to apply this costing techniques. The unites involved must
be identical and production should consist of a limited repetitive work.
Since it is a form of specific technique, the batch is made to meet
customer’s specific. The approach is applied in foot and ware industries,
brick making factories, clothing industries among others.
Example:
Mat limited, dealers of timber products, received an order from team ltd
for 2,000 benches of the standard size. Mat limited estimated that the
following cost could be incurred if the order is to be met.
Materials
Timber 400 meters @ 20,000/=
Nails 200kgs @ 4,000/=
Vanish 10 liters @ 25,000/=
Labor costs: workers to be got from two departments i.e A&B.
Dept. A, 100 labor hours @ 5,000/=
Dept.B, 30 men working for 10 days at the rate of 2000/= per day per
man
Variable overheads
Dept. A, are absorbed on the basis of direct labor hours at rate of 3000/=
@.
Dept. B. are absorbed as 20% of prime costs required for the order.
Fixed manufacturing Overheads
Fixed manufacturing cost per bench is 400/=
Required: Assuming the company would process it as batch number of
10.
a) Determine the cost unit of each bench.
b) What price would be charge to Team Ltd per Bench if, Mat ltd
targets gross profit 25% profit on cost.
c) What price would be charge to team ltd per Bench if, Mat ltd
targets gross profit 25% profit on sales.
Suggested solutions
Costs of batch number 10 0f 2000 benches
Materials cost UGX UGX
Timber 400 meters x 2,000/= 800,000
Nails 200kgs x 2,500/=
Vanish 500,000 1,550,000
10 liters X 25,000/= 250,000
Labor costs
Department A 100 hours X 5,000/= 500,000
Department B 30 men X 10 days x 600,000 1,100,000
2,000/=
Prime costs 2,650,000
Variable costs
Department A 100 hours X 3,000/= 300,000
Department B 20% X 2,650,000 530,000 830,000

Fixed 400 X 2,000 benches 800,000


Manufacturing
costs
Total batches 4,280,000

Cost per batch = Total batch costs


No. batches
= 4,280,000 / 2,000 = 2,140/= per bench
Selling price =Cost + mark-up
=2,140 +1/4*2,140 =2,675/=
C) If margin is ¼, then Mark-up
The selling price = 2,140 + 1/3 X 2,140 =2853.30/=