Chapter 13 Job, Batch and Service Costing

Job, batch and service costing are three very important systems. (there’s also another

one called process costing in next chapter).

 Costing System is a system of collecting costs which is designed to suit the way that

goods are processed or manufactured or the way that services are provided.

Each org’s costing system will have a unique features but costing systems of org’s in the

same line of business will have common aspects. On the other hand, org involved in completely

different activities such as hospitals and car part manufacturers will each use very different

costing systems.

I. Job Costing

 Job Costing is the costing method used where each job is separately identifiable as a

cost unit.

 The aim of job costing is simply to collect the cost information shown below:
  A profit ‘mark-up’ is added to the final figure and the total is the selling price of

the job. In other words, all we are doing is looking at one way of putting together the

pieces of info that we’ve studied separately.

1. What is a job?

 A job is a cost unit which consists of a single order or contract.

With other methods of costing it is usual to produce for inventory. Management

therefore decide in advance how many units of each type, size, color, quality and so on will be

produced during the coming period. These decisions will all be taken without taking into

account the identity of individual customers who will eventually buy the products.

In job costing on the other hand, production is usually carried out in accordance with

the special requirements of each customer. It’s therefore usual for each job differ in one or

more respects from every other job, which means that a separate record must be maintained

to show the details of a particular job.

The work relating to a job is usually carried out within a factory or workshop and moves

through processes and operations as a continuously identifiable unit.

2. Procedure for the performance of jobs

 The normal procedure in jobbing concerns involves the following:

o The prospective customer approaches the supplier and indicates the requirement

of the job.

o A responsible official sees the prospective customer and agrees the precise

details of the items to be supplied, for example the quantity, quality and color

of the goods, the date of delivery and any special requirements.

 o The estimating department of the org then prepares an estimate for the job. The

total of these items will represent the quoted selling price.

o At the appropriate time, the job will be ‘loaded’ on to the factory floor. This

means that as soon as all materials, labor and equipment are available and

subject to the scheduling of other orders, the job will be started.

3. Collection of job costs

 Each job will be given a number to identify it. A separate record must be maintained to

show the details of individual jobs. The process of collecting job costs may be outlined

as follows:

a. Materials requisitions are sent to stores.

b. The materials requisition note will be used to cost the materials issued to the job

concerned, and this cost may then be recorded on a job cost sheet.

c. The job ticket is passed to the worker who performs the final operation, the job

ticket is sent to the cost office, where the time spent will be costed and recorded on

the job cost sheet.

d. The relevant costs of materials issued, direct labor performed and direct expenses

incurred as recorded on job cost sheet are charged to the job account in the WIP

ledger.

e. The job account is debited with the job’s share of factory overhead, based on the

absorption rate(s) in operation.

f. On completion of the job, the job account is charged with the appropriate admin,

selling and distribution overhead, after which the total cost of the job can be

ascertained.
 g. The difference between the agreed selling price and the total actual cost will be the

supplier’s profit (or loss).

4. Job account

 Here is a proforma job account, which will be one of the accounts in the WIP control

account.

5. Job Card

 When jobs are completed, job cards are transferred from the WIP category to

finished goods.

 When delivery is made to the customer, the costs become a cost of sale.

 Job cards exist in manual systems but it’s increasingly likely that in large org the job

costing system will be computerized, using accounting software specifically designed

to deal with job costing requirements.

 Job costing systems may also be used to control the costs of internal service

departments, e.g. the maintenance department.

6. Cost plus pricing

  Many org base the price of a product on simple cost plus rules which involves

estimating costs and then adding a profit margin in order to set the price.

 Cost plus pricing is a method of determining the sales prices by calculating the full

cost of a product and adding a percentage mark-up for profit.

Note:

The full cost may be a fully absorbed production cost only, or it may include

some absorbed admin, selling and distribution overhead (non-production

overheads).

II. Batch costing

 Batch costing is a form of specific order costing in which sots are attributed to batches

of products.

 It’s similar to job costing in that each batch of similar articles is separately identifiable.

The cost per unit manufactured in a batch is the total batch cost divided by the number

of units in the batch.

 A batch is a cost unit which consists of a separate, readily identifiable group of product

units which maintains its separate identity throughout the production process.
  The procedures for costing batches are very similar to those for costing jobs.

Note:

Whilst direct labor costs, direct expenses and admin expenses increase in proportion to

the total labor hours require to complete the little units and the all-purpose units, there

will be no further material costs to complete the batches.

1. Controlling costs in job and batch costing:

One of the tasks of management is to control costs, and prevent unnecessary

expenditure or inefficiencies. Some of the methods of controlling costs are the same in any

type of org: economical purchasing, supervision, and training of employees to maintain

efficiency levels, controls over spending limits (department budgets) and so on. However there

are some aspects of cost control that differ between job costing and batch costing systems.

a. Job costing: although many jobs may be similar, a feature of job costing systems is

that each job is different cuz each customer has different specific requirements. As a

consequence:

i. The materials obtained for a job may be non-standard, and there may be a

tendency to over-purchase.
 ii. Similarly it may be difficult to estimate the time for a job with accuracy, and

the total labor cost of a job will increase with the length of time required for

completion.

iii. There may be special overhead costs for jobbing systems, with specialist

staff employed to liaise with customers and to monitor the progress of

individual jobs.

 Control over costs involves asking why particular expense are necessary, why the

job is taking so long to complete, or whether materials costs are excessive,

compared with the original job estimate.

b. Batch costing: involves the production of a quantity of the same units. The units

produced should be standard items, and the unit costs should be easier to estimate than

job costs.

 However, an important cost in batch costing is the cost of preparing for the next

batch of a product, ant the cost of cleaning up after one batch has been completed.

Costs of cleaning up and setting up for the next batch are called ‘set-up costs’. When

the time between batches is long, set-up costs may be high.

 Set-ups costs may be controlled by trying to ensure that the work is done as quickly

as possible, but also by manufacturing batches in a suitable size. With larger

batches, there will be fewer batches produced and therefore fewer ‘set-ups’ between

jobs.

III. Service Costing

 Service costing can be used by companies operating a service industry or by companies

wishing to establish the cost of services carried out by different departments.

 Service org do not make or sell tangible goods. Profit-seeking service org include

accountancy firms, law firms, transport companies, banks and hotels. Almost all not-

for-profit org like hospitals, schools and library are also service orgs.

 Service costing differs from the other costing methods in the following ways:

a. In general, with service costing, the cost of direct materials consumed will be

relatively similar compared to the labor, direct expenses and overhead costs.

b. Indirect costs tend to represent a higher proportion of total cost compared with

product costing.

c. The output of most service org is often intangible and it’s therefore difficult to

establish a measurable cost unit.

1. Cost units

 A particular problem with service costing is the difficulty in defining a realistic sot

unit that represents a suitable measure of the service provided. Frequently, a

composite cost unit may be deemed more appropriate if the service is a function of

two activity variables.

 Typical composite cost units used by companies operating in a service industry are

shown below:
 Each org will need to ascertain the cost unit most appropriate to its activities. If a

number of org within an industry use a common cost unit, valuable comparisons can be made

between similar establishments. This is particularly applicable to hospitals, educational

establishments and local authorities.