BM1805

UNIT COSTING AND JOB COSTING

Unit Costing
This is a method of costing which is commonly used in industries that produce identical products. In
addition, this is used in uniform manufacturing processes and situations when cost units have identical
costs. Examples of companies that employ unit costing include industries that manufacture homogeneous
products like sugar, bricks, cement works, collieries, and breweries. The following are the features of unit
costing:
• Average unit cost. Unit costing computes the average unit cost by dividing the total costs by the
number of units produced in a specified period.
• Single product. Unit costing involves a single product only or a number of grades of the product.
• Applicability. Unit costing is applied to industries where the manufacturing process is not
continuous.
EXAMPLE: The management of Pizza Restaurant desires to determine the unit cost associated in their
10,000 sales of pepperoni pizzas. The following variable expenses per pizza are available:
Flour P0.50
Yeast 0.05
Water 0.01
Cheese 3.00
Pepperoni 2.00
Total variable cost per unit P5.56 per pizza

The fixed expenses of Pizza Restaurant are the following:

Labor P1,500
Rent 3,000
Insurance 200
Advertising 500
Utilities 450
Total fixed cost P5,650

SOLUTION:
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 +
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆
𝑃𝑃5,650
= 𝑃𝑃5.56 +
10,000
= 𝑃𝑃5.56 + 𝑃𝑃0.57
= 𝑷𝑷𝑷𝑷. 𝟏𝟏𝟏𝟏
KEY POINTS: The unit cost provides a dynamic overview of the relationships among revenues, costs, and
profits. It helps business owners determine if their business is earning a profit. Also, it helps
them price their products by considering the costs associated in the product per unit.

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 BM1805

Job Costing
This is a cost allocation method used by companies that make custom products. In this system, work is
undertaken to customer’s specific requirements on the basis of orders. The work is carried out within the
factory, which passes through the processes or operation activities. This method of costing is used in
industries which are engaged in printing, steel structures, switchgear, heat exchangers, transformers,
motors, pumps, pressure vessels, general engineering works, oil well, and shipping. The following are the
features of job costing:
• A job which consists of a single order or contract.
• Each job is unique in nature.
• Products are not manufactured for general consumption.
• Each order is given a job number.
• Costs are accumulated with reference number.
• Costs are determined for each order.
• The duration of job order is comparatively short-term.
• It is possible to identify a job at each stage of its manufacturing process.
The main objectives of job costing are the following:
1. To determine the cost of production of every order;
2. To determine the profitability of each job in order to undertake future orders of similar nature;
3. To control operational efficiency by comparing actual costs with estimated costs; and
4. To plan future course of activities.
EXAMPLE 1: ABC Premier Cabinets uses job costing to calculate the cost of jobs as they are completed.
The company estimates that it will have P1,250,000 in overhead costs in 201A. The company
believes that the employees will have to work 200,000 hours to complete the job. Calculate
the predetermined overhead rate assuming that the company uses direct labor hours to
allocate overhead to jobs.
SOLUTION: The predetermined overhead rate can be derived by dividing estimated overhead by the
estimated activity.
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

1,250,000
=
200,000
= 𝟔𝟔. 𝟐𝟐𝟐𝟐 𝒑𝒑𝒑𝒑𝒑𝒑 𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍 𝒉𝒉𝒉𝒉𝒉𝒉𝒉𝒉
EXAMPLE 2: ABC Premier Cabinets completes job #322 on July 7. The job used 45 direct labor hours and
30 machine hours. The job consumed P1,800 worth of materials. The average direct labor
rate is P18.00 per hour and the company uses the predetermined overhead rate calculated
in Example 1. Calculate the total cost of job #322.
FORMULA: The three (3) components of job cost are direct materials, direct labor, and applied overhead.
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐽𝐽𝐽𝐽𝐽𝐽 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 + 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒

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PROCEDURE:
1. Calculate the direct labor. Based on the illustration, the rate of average direct labor is P18.00 per direct
labor hour and the activity or cost driver is 45 labor hours.

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 × 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

= 18.00 𝑝𝑝𝑝𝑝𝑝𝑝 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜 × 45 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
= 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷. 𝟎𝟎𝟎𝟎
2. Apply the overhead to the job by multiplying the predetermined overhead rate to the activity.
Applied Overhead = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 × 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴
= 6.25 𝑝𝑝𝑝𝑝𝑝𝑝 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜 × 45 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
= 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷. 𝟐𝟐𝟐𝟐
3. Compute for the job’s total cost.
Direct Materials P1,800.00
Direct Labor 810.00
Applied Overhead 281.25

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑗𝑗𝑗𝑗𝑗𝑗 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 + 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒

= 1,800 + 810 + 281.25
= 𝑷𝑷𝑷𝑷, 𝟖𝟖𝟖𝟖𝟖𝟖. 𝟐𝟐𝟐𝟐
KEY POINTS: The value of direct materials is given in the problem.

References
Accounting in Focus. (n.d.). Job costing and overhead allocation. Retrieved on October 03, 2018, from
https://accountinginfocus.com/managerial-accounting-2/overhead-allocation/job-costing-and-
overhead-allocation
InvestingAnswers. (n.d.) Cost per unit. Retrieved on October 03, 2018, from
https://investinganswers.com/financial-dictionary/financial-statement-analysis/cost-unit-5333
Lalitha, R. & Rajasekaran, V. (2010). Costing accounting. India: Pearson.

Rante, G. A. (2016). Cost accounting. Mandaluyong City: Millenium Books, Inc.

Surbhi, S. (2017). Difference between job costing and batch costing. Retrieved on October 25, 2018, from
https://keydifferences.com/difference-between-job-and-batch-costing.html

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