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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

Process
Costing

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.

Job Costing

Wide
variety
products.

Costs are typically computed


when a job is complete.
Cost is accumulated by Job or
department.

3
4

of

Process Costing
distinct Homogeneous
level) products.

(at

process-

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

II.

A manufacturer of sugar (Bajaj Hindusthan Ltd,)

process costing
process costing

III.

A manufacturer of luxury yachts

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

IX.

Construction of buildings by a construction firm (e.g., L&T


construction)
contract costing

Flow Of Cost

COST FLOW FOR JOB COST COMPONENTS


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

Indirect

Material

Direct

Allocate

Indirect

Factory
Overheads

Labor

Direct

Work in
Process

Finished
Goods

Cost of
Goods
Sold

FLOW OF OVERHEADS COST

Employee
Time Ticket

Other
Actual OH
Charges

Materials
Requisition

Indirect
Labor

Manufacturing
Overhead
Account

Indirect
Material

Applied
Overhead
With
POHR

Job Cost
Sheets

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

8/03

Totals

8966

Date Completed
Overhead Costs Applied

Date

Rate

Amount

63,280

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