Study 3

Job costing and the allocation of

overheads

Mr. Oarabile Manyaapelo | Chartered Accountant (SA) | Registered Auditor

 Job costing Vs Process Costing

• Each product or job is • Similar Products (E.g. Oil,

unique. (Built in masks, toothpicks etc.)
cupboard, tailored suits,
Dentures etc. • Direct materials, labour
JOB PROCESS and overheads allocated
• Direct materials, labour COSTING COSTING evenly to all similar
and overhead costs products
allocated according to
own unique features

2
 Job Costing
Typically used where items are ordered to be made to specification, E.g.:
 Dentures / prosthetic medical devices
 Construction of houses according unique plans
 Professional services (Law firms, Accounting firms)
 Motor vehicle service workshops
 Panel beaters

3
 What does the cost of a job consist of?
Direct Materials – Traced
directly to job

Manufacturing Overheads – Applie

Direct Labour – Traced
each job using overhead allocation
directly to job

4
 Job (Cost) Card
Job Card - The Primary document used to track the cost of material, labour and overheads
associated with each job.
Dent Clinic
Job Number A - 143 Date Initiated 25 July 2020
Date Completed
Department B3 Units Completed
Item Mercedes V250d Bumper Repair
Direct Materials Direct Labour Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labour
Manufacturing Overhead
Total Cost
Unit Cost

5
 Dent Clinic
 Dent clinic is a panel beating workshop that repairs accident damaged vehicles. The vehicles repaired range from minor
cosmetic repairs to major structural repair work.
 A customer with a damaged bumper has requested a quotation for the repair of the bumper of his Mercedes Benz V250d
after a minor collusion.
 The following costs information has been gathered regarding the repair work required:
 New Bumper - R5 000
 Paint - R2 000
 Labour – Remove and replace bumper - 1 hour @ R90 per hour
 Labour – Painting - 2 hours @ R90 per hour
 Electricity for entire factory - R15 000 per month (Average)
 Consumables (PPE, Cleaning material, grease) - R5 000 per month (Average)
 There is only one employee in the factory who works a total 160 hours per month

6
 Cost Sheet
 You are required to prepare a schedule of costs to repair the bumper.
Cost Item Cost Category Amount
New Bumper Direct Materials R5 000
Paint Direct Materials R2 000
Remove and replace Direct Labour R90
bumper
Painting Direct Labour R180
Electricity Overhead costs R?
Consumables Overhead costs R?

7
Calculation of the overhead allocation rate
1. Select an overhead allocation basis
2. We calculate a predetermined overhead allocation rate (POHR) which is based on the total expected
overhead costs spread the total labour hours.

Expected Overhead Costs R15 000 + R5 000

POHR = = R125.00 per
=
Total allocation units labour hour
160 hours

8
 Cost Estimate
Cost Item Cost Category Amount
New Bumper Direct Materials R5 000
Paint Direct Materials R2 000
Remove and replace bumper Direct Labour R90
Painting Direct Labour R180
Electricity (R15 000/160 Overhead costs R281.25
hours) x 3 hours
Consumables Overhead costs R93.75
(R5 000 / 160 hours) x 3 hours
Total Cost R7 645

9
 Allocated Overheads
Total hours Allocated Overhead Actual Overhead Under allocation Vs Over
worked Costs cost allocation
100 = 100 x 125 = R12 500 R20 000 R7 500 Under allocated
160 = 160 x 125 = R20 000 R20 000 R 0.00 Over / Under
allocated
180 = 180 x 125 R20 000 R2 500 Over allocated
= R22 500

The over / under allocation journal entry is passed to reconcile the allocated costs
back to the actual cost

10
 Allocated Overheads - Electricity
Total hours Allocated Overhead Costs Actual Under allocation Vs Over
worked Overhead allocation
cost
100 = 100 x (R15 000 / 160h) R15 000 R5 625 Under allocated
= 100 x R93.75
= R9 375
160 = 160 x (R15 000/ 160h) R15 000 R 0.00 Over / Under
= 160 x 93.75 allocated
= R15 000
180 = 180 x (R15 000/ 160h) R15 000 R1 875 Over allocated
= R180 x 93.75
= R16 875

11
Treatment of Over / Under allocated Overheads

Split between
Fully Allocate to
inventory OR
Cost of Sales
accounts

Work in Finished Cost of Cost of

progress Good Sales Sales

12
Under-allocated Overheads

13
Over Allocated Overhead Cost

14