JOB AND CONTRACT c es OSTING 2 © The Institute of Chartered Accountants of IndiaMEE 051 ano wanacemenr accounting © 9.1 JOB COSTING 9.1.1 Meaning of Job Costing CIMA London defines Job Costing as “the category of basic costing methods which is applicable where the work consists of separate contracts, jobs or batches, each of which is authorised by specific order or contract.” According to this method, costs are collected and accumulated according to jobs, contracts, products or work orders. Each job or unit of production is treated as a separate entity for the purpose of costing. Job costing is carried out for the purpose of ascertaining cost of each job and takes into account the cost of materials, employees and overhead etc. The job costing method is also applicable to industries in which production is carried out in batches. Batch production basically is of the same character as the job order production, the difference being mainly one in the size of 9.1.2 Principles of Job Costing The job costing method may be regarded as the principal method of costing since the basic object and purpose of all costing is to: Analysis and ascertainment of cost of each unit of production * Control and regulate cost * Determine the profitability © The Institute of Chartered Accountants of IndiaJos ano contract cosrinc NC The basic principles enunciated for the job costing method are valid essentially for all types of industry. For example, printing; furniture; hardwai heavy machinery; interior decoration, repairs and other similar work. 9.1.3 Process of Job costing * Prepare a separate cost sheet for each job * Disclose cost of materials issued for the job * Employee costs incurred (on the basis of bill of material and time cards respectively) + When job is completed, overhead charges are added for ascertaining total expenditure 9.1.4 Suitability of Job Costing * When jobs are executed for different customers according to. their specifications. ‘+ when no two orders are alike and each order/job needs special treatment. * Where the work-in-progress differs from period to period on the basis of the number of jobs in hand. (G 9.2508 COST CARD/ SHEET Each job order is asymmetrical to other due to specific and customised requirements. To ascertain cost of a particular job, it is necessary to record all the expenditure related with a job separately. For this purpose, Job Cost card is used. Job cost card is a cost sheet, where the quantity of materials issued, hours spent by different class of employees, amount of other expenses and share of ‘overheads are recorded. This is helpful in knowing the total cost, profitability etc. of a job. The following is an illustrative format of Job Cost card/ sheet. Format of Job Cost Sheet: Description: Job N Blue Print N Quantity: Material No.: Date of delivery: Reference No.: Date commenced: Date finished: © The Institute of Chartered Accountants of IndiaME 051 10 manacement accountine Total Summary of costs | Estimated | Actual @ @)__|/Forthejob Direct material cost Units produced Direct wages Cost/unit Production overhead Remarks PRODUCTION COST Prepared by: Administration and Checked by: Selling & Distribution Overheads TOTAL COST PROFIT/LOSS. SELLING PRICE G 9.3 COLLECTION OF COSTS FOR A JOB 9.3.1 Collection of Materials Cost An essential requirement of job cost accounting is that direct materials and their cost must be traced to and identified with specific job or work order. This segregation of materials cost by jobs or work order is brought by the use of separate stores requisitions for each job or work order. Where a bill of material is prepared, it provides the basis for the preparation of these stores requisitions. But when the entire quantity of materials specified in the bill of materials is drawn in one lot or in installments, the bill itself could be made to serve as a substitute for the stores requisition. After the materials have been issued and the stores requisitions have been priced, it is usual to enter the value of the stores requisition in a material abstract or © The Institute of Chartered Accountants of IndiaJos ano contract cosrin CS analysis book. It serves to analyse and collect the cost of all direct materials according to job or work orders and departmental standing orders or expense code numbers. From the abstract book, the summary of materials cost of each job is posted to individual job cost sheets or cards in the Work-in-Progress ledger. The postings are usually made weekly or monthly. Similarly, at periodic intervals, from the material abstract books, summary cost of indirect material is posted to different standing orders or expense code numbers in the Overhead Expenses ledger. If any special material has been purchased for a particular job, it is generally the practice to charge such special material direct to the job concerned without passing it through the Stores Ledger, as soon as it is purchased. If any surplus material is left over in the case of any job, unless it can be immediately and economically used on some other job, the same is returned to the stores with a proper supporting document/stores Debit Note or Shop Credit, and the relevant job account is credited with the value of excess material returned to the stores. If the surplus material is utilised on some other job, instead of being returned to the stores first, a material transfer note is prepared. The transfer note would show the number of the transfer to job as well as transferee job (or jobs) so that, on that basis, the cost thereof can be adjusted in the Work- in-Progress Ledger. 9.3.2 Collection of Labour Cost All direct labour cost must be analysed according to individual jobs or work orders. Similarly, different types of indirect labour cost also must be collected and accumulated under appropriate standing order or expenses code number. The analysis of labour according to jobs or work orders is, usually, made by means of job time cards or sheets. Alll direct labour is booked against specific jobs in the job time cards or sheets. All the idle time also is booked against appropriate standing order expense code number either in the job time card for each job or on a separate idle time card for each worker (where the job time card is issued job-wise). The time booked or recorded in the job time and idle time cards is valued at appropriate rates and entered in the labour abstract or analysis book. All direct employee cost is accumulated under relevant job or work order numbers, and the total or the periodical total of each job or work order is then posted to the appropriate job cost card or sheet in Work- Progress ledger. The postings are usually made at the end of each week or month. © The Institute of Chartered Accountants of IndiaPEC 051 10 manacement accountine The abstraction of idle time costs under suitable standing order or expenses code numbers is likewise done and the amounts are posted to the relevant departmental standing order or expense code number in the Overhead Expenses Ledger at periodical intervals. As regards other items of indirect labour cost these are collected from the payrolls books for the purpose of posting against standing order or expenses code numbers in the Overhead Expenses ledger. 9.3.3 Collection of Overheads Manufacturing overheads are collected under suitable standing order numbers and selling and distribution overheads against cost accounts numbers. Total overhead expenses so collected are apportioned to service and production departments on some suitable basis. The expenses of service departments are finally transferred to production departments. The total overhead of production departments is then applied to products on some realistic basis, eg. machine hour; labour hour; percentage of direct wages; percentage of direct materials; etc. It should be remembered that the use of different methods will lead to a different amount being computed for the works overhead charged to a job hence to different total cost. The problem of accurately absorbing, in each individual job or work order, the overhead cost of different cost centres or departments involved in the manufacture is difficult under the job costing method. It is because the cost or the expenses thereof cannot be traced to or identified with any particular job ‘or work order. In such circumstances, the best that can be done is to apply a suitable overhead rate to each individual article manufactured or to each production order. This is essentially an arbitrary method. 9.3.4 Treatment of spoiled and defective work Spoiled work is the quantity of production that has been totally rejected and cannot be rectified. Defective work refers to production that is not as perfect as the saleabl product but is capable of being rectified and brought to the required degree of perfection provided some additional expenditure is incurred. Normally, all the manufacturing operations are not fully successful; they result in turning out a certain amount of defective work. Nonetheless, over a period of time it is possible to work out a normal rate of defectives for each manufacturing process which would represent the number of defective articles which a process shall produce in spite of due care. Defects arise in the following circumstances © The Institute of Chartered Accountants of IndiaJos ano contract cosrinc Ne (1) Where a percentage | When a normal rate of defectives has already of defective work is| been established, if the actual number of allowed in —_a| defectives is within the normal limit or is near particular batch as it | thereto the cost of rectification be cannot be avoided. _| charged to the whole job and spread over the entire output of the batch. If, on the other hand, the number of defective units substantially exceeds the normal, the cost of rectification of the number which exceeds the normal will be written off as a loss in the Costing Profit and Loss Account. (2) Where defect is due |in this case cost of rectification will be to bad workmanship. | abnormal cost, ie, not a legitimate element of the cost. Therefore, the cost of rectification shall be written off as a loss, unless by an arrangement, it is to be recovered as a penalty from the workman concerned. It is possible, however that the management did provide for a certain proportion of defectives on account of bad workmanship as an unavoidable feature of production. If that be the case, the cost of rectifying to the extent provided for by the management will be treated as a normal cost and charged to the batch. (3) Where defect is due | In this case the cost of rectification will be to the Inspection | charged to the department and will not be Department wrongly | considered as cost of manufacture of the accepting incoming | batch. Being an abnormal cost, it will be material of poor | written off to the Costing Profit and Loss quality. Account. G 9.4 ACCOUNTING OF COSTS FOR A JOB 9.4.1 Entries in Control Accounts 1. For purchase of materials- Stores Ledger Control A/c Dr. © The Institute of Chartered Accountants of IndiaREC 051 ano manacement accounting To Cost Ledger Control A/c* 2. For the value of direct materials issued to jobs- Work-in-Process Control A/c Dr. To Stores Ledger Control A/c 3. For return of direct materials from jobs- Stores Ledger Control A/c Dr. To Work-in-Process Control A/c 4. For return of materials to suppliers ~ Cost Ledger Control A/c Dr. To Stores Ledger Control A/c 5. For indirect materials- Factory Overhead Control A/c Dr. To Stores Ledger Control A/c 6. For wages paid- Wages Control A/c Dr. To Cost Ledger Control A/c 7. For direct wages incurred on jobs- Work-in-Process Control A/c Dr. ‘To Wages Control A/c 8 For indirect wages ~ Factory Overhead Control A/c Dr. To Wages Control A/c 9. For any indirect expense paid- Factory Overhead Control A/c Dr. To Cost Ledger Control A/c 10. For charging overhead to jobs- Work-in-Process Control A/c Dr. To Factory Overhead Control A/c 11. For the total cost of jobs completed Cost of Sales A/c Dr. © The Institute of Chartered Accountants of IndiaJos ano contract cosrinc CS ‘To Work-in-Progress Control A/c 12. The balance of Cost of Sales A/c is transferred to Costing Profit and Loss a/c; For such transfer — Costing Profit and Loss A/c Dr. To Cost of Sales A/c 13. For the sales value of jobs completed - Cost Ledger Control A/c Dr. To Costing Profit and Loss A/c** *General ledger adjustment account is another name of Cost Ledger Control Account. **The balance of Costing Profit and Loss Account shall now represent profit or loss. The balance of Cost Ledger Control Account shall be carried forwarded. With the balance on all ‘the accounts trial balance can be drawn, The manufacturing cost of a work order is ® 1,00,000; 8% of the production against that order spoiled and the rejection is estimated to have a realisable value of 2,000 only. The normal rate of spoilage is 2%. RECORD this in the costing journal. Actual loss due to spoilage = 8% of & 1,00,000 = %8,000 and Normal loss = 2% of % 1,00,000 = %2,000, therefore abnormal loss = 76,000. The rejection has a realisable value of % 2,000, which is to be apportioned between normal loss and abnormal loss in the ratio of 2 : 6, The accounting entries necessary for recording the above facts would be: od a Material Control Account Dr. 2,000 Overhead Control Account Dr. 1,500 Costing Profit and Loss Control Account Dr. 4,500 To Work-in-Progress Control Account 8,000 In the case of defectives being inherent in the manufacturing process, the rectification cost may be charged to the specific jobs in which they have arisen. In case detectives cannot be identified with jobs, the cost of rectification may be treated as factory overheads. Abnormal defectives should be written off to the Costing Profit and Loss Account. © The Institute of Chartered Accountants of IndiaMELO 051 ano manacement accounting A shop floor supervisor of a small factory presented the following cost for Job No. 303, to determine the selling price. Materials 70 Direct wages 18 hours @ 72.50 45 (Deptt. x 8 hours; Deptt. Y 6 hours; Deptt. Z 4 hours) Chargeable expenses 5 120 Add : 33-1/3 % for expenses cost 40 160 Analysis of the Profit/Loss Account (for the year 20X9) a , Materials used 1,50,000 Sales less returns 2,50,000 Direct wages: Deptt. X 10,000 Deptt.Y 12,000 Deptt.Z — _8,000 30,000 Special stores items 4,000 Overheads: Deptt.X 5,000 Deptt.Y 9,000 Deptt.Z 2,000 16,000 Works cost 2,00,000 Gross profit ¢/d 50,000 2,50,000 2,50,000 Selling expenses 20,000 Gross profit b/d 50,000 Net profit 30,000 50,000 50,000 It is also noted that average hourly rates for the three Departments X, ¥ and Z are similar, © The Institute of Chartered Accountants of IndiaJos ano contract cosrin NE You are required to: (PREPARE a job cost sheet. (i) CALCULATE the entire revised cost using 20X9 actual figures as basis. (ii) Add 20% to total cost to DETERMINE selling price. Job Cost Sheet Customer Details Job No. Date of commencement — Date of completion Direct materials 70 Direct wages: Deptt. X & 2.50 x 8 hrs, = % 20.00 Deptt. Y € 2.50 x 6 hrs. = € 15.00 Deptt. Z ¥ 2.50 x 4 hrs. 45 Chargeable expenses 5 Prime cost 120 Overheads: Deptt.X = x 100 = 50% of & 20 = & 10.00 Deptt.Y = x 100 = 75% of 8 15 = & 11.25 Deptt.Z = x 100 = 25% of 210 = % 250 23.75 Works cost 143.75 Selling expenses= aS x 100 = 10% of work cost 14,38 Total cost 158.13 Profit (20% of total cost) 31.63 Selling price 189.76 © The Institute of Chartered Accountants of IndiaREELED 0s1 ano manacement accounting 9.4.2 Advantages and Disadvantages of Job Costing Some of the advantages and disadvantages of Job costing are summarised as below: The details of Cost of material,| 1. Job Costing is costly and laborious labour and overhead for all job | __method. is available to control. 2. Profitability of each job can be | 2. As lot of clerical process is involved derived. the chances of error is more. 3. It facilitates production | 3. This method is not suitable in planning, inflationary condition. 4, Budgetary control and Standard | 4. Previous records of costs will be Costing can be applied in job| meaningless if there is any change in costing. market condition. 5. Spoilage and detective can be identified and responsibilities can be fixed accordingly. 9.4.3 Difference between Job Costing and Process Costing The main points which distinguish job costing and process costing are as below: ‘Job is carried out or a product | The process of producing the product has a is produced by specific orders. | continuous flow and the product produced is homogeneous. (i Costs are determined for each | Costs are compiled on time basis ie, for job. production of a given accounting period for each process or department. (ii) Each job is separate and | Products lose their individual identity as independent of other jobs. | they are manufactured in a continuous flow. (iv) Each job or order has a number | The unit cost of process is an average cost and costs are collected against | for the period. the same job number. © The Institute of Chartered Accountants of India