METHODS OF COSTING
JOB, PROCESS, AND OPERATING COSTING
ALOK DIXIT
IIM LUCKNOW
METHODS OF COSTING/ COSTING SYSTEMS
Costing systems answer the question,
“How to accumulate the costs to determine product/ service cost,
and value of inventories and profit earned from the units sold.”
In any business firm, one or more methods of costing may be
followed to determine cost of goods & services - sold during the
period and carried forward (goods) to the next period in the form of
inventory;
The choice of method depends on the nature of business you are in
(A consultancy firm vs. an automobile manufacturing firm);
Different costing methods/ a combination thereof are used to suit
the requirement of businesses;
METHODS OF COSTING
Job Costing (Contract costing, Batch costing)
Process Costing
Operating/ Services Costing
COSTING METHODS USED TO DETERMINE PRODUCT
COSTS
Costing Methods/ Systems
Job-order Process
Costing Costing
Products (Services) manufactured (offered) are Customized/
Tailor-made/ order-specific.
Distinct jobs/ projects are carried out during each period.
Unit costs are computed by job.
Each job is assigned a distinct number. Cost records need to be
maintained for each product or job: JOB COST SHEET is used to
determine cost of Job.
COSTING METHODS USED TO DETERMINE
PRODUCT COSTS
Costing Systems
Job-order Process
Costing Costing
Mass
Mass production
production of
of identical
identical products
products (at
(at process-level).
process-level). For
For example,
example, Sugar,
Sugar,
food
food processing,
processing, chemical
chemical industry,
industry, Oil
Oil refineries,
refineries, Automobiles,
Automobiles, Mobile
Mobile
handsets, etc.
handsets, etc.
Many
Many units
units of
of homogenous/
homogenous/ similar
similar product(s)
product(s) (joint
(joint products)
products) flow
flow evenly
evenly
through
throughcontinuous
continuousproduction
productionprocess(s).
process(s).
One
One unit
unit of
of the
the product
product isis indistinguishable
indistinguishable (at
(at process-level)
process-level) from
from any
any other
other
unit
unitof
ofthe
theproduct.
product.
Each
Each unit
unit of
of the
the product
product (at
(at process-level)
process-level) isis assigned
assigned the
the same,
same,
average
averagecost.
cost.
SECTOR-WISE EXAMPLES
COMPARISON OF JOB-ORDER AND
PROCESS COSTING
S. No. Job Costing Process Costing
1 Wide variety of distinct products. Homogeneous (at process-level)
products.
2 Costs are typically computed when a Costs are calculated at the end of a
job is complete (in case completed specific period.
within the accounting period).
3 Cost is accumulated by job or batch. Cost is accumulated at process-level.
4 Unit cost is determined by dividing Unit cost is ascertained (at process-
total cost of job by number of units level) by dividing total cost at process-
produced normally (Batch Costing). level by total number of units produced
(normal output).
Batch costing is applied to the firms wherein customized order are supplied in bulk (large
number of the same units as per order), or manufacturing happens in batches. For
example, pharmaceuticals, printing jobs, Laptops supplied by Dell / Lenovo to
institutions or corporates (Bulk orders), e.g., Dell Latitude series, ThinkPad T series,
TYPES OF BUSINESSES USING JOB COSTING
A cost accounting system where costs are assigned to each job or batch of goods produced.
Audit engagement (PWC, KPMG, EY, etc.)
Management Consulting Firms (Bain & Co., McKinsey & Co., BCG, etc.)
Investment Banks & Project Advisory Firms (JPMC, Goldman Sachs,
Bank of America, EY, Avendus Capital, etc.)
Building construction (L&T Construction)
Law firms
Event Management Companies
Production of movie (RK Studio, Pixar, 20th Century Fox, Paramount
Pictures, Colombia Pictures, etc. )
EXAMPLES OF PROCESS AND JOB COSTING
I. Jamnagar (Reliance) oil refinery
process costing
II. A manufacturer of sugar (Bajaj Hindusthan Ltd.)
process costing
III. Payment aggregators like BillDesk (PayU)
process costing
IV. A professional services firm (McKinsey & Co.)
job costing
V. Honda service center
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)
X. Semiconductor manufacturing by Hitachi. Job/ contract costing
process costing
Flow Of Cost
COST FLOW FOR JOB COST COMPONENTS
JOB’S COST BECOMES THE BASIS FOR VALUING INVENTORY AND COST OF
GOODS SOLD (UNIT: JOB)
Direct
Material
Indirect
Work-in-
Factory Allocate Progress Finished
Overheads Applied Goods
using POHR
Indirect
Cost of
Labor Direct Goods
Sold
FLOW OF OVERHEADS COST
Employee Indirect
Time Ticket Labor
Other Manufacturing
Applied Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account
With
POHR
Materials Indirect
Requisition Material
JOB COST SHEET
JOB COST RECORD
HEAVY ENGINEERING CORPORATION LTD.
Source: Cost Accounting by Horngren
JOB COST RECORD (JOB COST SHEET)
Source: Managerial Accounting by James Jiambalvo
EXERCISES 1-2:
JOB COSTING IN A CONSULTING FIRM
SOLUTION
SOLUTION
EXERCISE 3: 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 = Rs. 1.40 per rupee of direct
labour.
SOLUTION
(D) Calculation of Profit
Job 100 Job 101
WIP cost 67200 71650
Additional Direct Labour 10000 20000
Additional Overheads (140% of DL) 14000 28000
Total Cost 91,200 1,19,650
Profit (Balancing figure) 18,800 50,350
Price 1,10,000 1,70,000
TEXTBOOK PROBLEMS
Ch 03, pp. 88-96
Review Problem, pp. 115-116 (Required: 1, 3, 4)
Exercise 3-35
Exercise 3-37
Problem 3-47 (Required: 1,2,4)
Problem 3-55
