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Job Costing: In case of special-order concerns products produced or jobs undertaken are of diverse nature.

They involve materials and labour in different quantities and entail different amounts of overhead costs. In such concerns it is necessary to keep a separate record of each lot of products or jobs from the time the work on the job or product begins till it is completed. A separate job card or sheet is maintained for each job or product in which all expenses of materials, labour, overheads are entered and cost of completing a job or manufacturing a product is found out. Such a cost system is known as job or terminal or specific costing. Objectives of job costing: 1. It helps in finding out the cost of production of every order and thus helps in ascertaining profit or loss made out on its execution. The management can judge the profitability of each job and decide its future courses of action. 2. It helps management in making more accurate estimates about the costs of similar jobs to be executed in future on the basis of past records. The management can conveniently and accurately determine and quote prices for orders of a similar nature which are in prospect. 3. It enables management to control operational inefficiency by comparing actual costs with the estimated ones. A system of job costing should be adopted after considering the following two factors. 1. Each order or job should be continuously identifiable from the raw material stage to the stage of completion. 2. The system is very expensive because it requires a lot of clerical work in estimating costs, designing and scheduling of production. It should, therefore, be adopted when absolutely warranted. Procedure: The following is the procedure adopted for costing purposes in a concern using job costing: 1. Job order number: Every order received is allotted a certain number from a running list maintained for this purpose. Every order or job will be known by its number throughout its production process in the factory. 2. Production / job order: A production / job order is a written order issued to the manufacturing department to proceed with a job. It is issued by the production planning department on receipt of a job order to the foreman of the relevant department. Instructions to the costing department to collect particulars of costs on execution of the job are also issued simultaneously. The production order is prepared with sufficient copies for all the departmental managers or foreman who will be required to take any part in the production. 3. Bills of materials: The production and planning department also prepares a list of materials and stores required for the completion of the job. A copy is also sent to the concerned foreman with the production order which serves as an authority to him for

collecting the materials and stores mentioned from the storekeeper. On the same pattern a list of tools required is also prepared. 4. Job cost card: Job cost card or job cost sheet is the most important document used in the job costing system. A separate card or cost sheet is maintained for each job in which all expenses regarding materials, labour and overheads are recorded directly from costing records. The method of finding out the cost of these elements in respect of a particular order is as follows. 1. Materials: The information regarding cost of materials or stores used for a particular job order can be obtained from materials or stores requisition slips. In case of large job orders, materials abstracts can be prepared for finding out the total value of materials issued to different jobs. 2. Labour: The cost of labour incurred on each job can be ascertained with the help of time and job cards. In case of a large number of jobs, preparation of wages abstract may considerably help in computing the amount paid as wages for completion of specific jobs. Wages paid for indirect labour will constitute an item of factory overheads. 3. Overheads: Every job will be charged with amount of overheads determined on the basis of the method selected for allocation of overheads. Normally on the basis of past results an overhead rate is determined and each job is charged for overheads at the pre-determined rate. Profit or loss on a job can also be found out by preparing a job account. The job account is debited with all expenses incurred on the job and is credited with the job price. The difference of the two sides will be the profit or loss made or suffered on the job. 1. Work-in-process: The account is maintained in the cost ledger and it represents the jobs under production. The account may be maintained in any of the following two ways depending upon the requirements of the business: 1. A composite work-in-process account for the entire factory. 2. A composite work-in-process account for every department. For example, if the factory has three departments A, B and C, a work-in-process for each of these three departments will be opened. The work-in-process account is periodically debited with all costs direct and indirect incurred in execution of the jobs. At intervals of month or so a summary of completed jobs is prepared and the work-in-process account is credited with the cost of completed jobs. In case work-in-progress account for each department of the factory has been opened, it will be necessary to find out the cost of completed jobs regarding each department. The balance in work-in-process account at any time represents the cost of jobs not yet completed. 1. Job ticket: In order to provide information regarding the progress of each job at each operation, generally a job ticket is issued by the production control department. The ticket contains detachable portions for different operations. The job ticket is useful for both production control and costing departments. On completion of an operation, the relevant portion of ticket is detached and sent to production control department. This enables production control department in keeping production schedule up-to-date. On the

basis of detached portion a departmental summary of production can be prepared which is very useful for costing purposes. Moreover, the amount of work-in-process as shown by the cost ledger can be checked by listing the ticket number of jobs in process in any department and valuing this list. 2. Progress advice: The foreman of a department may be required to send periodically a statement regarding the stage of completion of each job to ensure completion of jobs by scheduled dates. Such a note is called progress advice. Advantages of job costing: 1. Job costing enables the management to identify spoiled and defective work in respect to particular production orders, departments or groups of workers and hence the management can fix up responsibility for inefficiency. 2. Management can determine the trends in costs and compare the operating efficiency of men and machines in each cost centre. It can also determine the completion cost of each job. 3. It enables the preparation of estimates of costs of jobs before production. 4. It enables comparison of estimated costs with actual costs as the costs are analysed on the basis of costs, services and production. 5. It makes available to the management a complete file of production orders which contains valuable statistics on cost. 6. It enables ascertainment of profit or loss on each job immediately after their completion. 7. It enables the management to identify unprofitable jobs. 8. In case of cost plus contracts, job costing enables to provide precise quotations. 9. It helps in production planning. 10. It facilitates fixation of selling price. Limitations of job costing: 1. Job costing involves a lot of clerical work in identifying materials, labour and overheads with specific jobs and departments. 2. Management cannot evaluate precisely the operating efficiency of men and machines. 3. Since costs ascertained and compiled are historical costs, they are not of much utility to the management. 4. It does not apply budgetary control to important cost elements such as labour, materials and overheads. 5. Job costs over any period of time cannot be compared if major economic changes take place in between. 6. It is expensive to operate and errors are possible due to increased clerical work. Batch Costing: Batch costing is a modified form of job costing. While job costing is concerned with costing of jobs that are executed against specific orders of the customers, batch costing is used where articles are manufactured in definite batches. The articles are usually kept in stock for selling to customers on demand. The term batch refers to the lot in which the articles are to be

manufactured. Whenever a particular product is required, one unit of such product is not produced but a lot of say 500 or 1000 units of such product are produced. It is therefore also known as Lot Costing. This method of costing is used in case of pharmaceutical or drug industries, ready-made garment factories, industries manufacturing component parts of radio sets, television sets, watches, etc. The costing procedure for batch costing is similar to that under job costing except with the difference that a batch becomes the cost unit instead of a job. Separate job cost sheets are maintained for each batch of products. Each batch is allotted a number. Material requisitions are prepared batchwise, the direct labour is engaged batchwise and the overheads are also recovered batchwise. Cost per unit is ascertained by dividing the total cost of a batch by number of items produced in that batch. Ordinary principles of inventory control are used. Production orders are issued only when the stock of finished goods reaches the ordering level. In case the batches are repetitive, the costing work is much simplified. Since in batch costing production is done in batches and each batch consists of a number of units, the determination of optimum quantity to constitute an economical batch is all the more important. Such a quantity can be fixed on the basis of same formulae and principles as are applicable to economic order quantity of materials. Economic Batch Quantity = 2U x P S Where: U = Annual demand P = Setting up and order placing costs per batch S = Storage or inventory carrying over cost per unit per annum
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