Job Costing & Batch Costing

Question 1 Describe job Costing and Batch Costing giving example of industries where these are used? (May, 2001, 3 marks) Answer Job Costing: It is a method of costing which is used when the work is undertaken as per the customers special requirement. When an inquiry is received from the customer, costs expected to be incurred on the job are estimated and on the basis of this estimate, a price is quoted to the customer. Actual cost of materials, labour and overheads are accumulated and on the completion of job, these actual costs are compared with the quoted price and thus the profit or loss on it is determined. Job costing is applicable in printing press, hardware, ship-building, heavy machinery, foundry, general engineering works, machine tools, interior decoration, repairs and other similar work. Batch Costing: It is a variant of job costing. Under batch costing, a lot of similar units which comprises the batch may be used as a unit for ascertaining cost. In the case of batch costing separate cost sheets are maintained for each batch of products by assigning a batch number. Cost per unit in a batch is ascertained by dividing the total cost of a batch by the number of units produced in that batch. Such a method of costing is used in the case of pharmaceutical or drug industries, readymade garment industries, industries, manufacturing electronic parts of T.V. radio sets etc.

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Cost Accounting

Question 2 Distinguish between Job Costing & Batch Costing? 2004, Nov, 2006, 2 marks) Answer Job Costing and Batch Costing Accounting to job costing, costs are collected and accumulated according to job. Each job or unit of production is treated as a separate entity for the purpose of costing. Job costing may be employed when jobs are executed for different customers according to their specification. Batch costing is a form of job costing, a lot of similar units which comprises the batch may be used as a cost unit for ascertaining cost. Such a method of costing is used in case of pharmaceutical industry, readymade garments, industries manufacturing parts of TV, radio sets etc. Question 3 Distinguish between job costing and process costing? Answer The main points which distinguishes job costing and process costing are as below: Job Costing Process Costing (Nov,

(i) A Job is carried out or a The process of producing the product is produced by product has a continuous flow and specific orders. the product produced is homogeneous. (ii) Costs are determined for each Costs are compiled on time basis job. i.e., for production of a given accounting period for each process or department. (iii) Each job is separate and Products lose their individual independent of other jobs. identity as they are manufactured in a continuous flow.

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(iv) Each job or order has a The unit cost of process is an number and costs are average cost for the period. collected against the same job number. (v) Costs are computed when a job is completed. The cost of a job may be determined by adding all costs against the job. (vi) As production is not continuous and each job may be different, so more managerial attention is required for effective control. Question 4 (a) What do you understand by Batch Costing? In which industries it is applied? (b) Leo Limited undertakes to supply 1,000 units of a component per month for the months of January, February and March 1987. Every month a batch order is opened against which materials and labour cost are booked at actual. Overheads are levied at a rate per labour hour. The selling price is contracted at Rs. 15/- per unit. From the following data, present the cost and profit per unit of each batch order and the overall position of the order for the 3,000 units. Month Batch Output (Numbers) January 1987 February 1987 March 1987 1,250 1,500 1,000 Material Cost Rs. 6,250 9,000 5,000 Labour Cost Rs. 2,500 3,000 2,000 Costs are calculated at the end of the cost period. The unit cost of a process may be computed by dividing the total cost for the period by the output of the process during that period. Process of production is usually standardized and is therefore, quite stable. Hence control here is comparatively easier.

Labour is paid at the rate of Rs. 2 per hour. The other details are: Month Overheads Total Labour

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Cost Accounting

Hours January 1987 February 1987 March 1987 Answer (a) Batch Costing: It is a form of job costing. In this, the cost of a group of products is ascertained. The unit of cost is a batch or a group of identical products instead of a single job, order or contract. Separate cost sheets are maintained for each batch of products by assigning a batch number. The cost per unit is ascertained by dividing the total cost of a batch by the number of items produced in that batch. Batch costing is employed by companies manufacturing in batches. It is used by readymade garment factories for ascertaining the cost of each batch of cloths made by them. Pharmaceutical or drug industries, electronic component manufacturing units, radio manufacturing units too use this method of costing for ascertaining the cost of their product.
(b)

12,000 9,000 15,000

4,000 3,000 5,000

Leo Limited Statement of Cost and Profits Per Unit of Each Batch January Februar y 1,500 Rs. 22,500 Feb 87 Rs. 9,000 3,000 3,000 March 1,000 Rs. 15,000 March 87 Rs. 5,000 2,000 3,000 Total 3,750 Rs. 56,250 Total Rs. 20,250 7,500 9,750

(A) Batch Output (Numbers)

1,250 Rs.

(B) Sales Value (C) Costs

18,750 Jan. 87 Rs.

Material Wages Overheads*

6,250 2,500 3,750

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Total (D) Profit/Batch (BC) (E) Cost/Unit (CA) (F) Profit/Unit (DA) * See note (ii) Notes

12,500 6,250 10 5

15,000 7,500 10 5

10,000 5,000 10 5

37,500 18,750

Jan87 (i) Labour Hours (Labour Cost/Labour rate per hour) (ii) Overheads per hour (Total Overhead/ Total Labour hours)

Feb87

March87

., Rs2500 2
=Rs.1,250

. Rs3,000 2
=Rs.1,500

. Rs2,000 2
=Rs.1,000

. ,000 Rs12 4,000

Rs.3

. Rs9,000 4,500
Rs.2 Rs.3,000

. ,000 Rs15 , 5000

Rs.3 Rs.3,000

(iii) Overhead batch (i)(ii)

for

the

Rs.3,750

Overall position for 3,000 units Rs. Sales Value (3,000 units Rs.15) Less: Total Cost (3,000 units Rs.10) Profit Question 5 Define Product costs. Describe three different purposes for computing product costs. (Nov, 1999, 4 marks) 45,000 30,000 15,000

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Cost Accounting

Answer Definition of product costs Product costs are inventoriable costs. These are the costs, which are assigned to the product. Under marginal costing variable manufacturing costs and under absorption costing, total manufacturing costs constitute product costs. Purposes for computing product costs: The three different purposes for computing product costs are as follows:
(i) (ii)

Preparation of financial inventoriable costs.

statements:

Here focus is on

Product pricing: It is an important purpose for which product costs are used. For this purpose, the cost of the areas along with the value chain should be included to make the product available to the customer. Contracting with government agencies: For this purpose government agencies may not allow the contractors to recover research and development and marketing costs under cost plus contracts.

(iii)

Question 6 In Batch Costing, how is Economic Batch Quantity determined? (May, 2001, 3 marks) Answer Economic batch quantity in Batch Costing In batch costing the most important problem is the determination of Economic Batch Quantity The determination of economic batch quantity involves two type of costs viz, (i) set up cost and (ii) carrying cost. With the increase in the batch size, there is an increase in the carrying cost but the set-up cost per unit of the product is reduced; this situation is reversed when the batch size is reduced. Thus there is one particular batch size for which both set up and carrying costs are minimum. This size of a batch is known as economic or optimum batch quantity.

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Economic batch quantity can be determined with the help of a table, graph or mathematical formula. The mathematical formula usually used for its determination is as follows: EBQ= Where,

2 DC C
D = Annual demand for the product S = Setting up cost per batch C = Carrying cost per unit of production per annum

Question 7 A factory incurred the following expenditure during the year 2007: Rs. Direct material consumed Manufacturing Wages Manufacturing overhead: Fixed Variable 3,60,000 2,50,000 6,10,00 0 25,10,00 0 In the year 2008, following changes are expected in production and cost of production. (i) Production will increase due to recruitment of 60% more workers in the factory. (ii) Overall efficiency will decline recruitment of new workers. by 10% on account of 12,00,00 0 7,00,00 0

(iii) There will be an increase of 20% in Fixed overhead and 60% in Variable overhead. (iv) The cost of direct material will be decreased by 6%. (v) The company desire to earn a profit of 10% on selling price.

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Cost Accounting

Ascertain the cost of production and selling price. (May, 2008, 8 marks) Answer Budgeted Cost Sheet for the year 2008 Particulars Direct material consumed Add: 44% due to increased output 12,00, 000 5,28, 000 17,28, 000 Less: 6% for decline in price Direct wages (manufacturing) Add: 60% increase Prime cost Manufactured Overhead: Fixed Add: 20% increase 3,60,0 00 72,00 0 4,32,0 00 Variable Add: 60% increase 2,50,0 00 1,50,0 00 4,00,0 00 8,32,00 0 1,03,6 80 7,00,0 00 4,20,0 00 11,20,00 0 27,44,32 0 16,24,32 0 Amount Rs.

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Cost of production Add: 1/9 of Cost or 10% on selling price Selling price

35,76,32 0 3,97,368. 88 39,73,68 8.88

Production will increase by 60% but efficiency will decline by 10%. 160 10% of 160 = 144% So increase by 44%. Note: If we consider that variable overhead once will change because of increase in production (From 2,50,000 to 4,00,000) then with efficiency declining by 10% it shall be 3,60,000 and then again as mentioned in point No. (iii) of this question it will increase by 60% then variable overhead shall be Rs. 3,60,000 160% = 5,76,000. Hence, total costs shall be Rs. 37,52,320 and profit shall be 1/9th of Rs. 37,52,320 = 4,16,924. Thus, selling price shall be 41,69,244. Alternative Solution: Students may use a combined factor to arrive at the figures in respect of materials and variable overheads as under: 2007 production Increase in 2008: Materials Variable overheads 100 60% 12,00,000 144% = 160% = 144% = Rs. 17,28,000

Efficiency decline 10% 160 90%

2,50,000 144% = Rs. 3,60,000

Note: Variable overhead is a product cost and consequently if the output increases by 44%, the variable overheads will also go up proportionately with the increase in output. The other 60% increase given in the question is the increase in expense or rate or price of the overhead items like increase tariff, increase in the prices of consumables etc.