6 Job Costing & Batch Costing

Transcription

1 6 Job Costing & Batch Costing BASIC CONCEPTS AND FORMULAE Basic Concepts 1. Job Costing : 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, labour and overhead etc Meaning of spoiled and defective work under job costing:- Spoiled :- Produced units can not be rectified. Defective:- Units can be rectified with some additional cost. 2. Batch Costing: This is a form of job costing. Under job costing, executed job is used as a cost unit, whereas under batch costing, a lot of similar units which comprises the batch may be used as a cost 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. 3. Economic Batch Quantity: There is one particular batch size for which both set up and carrying costs are minimum. This size is known as economic or optimum batch quantity. Question 1 Describe job Costing and Batch Costing giving example of industries where these are used? Job Costing: It is a method of costing which is used when the work is undertaken as per the customer s 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.

2 6.2 Cost Accounting 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. Question 2 Distinguish between Job Costing & Batch Costing? 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? The main points which distinguishes job costing and process costing are as below: Job Costing Process Costing (i) A Job is carried out or a product is produced by specific orders. The process of producing the product has a continuous flow and the product produced is homogeneous. (ii) Costs are determined for each job. Costs are compiled on time basis i.e., for production of a given accounting period for each process or department. (iii) Each job is separate and independent of other jobs. Products lose their individual identity as they are manufactured in a continuous flow. (iv) Each job or order has a number and The unit cost of process is an average cost

3 Job Costing & Batch Costing 6.3 costs are 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. for the period. 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. Question 4 Define Product costs. Describe three different purposes for computing product costs. 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) Preparation of financial statements: Here focus is on inventoriable costs. (ii) 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. (iii) 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. Question 5 In Batch Costing, how is Economic Batch Quantity determined? 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

4 6.4 Cost Accounting 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. 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, 2DS C D = Annual demand for the product S = Setting up cost per batch C = Carrying cost per unit of production per annum Question 6 A factory incurred the following expenditure during the year 2007: (`) Direct material consumed 12,00,000 Manufacturing Wages 7,00,000 Manufacturing overhead: Fixed 3,60,000 Variable 2,50,000 6,10,000 25,10,000 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 by 10% on account of recruitment of new workers. (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. Ascertain the cost of production and selling price. Budgeted Cost Sheet for the year 2008 Particulars Direct material consumed 12,00,000 Add: 44% due to increased output 5,28,000 17,28,000 Amount (`)

5 Job Costing & Batch Costing 6.5 Less: 6% for decline in price 1,03,680 16,24,320 Direct wages (manufacturing) 7,00,000 Add: 60% increase 4,20,000 11,20,000 Prime cost 27,44,320 Manufactured Overhead: Fixed 3,60,000 Add: 20% increase 72,000 4,32,000 Variable 2,50,000 Add: 60% increase 1,50,000 4,00,000 8,32,000 Cost of production 35,76,320 Add: 1/9 of Cost or 10% on selling price 3,97, Selling price 39,73, Production will increase by 60% but efficiency will decline by 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 `3,60, % = 5,76,000. Hence, total costs shall be `37,52,320 and profit shall be 1/9 th of `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 100 Increase in :60%= 160% Efficiency decline 10% % = 144% Materials 12,00, % = `17,28,000 Variable overheads 2,50, % = `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

6 6.6 Cost Accounting Question 7 A Company produces two joint products P and Q in 70 : 30 ratio from basic raw materials in department A. The input output ratio of department A is 100 : 85. Product P can be sold at the split of stage or can be processed further at department B and sold as product AR. The input output ratio is 100 : 90 of department B. The department B is created to process product A only and to make it product AR. The selling prices per kg. are as under: Product P ` 85, Product Q ` 290, Product AR ` 115 The production will be taken up in the next month. Raw materials 8,00,000 Kgs. Purchase price `80 per Kg. Deptt. A Deptt. B (`) Lacs (`) Lacs Direct materials Direct labour Variable overheads Fixed overheads Total Selling Expenses: ` in Lacs Product P Product Q Product AR Required: (i) Prepare a statement showing the apportionment of joint costs. (ii) State whether it is advisable to produce product AR or not. Input in Deptt. A 8,00,000 kgs. Yield 85% Therefore Output = 85% of 8,00,000 = 6,80,000 kgs. Ratio of output for P and Q = 70 : 30. Product of P = 70% of 6,80,000 = 4,76,000 kgs. Product of Q = 30% of 6,80,000 = 2,04,000 kgs.

7 Job Costing & Batch Costing 6.7 Statement showing apportionment of joint cost P Q Total Product kgs. 4,76,000 2,04,000 Selling price per kg. ` ` lakhs ` lakhs ` lakhs Sales Less: Selling expenses Net sales Ratio 40% 60% 100% ` lakhs Raw materials (8,00,000 kgs. ` 80) 640 Process cost of department A Apportionment of Joint Cost (In the ratio of Net Sales i.e. P : Q., 40% : 60%. Joint Cost of P = ` 316 lakhs Joint Cost of Q = ` 474 lakhs Statement showing the profitability of further processing of product P and converted into product AR Product AR Output = 90% of 4,76,000 kgs. = 4,28,400 kgs. ` lakhs Joint costs Cost of Department B Selling expenses Sales value (`115 4,28,400) Profit ( ) If P is not processed profitability is as under. ` lakhs Sales Less: Joint expense Profit Further processing of product P and converting into product AR is beneficial to the company because the profit increases by ` lakhs ( ).

8 6.8 Cost Accounting EXERCISE Questions for Practice 1. Distinguish between job costing and process costing? : Refer to Chapter No. 6 i.e. Method of Costing (I) of Study Material 2. (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 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 `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 Material Labour (Numbers) Cost Cost (`) (`) January ,250 6,250 2,500 February ,500 9,000 3,000 March ,000 5,000 2,000 Labour is paid at the rate of `2 per hour. The other details are: Month Overheads Total Labour Hours January ,000 4,000 February ,000 3,000 March ,000 5,000 : (a) Refer to Chapter No. 6 i.e. Method of Costing (I) of Study Material (b) Batch (Numbers) 1,250 1,500 1,000 Cost/Unit (Rs.) Profit/Unit (Rs.) In a factory in a month 3 new jobs were commenced. The materials and labour used on them were as follows : Job 1 Job 2 Job 3 (`) (`) (`) Materials 4,000 4,500 2,700 Labour 5,100 8,300 1,400 Works overheads is charged at 60% of labour and office 10% of works cost. Jobs 1 and 2 were completed but job 3 was still in progress. Prepare the job Accounts. : Cost at the end of month : `13,376; `19,558 and `4,100.