TOPIC 3 JOB ORDER COSTING

CHAPTER 3
JOB ORDER

COSTING

CHAPTER 3
JOB ORDER COSTING

MADAM SITI ZAKIAH

OBJECTIVES DPA5023 Cost and Management Accounting 1
General Objective Chapter 3 Costing Methods : Job Order Costing
Specific objectives
CHAPTER 3 COSTING METHODS

3.1 UNDERSTAND JOB ORDER COSTING

: to understand and apply the methods of costing and job order costing.
: at the end of the unit you will be able to :

 explain the various methods of costing
 define job order costing correctly.
 explain the procedure in accumulating cost in job order costing
 prepare the job cost sheet.

3.1.0 INTRODUCTION

As stated earlier, the term ‛costing’ refers to the techniques and processes of determining cost
of a product manufactured or service rendered. Different methods are applied in business
enterprises to ascertain cost depending upon the nature of the product, production method and
specific business conditions. The following are some of the principal methods of costing.

3.1.1 METHODS OF COSTING

Generally, costing methods can be divided into:

i) Specific Order Costing

This is a method applying for a certain specific order. The CIMA defines the method as
‛the category of basic costing methods applicable where work consists of separate
contracts, jobs or batches, each of which is authorized by a special order or contract’.
Within this category falls :

a) Job Costing

This method is used when work is done according to customer’s order. Each job is
often of a short duration. Work must be planned and scheduled because there is no
predetermine pattern of work. This method is popular among enterprises that are
engaged in house building, ships-building, machinery production and repair. In job
costing all cost of directly charge to the specific job of the product.

b) Batch costing

Batch costing is based on the concept of contract costing. This method is used to
determine the cost of a group of identical or similar products. The batch consisting of
similar products refers to the unit and not the single item within the batch. This method
can be usefully applied for the production of nuts and bolts, components and other
items which are manufactured in distinct batches.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

c) Contract Costing

This method is similar to job costing except that the cost unit is large and work is of a
longer duration. The work carried out is of a constructional nature.

ii) Continuous / Operation Costing

This method applies to repetitive or continuous operation. The CIMA define the method as
the category of basic costing methods applicable where standardized goods or services
result from a sequence of repetitive and more or less continuous operations or processes
to which costs are charged before being average over the units produced during the
period. Within this category falls :

a) Process Costing

This costing method is used in industries where manufacturing is done continuously. It
is difficult to trace the costs to specific units. The total cost is the average of the
number of units manufactured. The units of output are more or less uniform.

b) Service Costing

This is used where standardized services are provided. Where the service is not
standardized, service costing may be used if it is convenient to regard it as such.
Under this method it is necessary to find the average cost of the service provided by
the cost centre during the period. For example in transport business, attention is given
to payload and length of journey in defining the cost unit which may be tonnage mile or
passenger mile. The cost centre needs to be defined. In transport business, the cost
centre may be vehicles, garages, vehicles maintenance and supervisors

3.1.3 CHARACTERISTICS OF JOB ORDER COSTING

After you have understand the definition of job costing, now we move to characteristics of job
order costing.

a) Job order costing is known by different names such as specific order or productionorder.

b) Under the job costing systems, direct material and direct labour costs are identified with
and charged to specific jobs on which they are incurred. Indirect manufacturing cost which
cannot be traced to specific jobs are apportioned among the jobs worked on during the
period through a predetermined overhead rate.

c) Unit cost is computed by dividing total manufacturing costs per job order by the number of
good units produced. Cost of a units can be a job order, an individual unit or even a batch
of a product.

d) Job cost sheets can be used to control efficiency and estimate future work.

e) Each job cost sheets have a number of the job.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

3.1.4 PROCEDURE IN ACCUMULATING COST

The focal point of a job order cost system is the cost sheet on which charges for direct
materials, direct labour, and indirect manufacturing costs can be accumulated as work on a job
order progresses.

i) Production Order

Each order received is given a production or work order number by the production control
department. Instructions will be issued to the factory by means of a production order to
complete the job or other according to the job specification prepared by the production
control department.

The production orders may be oral instructions (as in small business) or detailed written
instructions. The instructions may contain the date the order was prepared, job other
number, number of units to be made and their description, date to start and complete work,
materials required, sequence of production operation and authorized signature (see figure
3.1.1). The production order number is a means of identifying costs relating to an order.

PRODUCTION ORDER Number Order No :
Machine No :
Date to commence: Account No :
Date promised: Operation No :
Date completed: Department No :
Quantity required: Labour
Material Parts
Required Hours
Quantity Name Estimate
Work Detail

RM

Material…………

Labour…………..
Overhead………..
Description Inspected Total…………….

Signature
Date

Figure 3.1.1 : Production Order

ii) During Production Process

During a production order, a cost sheet identified by a job number is set up in the
accounting department. It is in summary form. It also records the job number and other
specifications and descriptive information as given in the production order.

The cost sheet that has been designed to record and summarize cost is grouped under
three major headings: material costs, labor costs and applied manufacturing overhead
costs. A job cost account is prepared by the cost office. The job cost account will record
the materials and wages incurred. Figure 3.1.2 presents a specimen of a job cost sheet.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

Date Ref. Dept Material Labour Overhead Misc. Total Remarks

Qty RM Hrs RM RM RM cost

Estimate Actual

Summary Material xx xx

Labour xx xx
Overhead xx xx

Misc. xx xx

Total cost xx xx
Price xx
xx
Profit xx xx

Signature:

Date:

Figure 3.1.2 : Job Cost Card

iii) Production Completed

When the job is, a finished goods note should be prepared by the production department.
Work is usually inspected by an inspector. Thee finished job is sent to the store. The
finished goods note is sent to the cost office. The job cost account will then be closed. The
cost is then transferred to the cost of sales account. The job must absorb the production,
administration, selling and distributions overhead. The profit or loss on the job is then
calculated.

3.1.5 DETERMINE PRODUCTIONS PRICE

Recording Cost on Job

i) Job Cost Card

From the information below, we will determine the selling price to be charged by using job
cost card.

Example 3.1.1

Andrew Manufacturing Co, Ltd. produces grinding machines. A customer has asked
Andrew Manufacturing Co, Ltd to quote a price for making the machine. The following

estimates were available :

Direct material cost RM500
Direct wages:

Machining 300 hours at 50 cents.
Assembling 200 hours at 25 cents.

Overhead is absorbed at 20 cents per direct labour hour.

Selling and distribution overhead is 25% of production cost

Profit is 25% of total cost.

Prepare the job cost card indicating to be quoted.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

Solution to example 3.1.1 :

JOB COST CARD

Name of customer: Commenced:
Particulars: Completed:
Order No:

Direct material cost RM
500
Dire ct wages : 200
Machining 300 hours × RM0.50 = RM 150

Assembling 200 hours × RM0.25 = RM 50

500 hours RM200

Production overhead : 500 hours at RM0.20 100
Production cost 800

Selling and distribution overhead: 200
25% × RM800 1,000

Total cost 250
Profit 25% × RM1,000
1,250
Selling price

ii) Cost ledger account

Another method of calculating selling price is by using cost ledger account.

Example 3.1.2 :
The data below relate to a single accounting period in jobbing engineering works.

Extracts from job cost cards

Opening chargedclosing WIP

WIP during period
( RM ) ( RM ) ( RM )
Materials 10,620 32,840 12,630

Labour 15,250 53,260 16,170
Production overheads 10,830 33,520 9,260

The financial accountant supplies the following information relating to the same period:

Materials purchased RM
Selling and administration overheads 39,150
Production overheads 12,780
Sales 30,620
146,330

The opening stock of material was RM9,200.
All completed jobs are invoiced immediately to customers.
The cost department recovers selling and administrative overheads at the rate 10% of the
cost of completed jobs.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

Using the above information, you are required to write up the cost ledger and prepare a
costing profit and loss account for the period.

Solution to example 3.1.2 :
COST LEDGER

Financial ledger Control Account

Sales RM Purchases RM
Balance C/F 14,6330 Sales & distribution ohd. 39,150
53,570 Production overhead 12,780
Wages 30,620
199,900 Profit 53,260
18,190
Balance 199,900

53,570

Work in progress control

RM Cost of sales RM
Balance B/F 36,700 118,260
Material 32,840 Balance C/F 38,060
Wages
53,260
Production overheads
33,520

156,320 156,320

Balance B/F 38,060

RM Store control RM
Balance B/F 9,200 Work in progress 32,840
balance C/F 15,510
Financial ledger control 39,150

48,350 48,350

Balance B/F 15,510

Production overhead control

Financial ledger control RM Work in progress RM
Overhead adjustment 30,620 33,520

2,900

33,520 33,520

RM Wages control RM
Financial ledger control 53,260 work in progress 53,260
53,260
53,260

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

Sales & Distribution Overhead Control

RM RM
Financial ledger control 12,780 Cost of sales 11,826

Overhead adjustment 954

12,780 12,780

Cost of sales
RM RM
Work in progress 11,8260 130,086
130,086
Sales & distribution overhead 11,826 Profit & loss account

130,086

Sales & distribution Overhead adjustment RM
overhead RM 2,900
2,900
Profit & loss account 954 Production overhead
1,946
2,900

Cost of sales Costing Profit and Loss Account RM
Profit and loss account RM 146,330

130,086 Sales 1,946
18,190 Overhead adjustment
148,276
148,276

KEY FACTS

1. Costing methods are designed to suit the method of manufacture or processing or the way services
are supplied.

2. Whatever method is used, it will employ basis costing principles relating to classification, analysis,
allocation and apportionment.

3. The two main categories of costing method are specific order costing and continuous operating (or
unit) costing.

4. Specific order costing can be sub-divided into job costing, contract costing and batch costing.
5. Continuous operating or unit costing can be sub-divided into service costing, and process costing

which include joint product and by-product costing.
6. Job costing is employed where work is done to customer’s requirement e.g. in a factory or

workshop.
7. All cost incurred must be charged to the job, usually onto the job cost card.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

8. Prime cost are gathered from labour and material cost. Overhead can be charged to the job either
using labour or machine hour absorption rates.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

ACTIVITY

1. Cik Su Ltd. undertook three jobs in January 2002. All jobs were started in January 2002. The
costs associated with the job for the month of January were as follow ;

Materials issued from store Dep T Dep P Dep M
Materials returned to store RM RM RM
Special materials purchased
Direct wages 3,000 7,000 5,000
30 70 -
100 -
600 300
2,000 400

It is estimated that the overhead for 2002 as RM50,000 and the direct labour hours as 25,000.
Overhead is to be absorbed on a direct labour hour basis.

Direct workers are to be paid RM1 per hour.

Prepare from the above data the tabulated cost cards for Department T, P, and M.

2. Zima Ltd., absorbs its production by using predetermined rates – a percentage on direct labour cost
for Department P and machine hour rate (calculated to three decimal places) for Department Q.

The estimates made at the beginning of the financial year with ended on 31 October were as

follows:

Dept. P Dept. Q

Direct labour cost RM450,000 RM150,000

Production Overhead RM517,500 RM922,500

Direct labour 172,500 hrs 40,000 hrs
20,000 hrs 180,000 hrs
Machine hour

For the month of October, the costs sheet for job No. 186 shows the following information:

Materials used Dept. P Dept. Q
Direct labour
Direct labour RM200 RM800
Machine hour RM360 RM190
120 hrs 47.5 hrs
20 hrs 260 hrs

Following the end of the financial year it was ascertained that actual production overhead incurred
by Department P was RM210 and that incurred by Department Q was RM1,400.

You are required to:
a) Calculate the overhead absorption rates for each of the departments.
b) Determine that total production Overhead cost be charged to Job No. 186 for October.
c) Show the over/under absorbed overhead for each department and for the company as a whole

for the year ended 31 October assuming that actual direct labour cost and machine hours
worked were as originally estimated.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

3. Top Ten Group manufactures equipments for the local market. The data for the period ended 30
September 2006 is as follows :

Budgeted overhead Machining Department Finishing Department
Actual direct labour hours RM130,000 RM100,000
Budgeted direct labour hours 10,000 hours 12,000 hours
Actual machine hours 10,500 hours 12,500 hours
Budgeted machine hours 13,800 hours 9,500 hours
Basis of overhead absorption rate 13,000 hours 9,000 hours

Machine hours Direct labour hours

During the first quarter of year 2006, the company received two orders for Job no 68 and Job no
69. The following data relates to the two jobs :

Direct material : A110 Job no 68 Job no 69
B120
RM3,000 RM3,200
Direct labour : Machining (RM2.50/hour) RM4,200 RM4,400
Finishing (RM3.20/hour)
1,000 hours 1,100 hours
Hire of special machine 900 hours 1,030 hours
Administrative expenses RM2,400
15% of factory cost -
Machine hours : Machining 20% of factory cost
Finishing 642 hours
500 hours 728 hours
Profit 20% on selling price 515 hours
25% on total cost

You are required to prepare job cost sheet showing the prime cost, total cost and selling price for
Job no 68 and Job no 69.

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

4. Annie Tailor is a company which directly involve in a tailoring business. The business has 3
departments consist of measuring, cutting and sewing. Budgeted production overhead for the year
2008 is as follows :

Overhead Measuring Departments Sewing
Overhead Absorption RM5,940 Cutting RM14,000
1,800 labour hour RM7,700 2,800 machine hour
2,200 labour hour

There are also fixed expenses which are considered as administrative overhead and need to be
paid every month:

Salary for supervisor RM1,100

Rental 500

In May 2008, the business received special order from a boutique to produce 400 baju kurung and
the special order no is BK1510. The information regarding BK1510 is as follows :

Direct material Measuring Departments Sewing
Direct wages per hour - Cutting RM24,000
Labour hours - RM5.25
Machine hours RM3.35 RM3.50
200 400 1,800
- - 800

For the order, the business hire special printing sewing machine RM200. Selling and distribution
expenses charged based on 5% of prime cost.

You are required to:

a) calculate the overhead absorb for each department. (3 marks)

b) prepare the Cost Statement for job order No. BK1510 (18 marks)

c) calculate the selling price for each baju kurung if the required profit margin is 20% over the total
cost. (4 marks)

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

5. Citra Nusa Co. produce glove for local hospital in Klang area. They have two production departments

in the production process. Design Department is responsible to produce the glove while Inspection
Department is responsible to check whether the glove produced meet the requirement set by their
customers. Below is the estimated cost incurred by Citra Nusa Co. for the year 2009.

Direct wages Design Department Inspection Department
Overhead
Labour hours RM72,000 RM160,000
Machine hours RM150,000 RM55,000

25,000 31,200
7,800 5,500

Citra Nusa Co. is using overhead absorption rate in order to allocate the cost of overhead for each
department. Overhead for Design Department is absorb based on labour hour while overhead for
Inspection Department is absorb based on machine hour.

In March 2009, Citra Nusa Co. received order from Klang Hospital to produce 500,000 gloves and
the following is information regarding the order:

Direct material Design Department Inspection Department
Direct wages
Labour hours RM172,000 RM260,000
Machine hours RM275,000 RM115,000

27,600 30,100
8,700 6,100

You are required to calculate:

i) The overhead absorption rate for each department and the overhead absorb for the order
received by Citra Nusa Co. in March 2009. (11 marks)

ii) The total cost for the order above. (7 marks)

iii) If Citra Nusa Co. targeted 20% profit margin from the total cost, calculate the selling price for
each unit glove that will be charged to Klang Hospital. (7 marks)

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

6. Final exam – July 2006

Syarikat Andalusia Tsunami Backery manufactures cakes and cookies. The budgeted overhead for
year 2005 as follows :

Department Budgeted Overhead Overhead Absorption
Mixing RM15,000 5,000 labour hours
Moulding RM20,000 5,000 labour hours
Baking RM24,000 6,000 labour hours
RM8,000 500 labour hours
Decorating

The business received order from a company to produce 1,500 marble cakes and this special order
had been numbered as KM 2735. The cost related to the order as follows :

Raw materials RM2,250
Labour : 80 hours at Mixing Department @ RM1.50/hour

100 hours at Moulding Department @ RM1.00/hour
200 hours at Baking Department @ RM2.00/hour
50 hours at Decorating Department @ RM0.50/hour

The business have to pay RM1,000 for special hire of machine for moulding. Time taken for
moulding was 42 machine hours.

You are required to calculate :
1. manufacturing cost and total cost

2. cost per unit for the order

3. profit if sales price was RM6.00 per unit

(25 marks)

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

7. Final exam – July 2007

Syarikat Indahtulisan produced stationeries. The company has 3 production departments and 2
service departments. The following is the budgeted expenses for the production :

Item PRODUCTION DEPARTMENT SERVICE DEPARTMENT
AB
Indirect materials I II III
Indirect labour RM1,500 RM2,000
Materials RM7,000 RM5,000 RM8,500 RM2,500 RM3,000
Direct labour
Depreciation RM5,000 RM2,500 RM6,500
Direct labour hour
Maintenance RM13,500 RM14,000 RM12,500

RM15,000 RM9,500 RM19,000

RM2,000 RM3,900 RM2,000 RM700 RM1,000
RM800 RM1,000
4,000 hours 4,000 hours 4,000 hours

RM1,500 RM1,000 RM2,000

Overhead cost at service departments distribute to production departments as follows :

Production Department A PRODUCTION DEPARTMENT SERVICE DEPARTMENT
Production Department B I II III AB
- 10%
45% 15% 30%
20% 35% 25% 20% -

The company used step method for re-distribute the overhead cost from service department.
Overhead for Production Department absorbed based on percentage of labour cost.

You are required to :

a) determined production overhead cost after re-distribute the overhead cost from Service

Department. (11 marks)

b) determined overhead absorbed for each Production Department. (4 marks)

c) calculate the total cost for order no. KR678 based on the following data :

Raw materials Production Department I RM3,500
Direct Labour Production Department II 4,000
Carriage cost Production Department III 2,500
Production Department I 5,000
Production Department II 3,000
Production Department III 6,000
1,500

(8½ marks)

d) calculate the selling price for order no. KR678 if profit targeted was 20% (1½ marks)

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

8. Final Exam – January 2008

Sporty Wear Co. sold and received order for sport wears. The company has 2 production
departments responsible for all orders. The following are the budget for year 2005 :

Department A Department B

Manufacturing overhead RM80,000 RM100,000
Direct labour RM120,000 RM150,000
Direct labour hour 20,000 hours 40,000 hours
Machine hour 16,000 hours 25,000 hours

The company used overhead absorption rate to absorb department overhead for all job orders.
Overhead for Department A absorbed based on machine hour and direct labour hour for
Department B.

The company received an order no. K 812. The following related to the order :

Department A Department B

Raw materials RM6,200 RM4,500
Labour RM8,000 RM7,500
Direct labour hour 80 hours 200 hours
Machine hour 300 hours 120 hours

Calculate :
a) overhead absorption rate for each department and overhead absorbed for order no. K 812.

b) total cost for job K 812.

c) selling price for order K 812 if profit targeted was 30% from the total cost.

(25 marks)

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

9. Final Exam – July 2008

Joe Jambul Enterprise produced wood furniture. In the month of June, the company received a
special order and it was numbered as 777. The following cost related to the job :

Raw materials : Department A RM2,400
Department B RM240
Department C RM60

Direct labour : Department A 30 hours at RM24 per hour
Department B 25 hours at RM20 per hour
Department C 10 hours at RM16 per hour

Machine hour : Department A 40 hours
Department B 30 hours
Department C 20 hours

Production Overhead Department A RM10 per machine hour
Absorption rate Department B RM20 per direct labour hour
Department C 20% from Prime Cost

Additional information :

i. The company hired a well known carpenter for his design and he was paid RM1,600.
ii. Administrative, sales and distribution expenses was charged by 20% from manufacturing cost.
iii. The profit maintained at 25% from sales price.

You are required to prepare Cost Statement and calculate sales price for job order no. 777.
(25 marks)

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

10. Final Exam – July 2009

Rising Connection Manufacturing Co. uses the basis below to absorb its overhead costs to each
job :

Department A - Machine hours
Department B - Direct labour hours
Department c - Direct material costs

The company estimates the costs below for the year ended December 2009 :

Production overhead (RM) Department A Department B Department C
Direct labour (RM)
Direct material (RM) 16,000 22,000 10,000
Direct labour hours 7,250 9,200 4,500
Machine hours 6,000 9,500 3,250
8,500 10,500 5,000
4,000 6,295 900

Information for Job No. 260 per unit is as follows :

Direct material (RM) Department A Department B Department C
Direct labour (RM) 6.25 2.00
Direct labour hours 4.75 11.00 4.50
Machine hours 7.50 7 3
2 0.5
5
3

You are required to :
(a) Calculate overhead absorption rate for each department.

(b) Calculate total overhead absorbed from each department.

(c) Calculate total costs if 50 units are produced.

(d) Determine the selling price if profit is 15% on total costs.

(25 marks)

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DPA5023 Cost and Management Accounting 1
Chapter 3 Costing Methods : Job Order Costing

11. Final Exam – January 2010

Syarikat Assy Raya obtains order to produce item TY07. The company use pre-determine overhead
rate to calculate overhead in job order No. TY07-3201. Department MM use labour hour while
Department NN use machine hour as a basic overhead absorption rate. The budgeted for both
departments is as follow:

Direct Labour Cost Department MM Department NN
Factory Overhead RM180,000 RM60,000
Direct Labour Hour RM96,000 RM24,000
Machine Hour 24,000 hours 16,000 hours
12,000 hours 12,000 hours

Record of job costing for ordering job No. TY07-3201 is:

Direct Material Cost Department MM Department NN
Direct Labour Cost RM6,000 RM2,000
Direct Labour Hour RM3,600 RM1,200
Machine Hour 120 hours 60 hours
80 hours 40 hours

Based on the above information you are required to calculate:

a. Overhead rate for each department. (4M)
b. Absorption overhead for work No. TY07-3201. (4M)
c. Cost per unit if 15 units are produced. (17M)

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