Study Note - 5

METHODS OF COSTING

This Study Note includes

5.1 Job Costing

5.2 Batch Costing
5.3 Contract Costing
5.4 Process Costing – Joint & By-Products
5.5 Operating Costing or Service Costing – Transport, Hotel and Hospital

5.1 JOB COSTING

Methods or Types of Costing

Costing is the technique and process of ascertaining costs. In order to do the same, it is necessary to
follow a particular method of ascertaining cost. Different methods of costing are applied to different
industries depending upon the type of manufacture and their nature. Broadly the costing methods are

Job Order Costing:

(iii) Large enterprises manufacturing a variety of products.

COST ACCOUNTING 233

Methods of Costing

(i) Jobbing concerns:

(iii) Large enterprises manufacturing a variety of products:

Procedure for Job Cost Accounting:

On receipt of an order from the customer or an indication from the sales department for manufacturing

product. The production order constitutes the authority for work. Usually a production order contains

The production order usually lays down only the quantities of materials required and the time allowed

cost sheet on which the cost of the order is compiled.

Production orders may, in general, be of three types:

(iii) Components or parts production type.

(i) Assembly type of order:

234 COST ACCOUNTING

(ii) Sub-assembly type of order:

(iii) Components or parts production type:

are issued.

Copies of Production Orders May be Distributed as Follows:

(a) One copy to the stores for provisioning and issue of materials on demand.

materials and employing men and machines on the operations.

and the aggregate cost, in summary, shown in the main cost sheet.

Material Cost:

or incorrect materials are returned from the shops to the stores on materials return notes. Scrap and
waste arising in the course of manufacture are returned in a similar manner. The materials requisitions,
materials return notes and materials transfer notes are ‘costed’ in accordance with the methods of

Labour Cost:

Manufacturing Overhead:

Completion of Jobs:

Work-in-Progress:

COST ACCOUNTING 235

Methods of Costing

Cost Control in Job Order System:

if any.

Advantages of Job Costing:

Limitations of Job Costing:

(c) The cost as ascertained, even where they are compiled very promptly, are historical as they are
compiled after incidence.

Reports in Job Costing System:

236 COST ACCOUNTING

If cost estimates are developed, a cost variance report showing the deviations of actual costs from

Illustration 1:

Particulars
Materials 12.08
Direct Wages – 22 hours at 25 paise per hour 5.50
Department A – 10 hours,
B – 4 hours

17.58
5.86
23.44

Particulars Particulars
Materials Used 77,500
A 2,500
A 5,000 B 4,000
B 6,000 C 1,000
C 4,000 Selling Costs 30,000

Solution

Factory Overhead Rates

Particulars Department
A B C
`
Factory Overheads 2,500 4,000 1,000
20,000 24,000 16,000
Factory Overhead Rates per hour 0.125 0.167 0.063

30,000
1,00,000

COST ACCOUNTING 237

Methods of Costing

Cost Sheet

Particulars
Materials 12.08

Dept. A 2.50
Dept. B 1.00
Dept. C 2.00 5.50
17.58

Dept. A (10 hours. @ 0.125) 1.25

Dept. B (4 hours. @ 0.167) 0.67
Dept. C (8 hours. @ 0.063) 0.50 2.42
Works Cost 20.00
6.00
Cost of Sales 26.00
2.60
28.60
Illustration 2:
A work order for 100 units of a commodity has to pass through four different machines of which the
1.25, Machine Q – 2.50, Machine R – 3 and Machine S – 2.25
8,000 and Wages 500.

to stores.

price of a unit of commodity ready for sale.

Solution
Statement showing the selling price of a unit

Particulars
Materials used ( 8,000 – 400) 7,600
Direct Wages 500
8,100

1.25 per hour 250

238 COST ACCOUNTING

 2.50 per hour 400
3 per hour 720
2.25 per hour 1,667
Works Cost
5,860
15,627
15,627) 78
Total Cost of the work order
3,110

Note

the value of scrap from the cost of production.

Illustration 3:

4,20,000, Factory overhead

cost rates prevalent in the previous year.

Solution

Particulars
Direct Materials
Direct Wages 7,50,000
16,50,000
4,50,000
Works Cost 21,00,000
4,20,000
25,20,000
5,25,000
Cost of Sales 30,45,000

Sales 36,54,000

COST ACCOUNTING
Methods of Costing

Estimated price of work order

Particulars
Direct Materials 12,00,000
7,50,000

4,50,000
Works Cost 24,00,000
4,80,000
28,80,000

Total Cost 38,40,000

7,68,000
46,08,000
Illustration 4:
A manufacturing company is divided into three production departments – A, B and C. All production is
to customers’ orders. All orders are dissimilar and they go through all the three departments.

Particulars Dept A Dept B Dept C Total

Direct material 1,80,000

40,000 20,000 30,000
Indirect manufacturing costs 20,000 40,000 30,000

Particulars
Direct material 1,000

Department A 120
Department B 280
Department C 200 600
Indirect manufacturing Costs 600
2,200

thorough investigation.

correct than the company’s procedure.

240 COST ACCOUNTING

Solution

Particulars Departments
A B C
Indirect Mfg. Cost ( ) 20,000 40,000 30,000
) 40,000 20,000 30,000

Revised Cost of Job

Particulars
Direct Materials (Given) 1,000

Dept. A 120
Dept. B 280
Dept. C 200 600
1,600

Dept. A 60
Dept. B 560
Dept. C 200 820
Total Cost 2,420

Illustration 5:

price.

Particulars )
Materials 70
Direct Wages 18 hours at 2.5 45

5
120
40
160

COST ACCOUNTING 241

Methods of Costing

Particulars Particulars
Materials 1,50,000 Sales 2,50,000

Dept. X 10,000
Dept. Y 12,000
Dept. Z 8,000 30,000
Special stores items 4,000

Dept. X 5,000
Dept. Y
Dept. Z 2,000 16,000
2,00,000
50,000
2,50,000 2,50,000
20,000 50,000
30,000
50,000 50,000

It is also noted that average hourly rates for the 3 departments, X, Y and Z are similar.

Solution
Calculation of Departmental Overhead Rates

Particulars Departments
X Y Z

(i) Direct Wages 10,000 12,000 8,000

(ii) Rate of wages per hour 2.5 2.5 2.5
(iii) Hours 4000 4800 3200
5000 2000
(v) Department Overhead Rates per hour (iv ' iii) 1.250 1.875 0.625

242 COST ACCOUNTING

 Revised job cost sheet

Particulars
Materials 70

Dept. X 20
Dept. Y 15
Dept. Z 10 45
5
120

Dept. X 10.00
Dept. Y 11.25
Dept. Z 2.50 23.75
Total Cost 143.75
28.75
172.50

Illustration 6 :

was prepared as under.

Materials Factory Overheads

Applied ( )
115 1,325 400 hrs 800 640
118 810 250 hrs. 500 400
120 765 300 hrs 475 380
2,900 1,775 1,420

Material requisitions No. Cost ( )

54 118 300
55 118 425
56 118 515
57 120 665
58 121
124 720
3,535

COST ACCOUNTING 243

Methods of Costing

NUMBER OF HOURS
JOB NO.
SHOP A SHOP B
115 25 25
118 30
120 75 10
121 65
124 20 10
275 75

Waiting for material 20 10

10 5
Idle time 5 6
Overtime premium 6 5
316 101

3 while at shop B it is 2 per hour. The factory overhead is

Solution:
Calculation of selling price of the Job

115 118 120

Costs in September
Material 1,325 810 765
800 500 475
Overheads 640 400 380
Total (A) 2,765 1,710 1,620
Costs in October
Material 515 665

125
330
245
100 264
Total (B) 225 1,106
2,726
272.6

651.80 620.18
3,721.08

244 COST ACCOUNTING