Great Lakes Institute of Management Gurgaon

Post Graduate Diploma in Management 2016-18

Cost and Management Accounting
16 November 2016
JOB COSTING
In a job-costing system, costs are assigned to a distinct unit,
batch, or lot of a product or service. In a process-costing system,
the cost of a product or service is obtained by using broad
averages to assign costs to masses of identical or similar units.

Cost poola grouping of individual cost items.

Cost tracingthe assigning of direct costs to the
chosen cost object.
Cost allocationthe assigning of indirect costs to the
chosen cost object.
Cost-allocation basea factor that links in a systematic
way an indirect cost or group of indirect costs to a cost
object.

Steps in Job Costing

The seven steps in job costing are: (1) identify the job that is the
chosen cost object, (2) identify the direct costs of the job, (3)
select the cost-allocation bases to use for allocating indirect costs
to the job, (4) identify the indirect costs associated with each
cost-allocation base, (5) compute the rate per unit of each costallocation base used to allocate indirect costs to the job, (6)
compute the indirect costs allocated to the job, and (7) compute
the total cost of the job by adding all direct and indirect costs
assigned to the job.
Two major cost objects that managers focus on in companies
using job costing are (1) products or jobs, and (2) responsibility
centers or departments.
Three major source documents used in job-costing systems are:
(1) job cost record or job cost sheet, a document that records and
accumulates all costs assigned to a specific job, starting when

work begins:
(2) materials requisition record, a document that contains
information about the cost of direct materials used on a specific
job and in a specific department; and
(3) labor-time record, a document that contains information
about the labor time used on a specific job and in a specific
department.
The main concern with the source documents of job cost records
is the accuracy of the records. Problems occurring in this area
include incorrect recording of quantity or rupee
amounts,
materials recorded on one job being borrowed and used on
other jobs, and erroneous job numbers being assigned to
materials or labor inputs.
Actual costing and normal costing differ in their use of actual or
budgeted indirect cost rates:
Actual

Normal

Budgeted

Direct

Actual

Actual

Budgeted

Indirect

Actual

Budgeted

Budgeted

Each costing method uses the actual quantity of the direct-cost

input budgeted quantity of direct cost input and the actual and
budgeted quantity of the cost-allocation base.
Under allocation or over allocation of indirect (overhead) costs
can arise because of (a) the Numerator reasonthe actual
overhead costs differ from the budgeted overhead costs, and (b)
the Denominator reasonthe actual quantity used of the
allocation base differs from the budgeted quantity.
Industries which will fall into

categories of costing Job order

costing, Process costing Hybrid Costing

A CA Firm
An

Job Costing
Oil Process

Software

Job Costing

Costing
Cold
Drink Process

Refinery
Custom

Job Costing

Producer
Movie Studio

Furniture

Costing

Manufacturer
Tyre
Process
Manufacturin
g
Text

Law Firm

Job Costing

Costing

Book Job Costing

Air

Craft Job Costing

Publisher

Manufacturin

Pharmaceutic Process

g
Management

al Company

Costing

Consulting

Job Costing

Firm
Biscuit Mfg

Advertising

Costing
Process

Job Costing

Process

Agency

Costing/

Flour Mill

Process

Catering

Hybrid
Job Costing

Paint

Costing
Process

Service
Paper Mill

Process

Repair

Costing
Job Costing

Manufacturer Costing
Hospital
Job Costing

Garage
Problem : Paras Products uses a job-costing system with two
direct-cost categories (direct materials and direct manufacturing
labor) and one manufacturing overhead cost pool. Paras allocates
manufacturing overhead costs using direct manufacturing labor
costs. Paras provides the following information:
Particulars

Budget for
Year 1

Actual results
for Year 1

Direct materials costs

Direct manufacturing
labor costs
Direct manufacturing
overhead costs

Rs 7,50,000
5,00,000

Rs 7,25,000
4,90,000

8,75,000

9,31,000

Required
1. Compute the actual and budgeted manufacturing overhead
rates for Year 1.
2. During March, the job-cost record for Job 626 contained the
following information:
a. Direct materials used

Rs 20,000

b. Direct manufacturing labor costs

Rs 15,000

Compute the cost of Job 626 using (a) actual costing and (b)
normal-costing.
3. At the end of Year 1, compute the under or overallocated
manufacturing overhead under normal costing. Why is there
no under or overallocated overhead under actual costing?
Solution
1. Actual manufacturing overhead rate = Actual manufacturing
overhead costs/Actual direct manufacturing labor costs
= Rs 9,31,000/Rs 4,90,000 = 1.9 or 190%
Budgeted

manufacturing

manufacturing

overhead

overhead

rate

costs/Budgeted

Budgeted
direct

manufacturing labor costs

= Rs 8,75,000/Rs 5,00,000 = 1.75 or 175%
2. Cost of Job 626 under actual and normal costing below:
Particular
Actual
Normal
Costing
Costing
Direct materials
Rs 20,000
Rs 20,000

Direct manufacturing labor

costs
Manufacturing
overhead
costs
Rs 15,000 x 1.9; 15,000 x
1.75
Total manufacturing costs of
Job 626
3. Total

manufacturing

15,000

15,000

28,500

26,250

63,500

61,250

overhead

allocated

under

normal

costing = Actual manufacturing labor costs x Budgeted

overhead rate
= Rs 4,90,000 x 1.75 = Rs 8,57,500
Under-allocated

manufacturing

overhead

Actual

manufacturing overhead costs Manufacturing overhead

allocated
= Rs 9,31,000 Rs 8,57,500 = Rs 73,500
There is no under or over allocated overhead under actual
costing because overhead is allocated under actual costing by
multiplying actual manufacturing labor costs and the actual
manufacturing overhead rate. This, of course equals the actual
manufacturing overhead costs. All actual overhead costs are
allocated to products. Hence, there is no under or overallocated
overhead.

Think of How to link cost in case of following

Manufacturing /Service Organisation
Hospital

University

Software

Show

Company

for

Business

Engineering

School
Room Coaching
Selling College

Tractors

College
Call Centre
like

FITJEE

Problem: The Maruti Co. uses a job-costing system at its

Gurgaon plant. The plant has a Machining Department and an
Assembly Department. Its job-costing system has two direct-cost
categories (direct materials and direct manufacturing labor) and
two

manufacturing

overhead

cost

pools

(the

Machining

Department overhead, allocated to jobs based on actual machinehours, and the Assembly Department overhead, allocated to jobs
based on actual direct manufacturing labor cost). The Year 1
budget for the plant is:
Particulars
Manufacturing
overhead
Direct manufacturing
labor cost
Direct manufacturing
labor-hours
Machine-hours

Machining
Department
Rs 36,00,000

Assembly
Department
Rs 72,00,000

28,00,000

40,00,000

2,00,000

4,00,000

1,00,000
4,00,000
Required
1. Present an overview diagram of Marutis job-costing system.
Compute the budgeted manufacturing over-head rate for
each department.

2. During February, the job-cost record for Job 494 contained

the following:
Particulars
Machining
Assembly
Depart
Department
ment
Direct materials used
Rs 90,000
Rs 1,40,000
Direct manufacturing
28,000
30,000
labor cost
Direct manufacturing
2,000
3,000
labor-hours
Machine-hours
4,000
2,000
3. At the end of Year 1, the actual manufacturing overhead
costs
were
Rs 42,00,000 in Machining and Rs 74,00,000 in Assembly.
Assume
that
Rs 1,10,000 actual machine-hours were used in Machining
and that actual direct manufacturing labor costs in Assembly
were Rs 44,00,000. Compute the over-or under allocated
manufacturing overhead for each department.
Solution
1. An overview of the product costing system is:
INDIRECT
COST
POOL

COST
ALLOCATION
BASE

COST OBJECT:
PRODUCT

DIRECT

Machining Department
Manufacturing Overhead

Assembly Department
Manufacturing Overhead

Machine Hours

Direct Manufacturing
Labor Cost

Indirect Costs
Direct Costs

Budgeted
COST manufacturing overhead divided by allocation base:
Machining overhead: Rs 36,00,000/1,00,000
= Rs 36 per
Direct Manufacturing Labor
Direct
machine hour
Materials
Assembly overhead: Rs 72,00,000/40,00,000 = 180 % direct
manufacturing labor costs
2.

Machining department, 4,000 hours x Rs

36
Assembly department 180% x 30,000
Total manufacturing overhead allocated
to Job 494
3. Particular
Actual manufacturing overhead
Manufacturing overhead allocated,
1,10,000 x Rs 36
180% x Rs 44,00,000
Underallocated (overallocated)

Rs 1,44,000
54,000
1,98,000
Machin Assembl
ing
y
42,00,0 74,00,000
00
39,60,0
00
79,20,000
2,40,00
(Rs
0 5,20,000)

Problem: Computing indirect-cost rates, job-costing. Sanjay Iyer,

the president of Tax Assist, is examining alternative ways to
compute indirect-cost rates. He collects the following information
from the budget for Year:
Budgeted variable indirect costs: Rs 20 per hour of
professional labor time
Budgeted fixed indirect costs: Rs 1,00,000 per quarter
The budgeted billable professional labor-hours per quarter are
January-March
April-June
July-September
October-December

20,000 hours
10,000
4,000
6,000

Sanjay pays all tax professionals employed by Tax Assist on an

hourly basis (Rs 60 per hour, including all fringe benefits).
Tax Assists job-costing system has a single direct-cost
category (professional labor at Rs 60 per hour) and a single
indirect-cost pool (office support that is allocated using
professional labor-hours).
Tax Assist charges clients Rs 130 per professional labor-hour.

Required
1. Compute the budgeted indirect-cost rate per professional
labor-hour using
a. Quarterly budgeted billable hours as the denominator
b. Annual budgeted billable hours as the denominator
2. Compute the operating income for the following four
customers using
a. Quarterly indirect-cost rates
b. An annual indirect-cost rate
Aashish: 20 hours in February
Amit: 12 hours in March and 8 hours in April
Nitin: 8 hours in June and 12 hours in August
Sudhir: 10 hours in January, 4 hours in September,
and 6 hours in November.
3. Comment on your results in requirement 2.
Solution
1(a)

Budgete Budg
d fixed
eted
indirect hours
costs

JanMarch
AprilJune
JulySep
OctDec
1(b)

Rs
1,00,00
0
1,00,00
0
1,00,00
0
1,00,00
0

Budgete
d fixed
indirect
cost
rate per
hour

Budgeted
variable
indirect
cost rate
per hour

Budget
ed total
indirect
cost
rate
per
hour
Rs 25

20,00
0

Rs 5

Rs 20

10,00
0
4,000

10

20

30

25

20

45

20

36.67

6,000

Rs
4,00,000

16.67
40,00
0

Rs 10

Rs 20

Rs 30

2(a) All four jobs use 20 hours of professional labor time. The only
difference in job costing is the indirect cost rate. The quarterly based
indirect job costs are:
Aashish: (20 x Rs 25)
Rs 500
Amit: (12 x Rs 25) + (8 x Rs 30)
540
Nitin: (8 x Rs 30) + 12 x Rs 45)
780
Sudhir: (10 x Rs 25) + (4 x Rs 45) + (6 x Rs 36.67)
650
Particulars
Revenues, Rs 130 x 20
Direct costs, Rs 60 x 20
Indirect costs
Total costs
Operating income

Aashis
h
Rs
2,600
1,200
500
1,700
Rs 900

Amit

Nitin

Sudhir

Rs
2,6
00
1,200
540
1,740
860

Rs
2,600

Rs
2,600

1,200
780
1,980
620

1,200
650
1,850
750

2(b) Using annual based indirect job-cost rates, all four customers
will have the same operating income:
Revenues, Rs 130 x 20
Rs
2,600
Direct costs, Rs 60 x 20
1,200
Indirect costs, Rs 30 x 20
600
Total costs
1,800
Operating income
Rs 800
3. All four jobs use 20 hours of professional labor time. Using the
quarterly-based indirect-cost rates, there are four different operating
incomes because the work done on them is completed in different
quarters. In contrast, using the annual indirect-cost rate, all four
customers show the same operating income. All these different operating
income figures for jobs with the same number of professional labor-hours
are due to the allocation of fixed indirect costs.
An overview of the Tax Assist job-costing system is:

INDIRECT
COST

Office
Support

Professional
Labor-Hours

POOL
COST
ALLOCATION
BASE

COST BJECT:
JOB

DIRECT
COST

Indirect Costs
Direct Costs

Professional

Labor
Accounting for manufacturing
overhead. Consider the
following selected cost data for the Bharat Forge co. for the
current year
Budgeted
manufacturing
Rs 70,00,000
overhead
Budgeted machine-hours
2,00,000
Actual
manufacturing
Rs 68,00,000
overhead
Actual machine-hours
1,95,000

The company uses normal costing. Its job-costing system has a

single manufacturing overhead cost pool. Costs are allocated to
jobs using a budgeted machine-hour rate. Any amount of under or
over allocation is written off to cost of goods sold
Required
1. Compute the budgeted manufacturing overhead rate.
2. prepare the journal entries to record the allocation of
manufacturing overhead.

3.

compute the amount of under

or over allocation of

manufacturing overhead. Is the amount significant? Prepare

a journal entry to dispose of this amount.
Solution
1. Budgeted manufacturing overhead rate = Rs
70,00,000/2,00,000 = Rs 35 per machine hour
2. Work-in-process control

Rs 68,25,000

To manufacturing overhead allocated

Rs
68,25,000
(1, 95,000 machine hours x Rs 35 per machine hour =
Rs 68,25,000)
3. Rs 68,25,000 68,00,000 = Rs 25,000 over allocated, an
insignificant amount
Manufacturing overhead allocated

68,25, 000

Manufacturing department overhead control

68,00, 000
Cost of goods sold

25,000

Problem: The Hero Honda Motors uses a job-costing system at

its Gurgaon plant. The plant has a Machining Department and a
Finishing Department. Hero Honda uses normal-costing with two
direct-cost categories (direct materials and direct machine-hours
as the allocation base, and the Finishing Department, with direct
manufacturing labor costs as the allocation base). The current
year budget for the plant is as follows:
Particulars
Manufacturing
overhead
Direct
manufacturing

Machining
department
Rs 1,00,00,000

Finishing
department
Rs 80,00,000

Rs 9,00,000

Rs 10,00,000

labor costs
Direct
manufacturing
labor-hours
Machine-hours

30,000

1,60,000

2,00,000

33,000

Required
1. Present an overview diagram of Hero Honda Motors jobcosting system
2. What is the budgeted overhead rate that should be used in
the machining Department? In the Finishing Department?
3. During the month of January, the job-cost record for Job 431
shows the follows:
Particulars
Machining
Finishing
departmen
departm
t
ent
Direct materials used
Rs 14,000
Rs 3,000
Direct
manufacturing
Rs 600
Rs 1,250
labor costs
Direct
manufacturing
30
50
labor-hours
Machine-hours
130
10
Compute the total manufacturing overhead allocated to Job
431.
4. Assuming that Job 431 consisted of 200 units of product,
what is the unit product cost of Job 431?
5. Amounts at the end of current year are as follows:
Particulars
Machining
Finishing
department
department
Manufacturing overhead
Rs
Rs 79,00,000
incurred
1,12,00,000
Direct
manufacturing
Rs 9,50,000
Rs 41,00,000
labor costs
Machine-hours
2,20,000
32,000
Compute the under or allocated manufacturing overhead for
each department and for the Gurgaon plant as a whole.

6. Why might Hero Honda use two different manufacturing

overhead cost pools in its job-costing system?
Solution
1. An overview of the job-costing system is:
INDIRECT
COST
POOL

COST
ALLOCATION
BASE

COST OBJECT:
PRODUCT

DIRECT
COST

Machining Department
Manufacturing Overhead

Finishing Department
Manufacturing Overhead

Machine-Hours
in Machining Dept.

Direct Manufacturing
Labor Costs
in Finishing Dept.

Indirect Costs
Direct Costs

Direct
Manufacturing
Labor

Direct
Materials

2. Budgeted manufacturing overhead divided by allocation

base:
a. Machining department:
Rs 1,00,00,000/2,00,000 = Rs 50 per machine hour
b. Finishing department:
Rs

80,00,000/40,00,000

200%

of

direct

manufacturing labor costs

3. Machining department overhead, Rs 50 x 130 hours
= Rs 6,500
Finishing department overhead, 200 per cent of Rs 1,250
=
2,500
Total manufacturing overhead allocated
9,000
4. Total costs of Job 431:
Direct costs
Direct
materials

Machining

Rs 14,000

department
- Finishing department
Direct manufacturing labor
Machining department
Finishing
department

3,000
600
1,250
18,850

Indirect costs
Machining department overhead,
Rs 50 x 130
Finishing department overhead,
200% of Rs 1,250

6,500
2,500

9,000
Total costs
Rs 27,850
The per unit product cost of job 431 is Rs 27,850/200 units = Rs
139.25 per unit
The point of this part is (a) to get the definitions straight
multiplying the actual amount of the allocation base by the
budgeted rate.
5. Particulars

Machinin Finishin
g
g
Manufacturing
overhead
incurred
Rs 79,00,00
(actual)
1,12,00,0
0
00
Manufacturing overhead allocated
2,20,000 hours x Rs 50
1,10,00,0
00
200% of Rs 41,00,000
82,00,00
_________
0
Underallocated
manufacturing
Rs
overhead
2,00,00 _________
0
Overallocated
manufacturing
Rs
overhead
3,00,0
00
Total overallocated overhead = Rs 3,00,000 Rs
Rs
2,00,000
1,00,000

6. A homogeneous cost pool is one where all costs have the

same or a similar cause-and-effect or benefits-received
relationship with the cost-allocation base. Hero Honda Motors
likely assumes that all its manufacturing overhead cost items
are not homogeneous.

Specifically, those in the Machining

Department

cause-and-effect

have

relationship

with

machine-hours, while those in the Finishing Department have

a cause-and-effect relationship with direct manufacturing
labor costs. Hero Honda Motors believes that the benefits of
using two cost pools (more accurate product costs and better
ability to manage costs) exceeds the costs of implementing a
more complex system.

Problem:

Ansal Construction assembles residential houses. It

used a job-costing system with two direct-cost categories (direct

materials and direct labor) and one indirect-cost pool (assembly
support). Direct labor-hours is the allocation base for assembly
support costs. In December Year 1. Ansal budgets Year 2
assembly-support costs to be Rs 4,000,000 and Year 2 direct
labor-hours to be Rs 80,000.
At the end of Year 2, Ansal is comparing the costs of several
jobs that were started and competed in Year 2.
Particulars
Construction
period
Direct materials
Direct labor
Direct labor-hours

Gurgaon Model
Feb-June 2004

Noida Model
May-Oct. 2004

Rs 2,12,900
Rs 72,552
1,800

Rs 2,55,208
Rs 82,820
2,020

Direct materials and direct labor are paid for on a contract basis. The
costs of each are known when direct materials are used or direct laborhours are worked. The Year 2 actual assembly-support costs were Rs
1,37,76,000, and the actual direct labor-hours were 328,000.
1.

Compute the (a) budgeted and (b) actual indirect-cost rates.

Why do they differ?

2.

What is the job cost of the Gurgaon Model and the Noida
Model using (a) normal costing and (b) actual costing?

3.

Why might Ansal construction prefer normal costing over

actual costing?

1. Budgeted

indirect

Solution
cost
rate

Budgeted

indirect

costs/Budgeted direct labor hours

= Rs 40,00,000/Rs 80,000
= Rs 50 per direct labor hour
Actual indirect cost rate = Actual indirect costs/Actual direct
labor hour
= Rs 1,37,76,000/3,28,000
Rs 42 per direct labor hour
These rates differ because both the numerator and the
denominator in the two calculations are different one based on
budgeted numbers and the other based on actual numbers.
2(a). Normal costing
Particulars
Direct costs
Direct materials
Direct labor

Gurgaon Noida Model

Model
Rs 2,12,900
72,552
2,85,452

2,55,208
82,820
3,38,028

Indirect costs
Assembly support (Rs 50 x
1,800; 50 x 2020)
Total costs

90,000

1,01,000

3,75,452

4,39,028

2(b) Actual costing

Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support (Rs 42 x 1,800; 42
x 2020)
Total costs

Rs
2,12,900
72,552
2,85,452

2,55,208

75,600

84,840

3,61,052

4,22,868

82,820
3,38,028

3. Normal costing enables Ansal to report a job cost as soon as

the job is completed assuming that both the direct materials and
direct costs are known at the time of use/work. Once the 1800
direct labor-hours are known for the Gurgaon Model (June Year 2),
Ansal can compute the Rs 3,75,452 cost figure using normal
costing. Ansal can use this information to manage the costs of the
Gurgaon. Model job as well as to bid on similar jobs later in the
year. In contrast, Ansal has to wait until the December year-end 2
to compute the Rs 3,61,052 cost of the Gurgaon Model using
actual costing.
Although not required the following overview diagram
summarizes Ansal Constructions job-costing system.

INDIRECT
COST

Assembly Support
POOL

COST
ALLOCATION
BASE

COST OBJECT:
RESIDENTIAL
HOME

Direct Labor-Hours

Indirect Costs
Direct Costs

DIRECT
COSTS
Direct
Materials

Direct Manufacturing Labor

Problem: Job-costing, consulting firm. Vaish and Associates, a

consulting firm, has the following condensed budget for Year 1.
Revenues
Total Costs:
Direct
Professional
Indirect
Consulting
Support
Operating
Income

40000000
10000000
26000000
36000000
4000000

Vaish has a single direct-cost category (professional labor) and a

single indirect-cost pool (client support). Indirect costs are
allocated to jobs on the basis of professional labor costs.
Required
1. Present an overview diagram of the job-costing system.
Compute the Year 1 budgeted indirect-cost rate of Vaish and
Associates.
2. The markup rate for pricing jobs is intended to produce
operating income equal to 10 per cent of revenues. Compute
the markup rate as a percentage of professional labor costs.
3. Vaish is bidding on a consulting job for Karims, a fast-food
chain. The budgeted breakdown of professional labor on the
job is as follows:
Professional labor
Budgeted rate
Budgeted
category
per hour
hours
Director
Rs 2,000
3
Partner
1,000
16
Associate
500
40
Assistant
300
160
Compute the budgeted cost of the Karims job. How much will
Vaish bid for the job if it is to earn its target operating income
INDIRECT

COST
of 10 per
cent of revenues? Consulting Support
POOL

Solution

COST ALLOCATION BASE

1. Budgeted indirect-cost rate =

Rs 2,60,00,000/1,00,00,000 =
Professional
Labor-Costs
26 per cent of professional labor
costs
COST OBJECT:
JOB FOR
CONSULTING
CLIENT

Indirect Costs
Direct Costs

DIRECT
COSTS
Professional
Labor

2. At the budgeted revenues of Rs 4,00,00,000, Vaishs

operating income of Rs 40,00,000 equals 10 per cent of
revenues
Mark up rate = Rs 40,00,000/1,00,00,000 = 400 per cent of
direct professional labor costs.
3. Budgeted costs
Direct costs
Director, Rs 2,000 x 3
Partner, Rs 1,000 x 16
Associate, Rs 500 x 40
Assistant, Rs 300 x 160
Indirect costs
Consulting support, 260% x 90,000

Rs 6,000
16,000
20,000
48,000

90,000

2,34,0
00
Total costs
Rs
3,24,000
Bid price to earn target operating income to revenue margin of
10 per cent can be calculated as follows:
Let R = revenue to earn target income
R 0.10R = Rs 3,24,000
0.90R = Rs 3,24,000
R = Rs 3,24,000/0.90 = Rs 3,60,000
Or

Direct costs
Indirect costs
Profit (0.40 x 90,000)
Bid price

Rs 90,000
2,34,000
36,000
3,60,000