A PROJECT REPORT ON

JOB ORDER COSTING

SUBMITTED BY

SONALI RAMBHAROSH WADATE

M.COM PART –II (SEM-III)

(2019-20)

UNDER THE GUIDANCE OF

PROF. DEEPAK UKIDAVE

KET’S V.G.VAZE COLLEGE OF

ARTS, SCIENCE AND COMMERCE
MITHAGAR ROAD, MULUND (E),
MUMBAI-400 081
 DECLARATION

I MS. Sonali Rambharosh Wadate of V.G.Vaze College of MCOM PART-

II( Advance Accountancy) Sem III hereby declare that I have completed this
project on Job Order Costing in the Academic Year 2019-20. The information
submitted is true and original to the best of my knowledge.

Date:-

Signature of Student
(MS. SONALI WADATE)
 ACKNOWLEDGEMENT

I have a great pleasure in presenting my project on “JOB ORDER COSTING”.

I would sincerely like to give a heartful acknowledgement and thanks to our
principal Dr. B.B.Sharma and our chief co-ordinator and Professor Mr. Deepak
Ukidave, who gave me an opportunity to learn more on the subject.

I sincerely thanks with deep sense of gratitude to Mr. Deepak Ukidave, my

guide, for her kind co-operation and constant motivation for the fulfilment of
this project.

I would like to thank PRAMA INSTRUMENTS PVT LTD, Rabale, for

providing me all the information and details regarding this project matter.

I would also like to thank our librarian Mr. Paritosh Pawar, Ms. Kavita Mehta
who helped me in getting the information regarding this project.

And last but not the least on a personal note, I would like to thank my friends, god,
and my family who were always there to help in every possible manner.
 DESIGN OF THE STUDY

I. Objective of the study:-

The main objective of the study is to understand about the Job Order Costing
provided by different Companies. The objective successfully achieved by
performing the detailed survey of the Manufacturing company.

 To understand the concept about “Job Order Costing provided by

PRAMA INSTRUMENTS PVT LTD”
 To cover the various aspects relating to Job Order Costing
 The project tries to take a glance over the various aspects of Job
Order Costing and their benefits to Company.

II. Scope:-

The first chapter deals with International prospective of Insurance industry in

which it includes the introduction of insurance, history of insurance industry,
principles, social effects, insurers business model.

The second chapter deals with Indian prospective of Insurance industry it

includes the introduction, the beginning of insurance in India, types of
insurance, IRDA and travel insurance in India
 The third chapter deals with the travel insurance concept its introduction, need,
advantages & disadvantages, types of travel insurance. It gives the detailed
information about the documents required, coverage along with the coverage
table, travel insurance for travelling in Indian railways and for traveling to
Schengen countries and its claim process.

The fourth chapter deals with the case study of ICICI Lombard and Veena
World in which it includes the introduction, history and profile of the
company. It includes the different types of ICICI Lombard Travel Insurance
Plans, its benefits to the customers & students, common exclusions, coverage,
premium table and claim process.

The last but not the least fifth chapter includes the findings, suggestions,
conclusion and questionnaire and application form of Travel Insurance of ICICI
Lombard.

III. Limitations:-

There are some limitations in this project, limitations are as follows:-

 Time limitation
 Many Company uses Job Order Costing, but only one company is
considered
 Company do not provide with its internal information/circular
 Non availability of sample size
 IV. Research Methodology:-

Data has been collected from the following sources:

 Primary data:-
 Secondary data:-

All the data has been collected by doing visiting at Company’s official website
and various other webpage’s.
 EXECUTIVE SUMMARY

To summarize the job order system, the cost of each job includes direct materials,
direct labour, and manufacturing overhead. While the product is in production, the
direct materials and direct labour costs are included in the work in process
inventory. The direct materials are requested by the production department, and the
direct material cost is directly attached to each individual job, as the materials are
released from raw materials inventory. The cost of direct labour is recorded by the
employees and assigned to each individual job. When the allocation base is known,
usually when the product is completed, the overhead is allocated to the product on
the basis of the predetermined overhead rate.
 INDEX

Sr Page Particulars
No No.
1 Introduction
2 Meaning & definition of job costing
3 Features of job costing
4 Characteristics of the job costing process
5 Objectives
6 Pre-Requisites for Job Order Costing
7 Advantages & Disadvantages
8 Methods of Costing
9 Similarities between Job Costing and Contract
Costing
10 Documents Used in a Job Costing System

11 Procedure of Job Order Cost System

12 Accounting System under Job Costing
13 Preparation of Job Cost Sheet
14 Job Order Costing in Manufacturing Companies
15 Job Order Costing in Service Organizations
16 PRAMA INSTRUMENTS
17 INSPIRE ARCHITECTS
18 Recommendations
19 Conclusion
20 Annexure
 INTRODUCTION

Job costing is usually a method of costing apply in industries, where the cost of the
production usually measure by the no. of completed jobs. This usually takes as a
factor to measure the feasibility of jobs.
These costs recorded on ledger throughout the whole job process & are added to
the final balance statement when preparing for job costs & the batch statement.
The job costing method or system can virtually use in any industry & use to check
whether if the cost of production exceeds the overheads & the price of the
materials , to provide profit for the whole process.
Job costing is a technique of costing where the amount of work done is in the form
of the no. of jobs completed. The production takes for the customers’ orders & not
as bulk for stocking purposes.
Moreover, the cost does not take singularly but as a bulk of objects.

For Example:-
Printing 5000 books, assembling 500 cars, delivering 4000 pamphlets & so on.
The elements within the job costing procedure consists of direct costs, employment
costs & material costs which comprise of prime cost & also overhead charge used
for the departmental costs & shipping & handling costs which also includes costs
taken for stocking & storage.
 Meaning and Definition of Job Costing

Job costing as a distinctive method costing is a form of specific order costing

which is adopted to execute the work strictly according to customer’s specification.
The production process depends upon the member of orders received from
customers. As such production is not standardized and intermittent in nature. The
goods manufactured are not for stocking but for immediate delivery once it is
complete in all respects.
The cost is ascertained separately for each job as every work order differs from
customers to customers. The purpose of job costing is to ascertain the profit or loss
made on each job. Further cost of job is compared with the estimated cost to
indicate whether estimation was defective or the actual cost incurred is excessive.
Such an analysis helps in taking remedial action to improve efficiency and also
facilitate revision of estimates.
According to Eric Kohler, “Job costing is a method of cost accounting whereby
cost is compiled for a specific quantity of product, equipment, repair or other
service that moves through the production process as a continuously identifiable
unit, applicable material, labor, direct expenses and usually a calculated portion of
the overhead being charged to job order.
From the above definition, it is clear that job costing is a method of costing under
which the cost of each job is ascertained separately. It is that form of specific order
costing which applies where work is undertaken to customer’s special
requirements. As distinct from contract costing, each job is of comparatively short
duration.
 FEATURES OF JOB COSTING

1. The products are produced only against customer’s order and not for
maintaining stock for sale.
2. The costs are accumulated to each job separately.
3. A job is performed according to the customer’s specifications.
4. The job costing method falls under the category of specific order costing.
5. Each job is differentiated from others. The reason is that the specification of one
customer is differing from other.
6. There is no continuous production.
7. Each job requires special attention and skill for completion.
8. There is no large-scale production of goods.
9. All the jobs are not passed through all the departments.
10. The unit of measurement of each job is unique and special.
13. A job is charged with its own costs.
14. A separate cost sheet is prepared for each job.
15. Work in progress at any time depends on the number of jobs in hand at that
time. A separate work in progress record is maintained for each job.
16. If a job involves number of operations for completion, job tickets are issued to
know the progress of completion of job.
CHARACTERISTICS OF THE JOB COSTING PROCESS

• Most of the manufacturing and non-manufacturing entities have acquired the

job costing process
• The entities which have adopted job costing manufacture goods over
customers demand and not for stocks
• In such entities, the total work assesses into various jobs and also each job
appraises as a separate cost unit.
• In this method, the production is not a continuous one
• An account opens for particular jobs including all the extra things, to know
the exact cost of the job.
• As every job is different, the procedure of job costing for it also differs
• The job of the cost finalizes after the job completed.
• The real-time profit or loss decided, only after comparing the actual cost
with the charged cost of the job
• Using job costing, the profit and each job’s cost can found out separately.

Here the organization does not have to spend on selling and distribution, the
customers are responsible for placing orders and collecting the goods.
Some of the Organization types which adopted job costing are:

1. Printers Machine tool manufacturing industries

2. Interior decorations
3. Advertising concerns
4. Furniture making industry
5. The musical instruments manufacturing industry
6. Management consulting industry
7. Toy making industry
8. Engineering workshop

Objectives of Job Costing

The main objectives are of job costing are:

(1) The main objective of job costing is to ascertain the cost as well as the
profit or loss on each job.
(2) Another objective of job costing is to find out those jobs which are more
profitable and those which are not profitable or less profitable.
(3) Control of costs, by comparing actual costs with estimated costs, is also
one of the objectives of job costing.
(4) Job costing is also intended to indicate, through the comparison of actual
cost of a job with its estimated cost, whether the estimation is incorrect or the
actual cost is excessive.
(5) Another objective of job costing is to provide a basis for estimating or
determining the cost of similar jobs undertaken in future.
 Pre-Requisites for Job Order Costing

In order to achieve the purposes of job order costing a considerable amount of

clerical work will be involved and to ensure effective and workable system, the
following factors are necessary:

(а) A sound system of production control.

(b) Comprehensive works documentation, typically this includes: work order

and/or operation tickets, bills of materials and/or materials requisitions, jig and tool
requisitions etc.

(c) An appropriate time booking system using either time sheets or piece work
tickets.

(d) A well organised basis to the costing system with clearly defines cost centres,
good labour analysis, appropriate overhead absorption rates and a relevant issue
pricing system.
 Advantages of Job Costing

1. Job costing acts as a form of analysis detailing all the types of costs that are
present throughout the manufacturing process. This includes the direct costs, the
labor costs, and the overhead charges.
2. It acts as a gauge determining the profitability of the job and helps for future
customers or companies to decide whether to take up the job or not. It also gives us
an idea about the feasibility of the job.
3. Job costing prevents duplication of work because it helps in the estimation
of a similar job. This helps in a company quoting the price of a job, it can always
depend on the pricing of a previous job as a reference.
4. The efficiency of the manufacturers can also take into observation while
taking account of their job costing and their associated expenses.
5. Ruination and defective work can found out through job costings and it can
immediately correct through certain individuals responsible for the job.
6. Budgetary control comes into action when taking into consideration the
various overhead charges which predetermine for each department.
7. Job costing information uses more for job contacts where the price of the job
depends on the amount of the work is doing, rather than depending on the final
price.
8. It evaluates the quality of the work through various statistical techniques.
9. Job costing provides an easy calculation of cost overheads for specific
needs, and in a precise manner.
10. Job costing enables the supervisors to keep track of various components
such as money, materials and the performance of the employees.
 Disadvantages of Job Order Costing

1. Based purely on costs. This method, disadvantageous in fixing prices for the
complete process, as the costs record along each step. Hence it makes it difficult to
prevent unwanted costs and expenditures occurred in between the processes.
2. It’s very expensive because records are to prepare for every step of the
order. Starting from the materials list to the final product statement. Hence capital
needs to keep such records properly.
3. There no exact procedure for estimating the job cost since there are no
specific methods to differentiate direct and indirect costs occurring in a process.
4. This method of price estimation, may not be useful for jobs that are cost-
efficient and fast-paced.
5. No standard procedure to follow while estimating. The only thing that can be
followed is the need for supervision when calculating costs. To prevent any
miscalculations and forgery of the prices and materials respectively.
6. More and more clerical work required to detail the measures and quota takes
in every step of the project from the start to the finish.
7. Highly expensive because of the number of people working for a single
project and unwanted expenditures may also present.
8. No control of costs, since quality control and price control usually do after
the estimation of the final price. That too price control can also do under a limit.
Only to visible price variations, there is a chance of hidden costs that may not be
recorded.
9. These kinds of jobs are only applicable, depending on the nature of the
market and not on the nature of the job assigned. This becomes useless when the
behavior of the consumer market doesn’t support such jobs, more and more
expenditure for man, machine and materials takes place.
10. During inflation and recession, such jobs are useless and comparing such job
costs is fruitless and a waste of time. Ordering job costs during the time of inflation
not consider smart.
11. No form of correction can take place if the actual profit is less than the
estimated profit. The only thing we can do while calculating job costs are
preventing loss to both the consumer and the manufacturer.
12. Since overheads are allocated to each department on a predetermined basis,
there is no strict method to control the cost of the project using job costing.
13. Record keeping is what keeps the process of job costing alive. If there is no
sufficient record work, then it can cause a huge downfall to the whole project and
it may lead to a huge loss to the manufacturer.
14. There no 100% accurate estimation of the total final cost of a job using job
costing.
Job costing is an efficient method in keeping track of the expenditure against
the given revenue, that is, the income or the fixed budget by the customer. It
expands to all industrial professions and people of different designations.
Job costing depends on the type of work that is doing, rather than applying
to any kind of job. This way the result suited to the customer’s needs and choices.
Usually, job costing’s happen by contractors, architects, and consultants. People
who own a small convenience or a hardware store doesn’t have to use job costing
techniques. Using job costing helps you to focus on the strongest and the weakest
link of the business.
Hence, it helps the manufacturers to focus on the strongest link to produce
more and more profits while giving expert care to the weakest links, so as not to
provide any unwanted losses.
 Methods of Costing

1. Unit Costing – If production is made in different grades, costs are ascertained

grade wise. Per unit cost is calculated on the basis of units produced. This method
is applicable to steel production bricks, mines and flour mills etc.

2. Job Costing – This method is applicable where work is undertaken to

customers. This method is used in repair shops printing press and interior
decoration etc.

3. Contract Costing – Unit cost in a contract is of a long duration and it may

continue for more than a year. It is most suitable in roads, bridge, shop building
etc.

4. Process Costing – The method is used in mass production industries. The raw
material passes through a number of processes up to a completion stage. The
finished product of one process passed through a number of processes for the next
process. This method is used in chemical works, sugar mills etc.

5. Service Costing – This method is used where services are provided such as
hotels, cinemas, hospitals, transport, and electricity companies etc.

6. Composite Costing – This method is used where a number of components are

manufactured separately and then assembled in a final product such as in Scooters,
Cars, and Air Conditioners etc.

7. Batch Costing – The cost of a batch is ascertained and each batch is a cost unit.
This method is used in readymade garments, shoes, tyres and tubes etc.

8. Operation Costing – This system is followed where number of operations is

involved. It provides minute analysis of costs and ensures greater accuracy and
better control.
 Similarities between Job Costing and Contract Costing

There are many similarities between job costing and contract costing, which are:

(1) Both job costing and contract costing are specific order costing.

(2) In the case of both job costing and contract costing, each job or contract

constitutes a cost unit.

(3) Both methods have the same object to find out cost and profit.

(4) Under both the methods a separate account is opened.

(5) Under both the methods customer come to them, so there is no demand creation

in the case of both.

(6) Under both the methods works are executed as per the specifications of the

customers.

(7) In both the cases work commences on the receipt of order from the customer.

(8) In both the cases quotation is called by the customer before placing the order.
 Documents Used in a Job Costing System

1. Production order:
Production order or cost order is a type of work order, authorizing and sanctioning
the manufacturers to produce, the order gives to the customer. This process
initiates the manufacturing process

2. Cost sheet:
For recording purposes, another type of document is presently called the cost sheet.
The cost sheet and the works order both can be combined at the last stage while
establishing the final production value.

3. Other documents:
The other documents are processed and submitted in between the manufacturing
processes such as materials order, tool tickets, storage and stocking documents,
warehousing, and inspection tickets.
 Procedure of Job Order Cost System

A cost accounting system should be so designed that it would be able to provide

the necessary information for achieving control of cost and performance. Thus it
shows in detail their cost components of the total cost of executing a job which
may take the form of either a special order or job or a batch of orders.

A job cost sheet is prepared for every job which is undertaken on the basis of
material requisition concerned. Labour cost on the basis of time clocked in respect
of the job with the help of time tickets and factory overheads are added to these
cost components according to some rational methods of overhead absorption.

The total cost of a job as indicated by the job cost sheet consists partly of direct
cost and partly of costs arrived at by assignment, allocation, apportionment and
finally by absorption. Thus it is clear that similar jobs executed during a certain
time period are bound to have different units of production. Unit cost is determined
by dividing total cost by the number of units or a volume of goods produced there
under.
The procedure for job order cost system may be summarized as follows:
1. Receiving an Enquiry:
The customer will usually enquire about the price, quality to be maintained, the
duration within which the order is to be executed and other specification of the job
before placing an order.
2. Estimation of the Price of the Job:
The cost accountant estimates the cost of the job keeping in mind the specification
of the customer. While preparing estimate, the cost of execution of similar job in
the previous year and possible changes in the various estimates of cost are taken
into consideration. The prospective customer is informed with the estimate of the
job.
3. Receiving of Order:
If the customer is satisfied with the quotation price and other terms of execution,
he will then place the order.
4. Production Order:
If the job is accepted, a Production Order is made by the Planning Department. It is
in the form of instructions issued to the foreman to proceed with the manufacture
of the product. It forms an authority for starting the work.
It contains all the information regarding production. It is prepared with sufficient
copies so that a copy of the same may be given to all the departmental managers or
for man who are required to take any part in the production.
A specimen of production order is given below:

When an order is received, the Production Control Department allots a Production

Order Number to it. Sometimes, the work may be sub-divided and sub-numbers
may also be allotted to various works constituting it in addition to one master
number.

5. Recording of Costs:
The costs are collected and recorded for each job under separate Production Order
Number. Generally, Job Cost Sheet (or Card) is maintained for each job. This is a
document which is used to record direct material, direct wages and overheads
applicable to respective jobs.
The bases of collection of costs are:
(a) Materials:
Materials Requisitions, Bill of Materials or Materials Issue Analysis Sheet.
(b) Wages:
Operation Schedule, Job Card or Wages Analysis Sheet.
1. Operation schedule:
It’s a form of the timetable which relates to the allocation and reissuing of
resources in an organization.
2. Job card:
A form of the card used to detail the details of the job need to do in a production
facility. It instructs the foreman what to do as a set of instructions. Helpful for both
the parties involved in the business.
3. Wages analysis sheet:
It is a derivative of the income statement. It consists of the payroll statements and
the wages for both the manufacturing and non-manufacturing employees
depending on whether if it is a fixed salary or an hourly wage.
(c) Overheads:
Standing Order Numbers or Cost Account Numbers.
Miscellaneous costs:
These include hidden costs such as transportation, stocking, storage, food,
infrastructure, etc.
All the basic documents will contain cross reference to respective production order
numbers for convenience in collection of costs.
A specimen of Job Cost Sheet is as given below:

6. Completion of Job:
On completion of a job, a completion report is sent to costing department. The
expenditure under each element of cost is totalled and the total job cost is
ascertained. The actual cost is compared with the estimated cost so as to reveal
efficiency or inefficiency in operation.

7. Profit or Loss on Job:

It is determined by comparing the actual expenditure or cost with the price obtaine
 Accounting System under Job Costing

There are four elements of cost (i.e. material, labour, chargeable expenses and
overheads) which are also applicable to job costing.

They are discussed as under:

1. Materials Cost:

Materials are classified into direct and indirect materials on the basis of traceability
of materials to the job. Those materials which are traceable to the job are treated as
prime cost element and those not traceable to the job are treated as manufacturing
overhead.

2. Direct Labour Cost:

The direct labour cost is debited to the job on which work is directly performed.
Clock card is used to record the hours worked by each employee. At the end of
each week, the payroll department uses the information on the clock card to
calculate each employee’s pay. The clock card only records the total time worked
by each employee.

It is used by the employee to indicate how much time he worked in a period and by
the employer to determine how much to pay the employee for that work. A clock
card does not record the time spent by each employee on the jobs. This information
is recorded by the employees on a time ticket. A time ticket shows the date on
which the work was completed, the employee’s name, name of the department, the
time of starting and finishing the work.

If the work is performed directly on a job, the employee would record the job
number, indicating the labour as direct labour. The cost accounting department
collects all the labour time tickets, records the pay rate of the employee on the
ticket and calculate the labour cost of the operation.

Treatment of Overtime Wages in Job Costing:

When overtime work is done on a job to speed up production with the view to
expedite the delivery, the overtime wages is to be debited to that job on which
overtime work is performed where overtime work is performed as a routine work it
forms part of factory overhead.

3. Direct Expenses:

The direct expenses under job order industries usually include cost of designs,
moulds, hiring of special tools and equipments and maintenance cost of such tools.

4. Factory Overheads:

In most cases pre-determined overhead rates are used for the absorption of factory
overheads. The pre-determined overhead rate is calculated at the beginning of the
year by estimating the total overhead cost for the year and then dividing either by
direct labour cost or direct labour hours. Throughout the year the overhead rate is
applied to calculate the overheads and thus charged to job.

7. Preparation of Job Cost Sheet:

 Preparation of Job Cost Sheet

Under job costing, a job cost sheet is prepared for every job. It presents the cost
data relating to a job. It states the various elements of cost, such as, direct material,
direct labour, direct expenses and overheads under the various division of cost like
prime cost, works cost, cost of production and total cost. It also states the sale price
and profit or loss made on a job.

Job cost sheet is a document used to record manufacturing costs and is prepared
by companies that use job-order costing system to compute and allocate costs to
products and services.

The accounting department is responsible to record all manufacturing costs (direct

materials, direct labor, and manufacturing overhead) on the job cost sheet. A
separate job cost sheet is prepared for each individual job.

All necessary details about the job and costs incurred to complete the job are
written on the job cost sheet.

The information about a job or order that is shown on job cost sheet usually
includes job number, product name, starting date, completing date, number of units
completed etc.

The information about manufacturing costs that is shown on job cost sheet usually
includes materials requisition number, cost of direct materials issued, time tickets,
direct labor hours, direct labor rate per hour and total cost, manufacturing overhead
rate per direct labor or machine hour and total cost etc.
Job cost sheet is not only used to charge cost to jobs but is also a part of the
company’s accounting record. It is used as a subsidiary ledger to the work in
process account because it contains all details about the job in process.

Example:

An example of a complete job cost sheet is given below:

Measuring and recording direct materials cost

After accepting a job or order, the first step in a job order costing system is to
determine the direct materials requirement to complete the job. The type and
quantity of direct materials required to manufacture a product can be determined
either by using a bill of materials or by production staff.

Bill of materials is a document that lists the type and quantity of direct materials
required to manufacture a standard product. But companies using job order costing
system frequently receive orders that require customization in design, size and
color etc.  In such circumstances, the bill of materials cannot be used to determine
the type and quantity of materials required to complete the job. Therefore the
production department determines materials requirement using the information
provided by customers.

After direct materials requirement has been determined, the production process
starts with issuance of direct materials. For this purpose, production department
prepares a document known as ‘materials requisition form‘. An authorized person
from production department writes the type, quantity, and job number (to which
the materials cost is to be charged) on materials requisition form. A signed copy of
this form is then sent to the storeroom clerk who completes the form by entering on
it per unit and total cost of materials to be issued. After necessary verification,
storeroom clerk issues direct materials to production department.

A complete materials requisition form is also used by accounting department to

record direct materials cost on the job cost sheet of the related job order.
An example/sample of materials requisition form is given below:

 Use of computer technology for materials requisition:

The procedure described above is the manual procedure of issuing materials. In

today’s business world, many companies are replacing manual procedure with
computer technology. In computer technology, automated information processing
systems are used to send the requisition information to storeroom. The material is
transferred from storeroom to the production department on the basis of this
information. An entry about each requisition is made in a computer that
automatically updates the subsidiary materials record.

 Journal entries to record the flow of materials:

Normally two types of journal entries are made for direct materials cost. One at the
time of purchase of direct materials from suppliers and one at the time of issuance
of direct materials from storeroom to production department. These two entries are
given below:
When materials are purchased:

When materials are issued:

 Measuring and recording direct labor cost

In job order costing system, the method of measuring and recording direct labor
cost is similar to measuring and recording direct materials cost.

Direct labor hours worked, direct labor rate per hour, and total amount in dollars
for each individual job or task is recorded on a document known as time
ticket or employee time ticket. A separate time ticket is prepared by each worker
for every working day.

Accounting department collects all time tickets at the end of the day. These time
tickets are used to enter direct labor cost on the job cost sheet of each individual
job order. An example/sample of complete time ticket is given below:

Employee Time Ticket

In job order costing system, any labor charges that are not directly traceable to a
particular job are known as indirect labor cost. In example of time ticket given
above “maintenance” is indirect labor. Other examples of indirect labor are
cleanup costs and supervision etc. Indirect labor is not included in direct labor cost
and, therefore, becomes a part of the manufacturing overhead.

These days, many companies have replaced the manual process of recording direct
materials cost with the computerized approaches. They use a bar code technology
to enter data into a computer. This technology increases the speed and accuracy of
the whole process.

 Journal entry to record direct labour cost

After collecting time tickets by accounting department, wages of workers are

computed and labor costs are classified as direct or indirect on the basis of
information provided by time tickets. As discussed earlier, indirect labor is a part
of manufacturing overhead and its accounting treatment has been discussed in
“measuring and recording manufacturing overhead” article. The journal entry of
direct labor cost is made as follows:
  Measuring and recording manufacturing overhead cost

Manufacturing costs other than direct materials and direct labor are known as

manufacturing overhead (also known as factory overhead). It usually consists of
both variable and fixed components. Examples of manufacturing overhead cost
include indirect materials, indirect labor, depreciation, salary of production
manager, property taxes, fuel, electricity, grease used in machines, and insurance
etc.

Unlike direct materials and direct labor, manufacturing overhead is an indirect cost
that cannot be directly assigned to each individual job. This problem is solved by
using a rate that is computed at the beginning of each period. This rate is known
as predetermined overhead rate.

 Application of manufacturing overhead:

As stated earlier, the predetermined overhead rate is computed at the beginning of

the period and is used to apply manufacturing overhead cost to jobs throughout the
period.

Manufacturing overhead cost is applied to jobs as follows:

Overhead applied to a particular job = Predetermined overhead rate × Amount of
the allocation base incurred by the job.

Example:

Suppose the GX Company has completed a job order. The time tickets show that
the workers have worked for 27 hours to complete the job. The predetermined
overhead rate computed at the beginning of the year is Rs 8 per direct labor hour.
The manufacturing overhead cost would be applied to this job as follows:

Overhead applied to a particular job = Predetermined overhead rate × Amount of

the allocation base incurred by the job

= 8.00 × 27 DLH (Direct Labour Hour)

= Rs216

The manufacturing overhead cost assigned to the job is recorded on the job cost
sheet of that particular job.

Journal entry to record manufacturing overhead cost:

The manufacturing overhead cost applied to the job is debited to work in process
account. The journal entry for the applied manufacturing overhead cost, computed
in the above example, would be made as follows:
The reason of using a predetermined overhead rate rather than actual
overhead costs:

Notice that the procedure of manufacturing overhead application described above

is based on an estimated overhead rate (predetermined overhead rate). The
manufacturing overhead cost applied to the job is, therefore, not actual
manufacturing overhead cost incurred by the job. The reason is that the total actual
manufacturing overhead costs are usually not known to managers before the end of
the year. The application of manufacturing overhead based on a predetermined
overhead rate helps in computing cost of goods sold of a particular job before it is
shipped to the customer.

The use of predetermined overhead rate to apply manufacturing overhead cost to

products or job orders is known as normal cost system.

 PREDETERMINED OVERHEAD RATE

Predetermined overhead rate is used to apply manufacturing overhead to

products or job orders and is usually computed at the beginning of each period by
dividing the estimated manufacturing overhead cost by an allocation base (also
known as activity base or activity driver). Commonly used allocation bases are
direct labor hours, direct labor dollars, machine hours, and direct materials.

Formula:

The formula of predetermined overhead rate is written as follows:

Example:

Suppose GX Company uses direct labour hours to assign manufacturing overhead

cost to job orders. The budget of the GX Company shows an estimated
manufacturing overhead cost of Rs 8,000 for the forthcoming year. The company
estimates that 1,000 direct labour’s hours will be worked in the forthcoming year.

Using the above information, we can compute the predetermined overhead rate as
follows:

Predetermined overhead rate = Estimated manufacturing overhead

cost/Estimated total units in the allocation base

Predetermined overhead rate = Rs 8,000 / 1,000 hours

= Rs 8.00 per direct labour hour

 Multiple Predetermined overhead rate:

The predetermined overhead rate computed above is known as single
predetermined overhead rate or plant-wide overhead rate. It is mostly used by
small companies. In large companies, each production department computes its
own predetermined overhead rate. The use of multiple predetermined overhead
rates may be complex and time consuming but is considered more accurate than a
single plant-wide overhead rate.

According to a survey 34% of the manufacturing businesses use a single plant wide
overhead rate, 44% use multiple predetermined overhead rates and rest of the
companies use activity based costing (ABC) system.

 Over or under-applied manufacturing overhead

The over or under-applied manufacturing overhead is defined as the difference

between manufacturing overhead cost applied to work in process and
manufacturing overhead cost actually incurred during a period.

If the manufacturing overhead cost applied to work in process is more than the
manufacturing overhead cost actually incurred during a period, the difference is
known as over-applied manufacturing overhead. On the other hand; if the
manufacturing overhead cost applied to work in process is less than the
manufacturing overhead cost actually incurred during a period,  the difference is
known as under-applied manufacturing overhead.

The occurrence of over or under-applied overhead is normal in manufacturing

businesses because overhead is applied to work in process using a predetermined
overhead rate. A predetermined overhead rate is computed at the beginning of the
period using estimated information and is used to apply manufacturing overhead
cost throughout the period.

 Recording actual and applied overhead cost in manufacturing

overhead account

Over or under-applied manufacturing overhead is actually the debit or credit

balance of manufacturing overhead account (also known as factory overhead
account).

Actual manufacturing overhead costs are debited and applied manufacturing

overhead costs are credited to manufacturing overhead account. Actual overhead
costs are debited as they are incurred and applied overhead costs are credited as
they are applied to work in process. At the end of a period, if manufacturing
overhead account shows a debit balance, it means the overhead is under-applied. 
On the other hand; if it shows a credit balance, it means the overhead is over-
applied. For further explanation of the concept, consider the following example:

The debit or credit balance in manufacturing overhead account at the end of a

month is carried forward to the next month until the end of a particular period –
usually one year.
Disposition of over or under-applied manufacturing overhead:

At the end of the year, the balance in manufacturing overhead account (over or
under-applied manufacturing overhead) is disposed off by either allocating it
among work in process, finished goods and cost of goods sold accounts or
transferring the entire amount to cost of goods sold account. These two methods
have been discussed below:

Allocation among work in process, finished goods and cost of goods sold
account:

Under this method, the amount of over or under-applied overhead is disposed off
by allocating it among work in process, finished goods and cost of goods sold
accounts on the basis of overhead applied in each of the accounts during the
period. The following journal entry is made to dispose off an over or under-applied
overhead:

When overhead is under-applied:

When overhead is over-applied:

This method is more accurate than second method. The only disadvantage of this
method is that it is more time consuming.

Transferring the entire amount of over or under-applied to cost of goods sold:

Under this method the entire amount of over or under applied overhead is
transferred to cost of goods sold. The following entry is made for this purpose:

When overhead is under-applied:

When overhead is over-applied:

This method is not as accurate as first method. Companies use this method because
it is less time consuming and easy to use.
Example:

During the year 2012, Beta company started two jobs – job A and job B . Job A
consisted of 1,000 units and job B consisted of 500 units. At the end of the year
2012, job A was completed but job B was in process. The information about
manufacturing overhead cost applied to job A and B was as follows:

The actual manufacturing overhead cost incurred by the company during 2012 was
$108,000. Out of 1,000 units in job A, 750 units had been sold before the end of
2012.

Required: Calculate over or under applied manufacturing overhead and make

journal entries required to dispose of over or under applied manufacturing
overhead assuming:

1. It is disposed off by allocating between inventory and cost of goods sold

accounts.
2. It is disposed off by transferring to cost of goods sold.

Solution:

Calculation of over or under-applied manufacturing overhead:

In our example, manufacturing overhead is under-applied because actual overhead
is more than applied overhead. The under-applied overhead has been calculated
below:

Under-applied manufacturing overhead = Total manufacturing overhead cost

actually incurred – Total manufacturing overhead applied to work in process

= Rs 108,000 – Rs 100,000

= Rs 8,000

Journal entries to dispose of under-applied overhead:

(i). Allocation of under-applied overhead among work in process, finished goods,

and cost of goods sold accounts:
(ii). Transfer of entire under-applied overhead to cost of goods sold account:

 TREATMENT OF NON-MANUFACTURING COSTS

Non-manufacturing expenses have no effect on the production cost of the company

because they are treated as period costs.

Non-manufacturing costs are not included in manufacturing overhead account but

are charged directly to income statement. Examples of non-manufacturing
expenses are sales commission, advertising expenses, rent of office building, and
depreciation on the equipment used in office etc.

Journal entries to record non-manufacturing costs:

To understand how entries for non-manufacturing costs are made, consider the
following example:

GX Company uses job order costing system and has incurred the following non-
manufacturing expenses for the most recent period:

1. Selling and administrative salary: $60,000

2. Depreciation on office expenses furniture: $14,000
3. Advertising expenses: $84,000
 4. Other selling and administrative expenses: $16,000

Required: make journal entries from the information provided above.

 Journal entries:

In entry 2, the depreciation on office furniture has been debited to depreciation

expense because depreciation on office furniture or equipment is treated as period
cost. If it were depreciation on factory equipment, it would have been debited to
manufacturing overhead because depreciation on factory equipment is treated as
manufacturing or product cost.

FINISHED GOODS AND COST OF GOODS SOLD

In a job order costing system, all manufacturing costs (i.e., direct materials, direct
labor, and applied manufacturing overhead) of the job are debited to work in
process account. When a job is completed, its cost (as shown by job cost sheet) is
transferred from the work in process account to the finished goods account.
After completion, the job becomes finished goods and is, therefore, transferred
from the production department to the finished goods storeroom (also called
warehouse).

The following journal entry is made to transfer the cost of a completed job from
work in process account to finished goods account:

The total cost transferred from the work in process account to the finished goods
account during a period is equal to the cost of goods manufactured for that period.

At the end of a period, the cost of incomplete jobs remains in the work in process
account and is shown as “work in process inventory” in assets section of
the balance sheet. Next period, this cost represents the opening balance of the work
in process account.

Cost of goods sold:

When finished goods are shipped to customers, the costs of finished goods are
transferred from finished goods account to cost of goods sold account. If a job is
completed according to specification of a particular customer, the complete job is
shipped to the customer immediately and the manufacturing cost associated with
the job (as shown by the job cost sheet) is charged to the cost of goods sold. But in
some cases, the complete job is not shipped but only a portion of the job is sold to
customers. In such circumstances, the manufacturing cost per unit is computed and
the cost of the units that have been shipped to customers is charged to cost of
goods sold account.

Sales and the transfer of cost from finished goods to cost of goods sold account are
recorded by making the following journal entries:

(1). When sales are made:

i. If sales are made on account:

ii. If sales are made on cash

(2). When cost is transferred to cost of goods sold account:

 Job Order Costing in Manufacturing Companies

Manufacturing companies incorporate job order costing as a means of controlling

usage of raw materials, production equipment and labor hours. These businesses
consider each customer order a separate job for the purposes of job order costing.
Alternatively, manufacturers may group smaller value projects together under a
single job heading.

How manufacturers group jobs depends on the size of the company. For
example, a small business manufacturer may consider any job valued over $1,000
as a single job, but they may group smaller customer orders together in blocks of
$1,000 for costing purposes.

Job order costing system is generally used by companies that manufacture a

number of different products. It is a widely used costing system in manufacturing
as well as service industries.

Manufacturing companies using job order costing system usually receive orders for
customized products and services. These customized orders are known as jobs or
batches. A clothing factory, for example, may receive an order for men shirts with
particular size, color, and design.

When companies accept orders or jobs for different products, the assignment of
cost to products becomes a difficult task. In these circumstances, the cost record
for each individual job is kept because each job have a different product and,
therefore, different cost associated with it.
The per unit cost of a particular job is computed by dividing the total cost allocated
to that job by the number of units in the job. The per unit cost formula is given
below:

Per unit cost = Total cost applicable to job / Number of units in the job

Job order costing is extensively used by companies all over the world.

Examples of manufacturing businesses that use job order costing system include
clothing factories, food companies, air craft manufacturing companies etc.
 Job Costing in Service Organizations
Electricians, accountants, and auto mechanics are examples of service providers
that use job costing. Electricians track costs by project (e.g., a new building or a
kitchen remodel), accountants track costs by client (e.g., an individual or a
corporation), and auto mechanics track costs by job (e.g., replacing a drive belt on
a company truck). How does job costing work in a service company setting?

 Job costing in service organizations is the same as in manufacturing organizations,

except that service organizations tend to use fewer materials. There are also minor
differences in the accounts that these types of organizations use, as shown in 

Accounts Used in Service Organizations and Manufacturing Organizations

Manufacturing Organization Service Organization Account

Financial Statement
Account Name Name

Raw materials inventory Parts inventory or supplies Balance sheet (asset)

Work-in-process inventory Work in process* Balance sheet (asset)

Finished goods (Not applicable) Balance sheet (asset)

Cost of services (or other expense Income statement

Cost of goods sold
accounts) (expense)

None (clearing
Manufacturing overhead Overhead (or service overhead)
account)

*Some service companies do not use a work-in-process account but instead simply charge
costs directly to expense accounts.
Service organizations use a job cost sheet to track direct materials, direct labor, and
overhead.

Direct Materials

How do service organizations track direct materials using job costing?

Many service organizations do not track direct materials for each job
because the cost of the materials is negligible. For example, accountants and
attorneys use low-cost materials, such as binders and paper. These materials, often
called supplies, are included in overhead rather than tracked by job.

Some service organizations track direct materials for each job because the cost of
the materials is significant. Consider auto mechanics, who track the parts needed to
perform repairs for each job, or electricians, who track the materials needed to wire
a new building. Materials may be requisitioned from parts inventory or supplies,
similar to raw materials inventory in a manufacturing setting, or may be purchased
directly from a supplier, depending on the nature of the business. The process of
recording this information in the journal and job cost sheet is exactly the same as
for a manufacturing company.

Direct Labor

How do service organizations track direct labor using job costing?

Direct labor tends to be the most significant cost for service organizations.
The process of tracking labor using a timesheet and recording labor costs in the
journal and job cost sheet is exactly the same as for a manufacturing company
Overhead

Like manufacturing companies, service organizations often use a predetermined

overhead rate to apply overhead. What allocation bases are most commonly used
by service organizations to apply overhead costs to jobs?

 Because overhead is typically driven by direct labor hours in a service

organization, direct labor hours or direct labor cost is the most common allocation
base. Again, the process of recording this information in the journal and job cost
sheet is exactly the same as for a manufacturing company
Prama Instrument Pvt Ltd
 Introduction
Prama Instruments Pvt Ltd is established since 1990 and have an enriched
experience of more than 20 years in the field of analytical laboratory requirements
with industries like Pharmaceutical, Chemical, Food, Fragrances, Forensic,
Environment monitoring etc. This has helped us to establish a strong relationship
with customers across India.
At Prama "They shape ideas with custom built designs" along with providing the
"Solutions for Laboratory." Our entire range of product is designed and engineered
as per the latest technological advancement and clients' specifications. Our product
range is available in both standardized as well as customized. These products are
widely acclaimed in the market by prestigious customers, for their quality features
like trouble free operations, easy to maintain and long life.
They as organization believe that success of an organization depends on prompt
quality support to customer before and after sales along with quality products.
Prama team takes this belief strongly forward across country to provide quality
support to achieve customer satisfaction. Prama's quality products and support has
been highly appreciated by wide customer base throughout India.
They are an ISO 9001: 2008 approved company for manufacturing and export. For
manufacturing a quality range of products, we have developed a vast infrastructure,
which is well equipped with the sophisticated machines and latest technology to
meet the emerging market demands of our customer in India and abroad. They
proudly represent and exclusively deal for principals from USA, UK and
Europe in India.
Over the years they have widen their network to cater effectively
to Countrywide Customer Base
Job Cost Sheet
Job cost sheet is a document used in a job-order costing system to record all the costs
incurred on a job. In addition to job identification details such as job number, customer
name, etc., it includes particulars of direct material, direct labor and manufacturing
overheads incurred on the job.

In a process costing system, the purpose of the job cost sheet is fulfilled by the cost of
production report.

Template
Following is a template that can be used as a job cost sheet:

Company ABC

Job Cost Sheet

Job Number Order No

Customer
Name

Date Started Date Completed

Job Supervisor

Units Ordered Units Completed

Direct Material:

Request No. Units Price Amount

Total Direct Materials (A)

Direct Labor:

Employee Hours Wage Rate Amount

 Company ABC

Job Cost Sheet

Total Direct Labor (B)

Manufacturing Overheads:

Allocation Base Base Units Rate Amount

Total Manufacturing Overheads (C)

Total Job Cost (D=A+B+C)

Total Revenue (E)

Percentage of Cost Recovered (D/E)