Job

Batch

Contract costing

Job costing or job order costing also called specific order costing is a method of costing which is used when work is undertaken as per the customers special requirement Job costing is employed in the following cases : 1. Where the production is against the order of the customer or jobs are executed for different customers according to their specifications. 2 Where each job needs special treatment and no two orders are necessarily alike. 3. Where there is no uniformity in the flow of production from one department to another.

Job costing serves the following objectives : 1. It helps in finding out the cost of production of every order and thus helps in ascertaining profit or loss made out on its execution. 2. It helps management in making more accurate estimates about the costs of similar jobs to be executed in future on the basis of past records. The management can conveniently and accurately determine and quote prices for orders of a similar nature which are in prospect. 3. It enables management to control operational inefficiency by comparing actual costs with the estimated ones.

Illustration 1 : The following given below has been taken from the cost records of an engineering works in respect of the Job No. 333. Material : Rs. 4010 Wages : Department A-60 hours @ Rs. 3 per hour Department B-40 hours @ Rs. 2 per hour Department C-20 hours @Rs. 5 per hour. The overhead expenses are as follows : Variable : Department A-Rs. 5000 for 5000 hour Department B-Rs. 3000 for 1500 hour Department C-Rs. 2000 for 500 hour Fixed expenses Rs. 20,000 for 10,000 working hours. Calculate the cost of the job no. 333 and the price for the job to give a profit of 25 per cent on the selling price.

Work in-progress in Job Costing The cost of an incomplete job, that is, a job on which some manufacturing operation is still due is termed work-in-progress. If a production order has not been duly completed by the end of an accounting period, it is essential that the closing stock of the work-inprogress be determined. The account is respect of such jobs may be maintained in the following ways : 1. A composite work-in-progress account for all the jobs. 2. A work-in-progress account for each job.

Illustration : The following information for the last year is obtained from the books and records of a factory :

Completed Jobs Raw materials supplied 9,00,000 from stores Wages 10,00,000 Chargeable expenses 1,00,000

Work-in progress 3,00,000 4,00,000 40,000

Materials returned to stores 10,000 Factory overheads are 80% of wages and office overheads 25% of the factory cost. Selling overheads are 10% of cost of production The sale value of completed jobs during the year is Rs. 41,00,000. You are required to prepare: (i) A consolidated work-in-progress account, and (ii) A cost of sales account showing profit made or loss incurred on the completed jobs.

Batch costing is a modification of job costing. It is used where articles are manufactured in definite batches and these articles are kept in stock for selling to customers. A batch, in fact, is a cost unit consisting of a group of identical items which maintain their identity throughout one or more stages of production. Batch costing is generally followed in toy making, aircraft manufacturing, bakeries, biscuit factories, radio-sets and watches manufacturing factories

Since production is done in batches, and each batch can contain any number of items, the determination of the optimum batch quantity is very significant. The following formula may be used to determine the economic or optimum batch quantity (EBQ) : EBQ = 2AO/c A= annual consumption O = setting up or order processing cost per batch C = storage or carrying cost per annum

Illustration 3 : A firm requires 12,000 units of component X per annum. The setting up cost per batch amounts to Rs.600. The annual cost of capital and storage comes to 24% per annum and manufacturing cost per unit of the component is estimated at Rs.60. You are required to determine the economic batch quantity.

Illustration 4 : Following information relates to the manufacturing of a component X-101 in a cost centre : Cost of materials 6 paisa per component Operators wages 72 paisa an hour Machine-hour rate 1.50 Setting uptime of the machine 2 hrs and 20 mins Manufacturing time 10 mins per component. Prepare a cost sheet showing both production and setting up costs total and per unit, when the batch consists of a) 10 components. b) 100 components

Contract costing is a special form of job costing. The difference between these two is that in job costing a job is relatively small, whereas in contract costing contract is big. Contract costing is employed in business undertakings engaged in building construction, road construction, bridge construction and other civil engineering works.

Certain special aspects of contract costing and treatment of some important items of expenses in contract account is discussed below: 1) Materials : All materials purchased directly for the contract or supplied from the stores are debited to the concerned contract account. 2) Labour or Wages : All labour employed at the contracts site should be regarded as direct labour and charged direct to the contract concerned 3) Direct Expenses : All expenses other than material and wages are charged to individual contract as and when they are incurred. 4) Indirect expenses : Such expense may be distributed on several contracts on some suitable basis as a percentile of material or labour

5) Plant and Machinery : When some plant and machinery is used for a contract, the following methods are generally in use for charging the contract ; a) when plant is specifically purchased, the contract account should e debited with the cost of plant. At the end of accounting period the depreciated value of plant is posted on credit side of contract account b) when plant is for short period, the contract account is debited with usual depreciation

6) Extra Work : Sometimes additional work upon the work originally contracted for is required by the contractee. If the additional work is quite significant, it should be treated as a separate contract and a separate account should be opened for it. If it is not significant, expenses incurred upon extra work should be debited to the contract account 7) Sub-Contracts : Many a times, work of a specialised character such as special flooring, grilling etc. is entrusted to other contractors (subcontractors) by the main contractor. Such cost is debited to the concerned contract account

Cost Plus Contracts When it is not possible to estimate the cost of work with a reasonable degree of accuracy at the time of entering into the contract, a cost-plus-contract is generally adopted. Cost plus contracts are advantageous both to the contractor and the contractee. The contractee knows well how much he is paying for elements of cost and how much as profit to the contractor. He can ensure a fair price of the contract by being entitled to verify the books and documents of the contractor. The contractor also receives a reasonable profit in addition to his cost.

Work Certified It is generally agreed between the contractor and the contractee that on accounts payment will be made by the contractee at stages of progress in the work. An architect or a surveyor is appointed by the contractee to certify the extent of the work completed. Retention money The contractee generally does not make full payment of the work certified by the surveyor. He retains some amount, (say 10% to 20% of the amount due) to be paid within a reasonable period when it is ensured that there is no fault in the work done. The amount held back is called retention money.

Cash Received Cash received is ascertained by deducting the retention money from the value of work certified, Cash received = Value of work certified Retention money. Cost of work certified The cost of work certified represents the total expenditure incurred on the contract to date, less cost of work uncertified, materials in hand, plant at site

Work uncertified Work uncertified (or work not yet certified) represents the cost of the work which has been carried out by the contractor but has not been certified by the contractee architect. It is always shown at cost price. Work in progress Incomplete contracts are referred to as work-in-progress. This should be shown on the assets side of the balance sheet under the heading work-in progress. From the viewpoint of the contractor, work-in-progress represents the net expenditure incurred on the contract, irrespective of whether any cash for it has been received or not. While showing the work-in-progress in the balance sheet, any notional profit held back (profit in reserve) and cash received are deducted.

Escalation Clause This clause is often provided in contracts to cover any likely changes in the price of utilisation of materials and labour. Thus a contractor is entitled to suitably enhance the contract price if the cost rise beyond a given percentage. The object of this clause is to safeguard the interest of the contractor against unfavourable changes in cost.

Notional Profit Notional profit represents the difference between the value of work certified and cost of work certified. Profits on incomplete: At the end of accounting period it may be found that certain contract are complete while others are still in process. The total profits may safely be taken to credit of profit and loss account but in case of incomplete contract there are possibility of profits being turned into losses. Therefore profits on incomplete contacts should be considered after providing adequate sum for meeting unknown contingencies. Following rules may be followed :

Profits should be considered in respect of work certified only, work uncertified is always valued at cost 2) No profits should be considered if the value of work certified is less than of contract price 3) If work certified is or more but less than of the contract price, 1/3 of profit, as reduced by the percentage of cash received should be taken to Profit & Loss account and the balance to be treated as reserve i.e. 1/3 x notional profit x cash received work certified
1)

4) If work certified is or more of the contract price, 2/3 of profit, as reduced by the percentage of cash received i.e. should be taken to Profit & Loss account and the balance to be treated as reserve i.e. 2/3 x notional profit x cash received work certified 5) In case if the contact is very much near to completion, the total cost of completing the contract should be estimated if possible, the total estimated profit should be transferred to profit & loss on cash basis, which the value of work certified bears to contract price
estimated profit x value of work certified x %age of cash received contract price

Utkal construction Ltd. took a contract for road construction in 1994. the contract price was 10,00,000 and it is estimated that cost of completion would be 9,20,000. at the end co,. Received 3,60,000 representing 90% of work certified. Work not certified was 10,000 expenditure incurred on contract during 1994 was as follows: Material 50,000 : labour 3,00,000 : plant 20,000 : material costing 5,000 were damaged and was disposed off for 1,000. plant is considered having depreciated by 25%. Prepare contract account in the books of utkal construction ltd.

Illustration Nikhil Limited undertook a contact for Rs. 5,00,000 on 1st July 1994. On 30th June 1995 when the accounts were closed, the following details about the contract were gathered : Materials purchased 1,00,000 Wages paid 45,000 General expenses 10,000 Plant purchased 50,000 Materials in hand 30.6.1995 25,000 Wages accrued 30.6.1995 5,000 Work certified 2,00,000 Cash received 1,50,000 Work uncertified 15,000 Depreciation of plant 5,000

The contract contained an escalation clause which read as In the event of increase(s) of prices of materials and rates of wages by more than 5% the contract price would be increased accordingly by 25% of the rise of the cost of materials and wages beyond 5% in each case. It was found that since the date of signing the agreement, the prices of materials and wage rates increased by 25%. The value of the work certified does not take into account the effect of the above clause.

The Hindustan construction ltd. has undertaken a construction of bridge over river Yamuna. The value of contract is 12,50,000, subject to retention of 20% until one year the certified completion of contract. The following are the details: Labour 4,05,000 Material direct to site less returns 4,20,000 Material from store 81,200 Hire and use of plant 12,100 Direct expenses 23,000 General overhead 37,100 Material in hand on 30th June 95 6,300 Wages accrued on 30th June 95 7,800 Direct expenses accrued on 30th June 95 1,600 Work not yet certified at cost 16,500 Amount certified 11,00,000 Cash received on account 8,80,000 Prepare contract account and show how relevant items appear in balance sheet