CHAPTER - THREE

JOB ORDER, BATCH AND CONTRACT

COSTING METHODS

Management accountants use two

basic types of costing Methods to
assign costs to products or services
 Methods of Costing
 The method of costing refers to a system of
cost ascertainment and cost accounting
 Different methods of costing are applied to
different industries depending upon the type of
manufacture and their nature. Broadly the
costing methods are classified into the
following:
1. Specific Order Costing (Job or Terminal
Costing)
2. Operation Costing or Process or Period
Costing (we will see chapter 4)
I. Specific Order Costing
Specific order costing is the category of
basic costing methods applicable where
the work consists of separate jobs,
batches or contracts each of which is
authorized by a specific order or
contract. It includes
1. Job costing consisting
2. Batch costing and
3. Contract costing.
1. Job Costing Principles
Definition: Job costing is the process of
calculating the costs of a specific job.
A job is a cost unit that consists of a
single order or contract. Compared to
continuous production, it is usually limited
in scope and period.
For example, a building company may
contract to construct an office building for
a client.
• The critical difference between a job and
continuous production is that the output of
each job is uniquely identifiable, compared
to the homogeneous result of continuous
production, where every cost unit is
identical.
• Job costing is an appropriate system for
deriving the cost of unique or specific
customer orders.
• It is helpful in industries where each job is
different (and incurs different costs).
Job Costing Process
Characteristic of job costing
• Works or production are undertaken against the
order of customers.
• Production is not as a continuous process
because each job is accepted by work order
basis not for the stock or future sales.
• Each job is treated as a separate entity for the
purpose of costing.
• There is no uniformity in the flow of production
because of different production process.
• Costs are collected and accumulated after the
completion of each or products in order to find
out profit or loss on each job.
 Objectives of job costing
• Job costing provides accurate cost information for
each job.
• In enables management to reduce the cost by
making comparison of each element of actual
costs with estimated ones.
• It helps management to measure the operational
efficiency and inefficiency for each job or works to
take effective decision making.
• Helps management to provide proper valuation of
work in progress.
Cost Collection Procedure in Unit
Costing
1. Collection of Materials Cost: Cost of materials
issued for production are collected from Material
Requisition notes and accumulated for a certain
period or volume of activity.
2. Collection of Employees (labor) Cost: All direct
employee (labour) cost is collected from job time
cards or sheets and accumulated for a certain
period or volume of activity.
3. Collection of Overheads: Overheads are
collected under suitable standing orders
numbers, and selling and distribution overheads
against cost accounts numbers.
Unit costs
production unit costs $
Direct materials X
Direct labor X
Direct expenses X
Total direct costs X
Production overhead X
Total production unit
costs X
Example of a job account:
Step 1: Job cost card
Job cost card $ $
Direct materials 800
Direct labour 500
Direct expenses 1,800
Total direct (prime) cost 3,100
Production overhead 1,000
Total production cost 4,100
Administration overhead 600
Selling and distribution overhead 300
Cost of sales 5,000
Step 2: Budget
• The job cost card is used to inform a
budget for the job.
• The budget in this example would be
$5,000
Step 3: Job Account
• The actual costs for the job are
recorded in a job account.
Job-Account
Job account
$ $
Direct materials 900 Cost of sales 5,250
Direct labour 600
Direct expenses 1,900
Production overhead at 1,100
budgeted rate
Administration overhead 500
Selling and distribution 250
overhead
5,250 5,250
Step 4: Comparison with Budget
Budget Actual Variance
$ $ $
Total direct (prime)
cost 3,100 3,400 (300)
Production
overhead 1,000 1,100 (100)
Total production
cost 4,100 4,500 (400)
Administration
overhead 600 500 100
Selling and
distribution
overhead 300 250 50
Cost of sales 5,000 5,250 (250)
Cost-Plus Pricing
The cost-plus pricing method adds the required
profit to the total cost of the product or job.
The required profit may be expressed as:
• Mark-up % A percentage of the cost.
• Margin % A percentage of the selling price
T-Shirt Co has a job, Job A, with a total cost of
$5,000.
Calculate Job A’s profit and selling price, with a
profit markup of 20% on the total cost.
Mark-up % A percentage of the cost.
Solution
The organization has a target profit of a
20% mark-up on the total cost:
• Mark-up ($)
• = Mark-up % × Cost
• = 20% × $5,000
• = $1,000
The selling price of Job A is calculated as
follows:
Selling price $ = Total cost + Mark-up $
=$5,000 + $1,000 = $6,000
Margin % A percentage of the selling
price
T-Shirt Co has a job, Job A, with a total cost of $5,000.
Calculate Job A’s profit and selling price, with a
profit margin of 20%.
Solution
Total cost % of the selling price
= 100% − Margin %
=100% − 20%
= 80%
The selling price of Job A is calculated as follows:
Selling price $ = Total cost $ / Total cost %
= $5,000 / 80%
= $6,250
2. Batch Costing
• A batch is a group of identical but separately
identifiable products that are made together.
• Batch costing is a form of specific order costing in
which costs are attributed to batches of products.
• Each batch is very similar to a job and in exactly the
same way as job costing.
• The separate cost sheet is maintained for each
batch by assigning a batch number.
• The costs of that batch are gathered together on a
batch cost card. These costs are materials, labour,
expenses and a batch’s share of overheads
Unit Cost of a Batch
• As a batch is made up of a number identical
products or cost units, the cost per unit
computation differs from the job.
• In order to find the cost of each product or cost
unit the total cost of the job is divided by the
number of products in that batch
Example: Batch number 2025 has the following
inputs and 100 outputs:
• May 1, Material X: 30kg @ Br. 10,000 per kg
and 40 hours of grade II labour at Br. 6,000
per hr.
• May 15, Material Y: 20kg @ Br. 30,000 per kg
and 60 hours of grade III labour at Br. 5000
per hr.
• Production overheads are to be absorbed into
the cost of each batch on the basis of labour
hours at a rate of Br. 500 per labour hour.
• Required: Calculate the cost per unit in the
batch.
 Unit in Unit Price in
Items Kg/Hour Birr Total cost in Birr
Material X 30 10,000 300,000
Material Y 20 30,000 600,000

Labour Grade II 40 6,000 240,000

Labour Grade III 60 5,000 300,000

Production overhead 100 500 50,000

Total 1,490,000

cost per unit = Total batch cost

Total units in batch

Cost per per unit 1,490,000

100
= 𝐵𝑟. 14,900
 3. Contract Costing
• Contract costing is a form of specific order
costing in which costs are attributable to
individual contracts.
• It is the method of costing applied in a business
where separate contracts of a non- repetitive
nature are undertaken.
• The main difference between a job and a contract
is one of size and time span.
• Contract costing is used building firms or other
constructional work that takes years or months to
complete.
Features regarding Cost
• The cost unit in contract costing is a contract.
• A separate account is prepared for each contract
to ascertain the profit or loss on each contract.
• Most of the items of cost can be classified as
direct since they can be easily identified with a
specific contract
• The contract price is often fixed in advance and
payment is received at various stages of
completion based on architect’s certificate.
• A separate contract ledger is maintained for
recording costs when the number of contracts is
large
Types of Contract Costing
• The contract are generally of three types:
1. Fixed Price Contracts : Under these contracts, a
fixed price of contract is agreed upon between the
contractor and the contractee
Deductions are made for defective and penalties for
delay and extra payment is made for additional work
2. Contracts with Escalation Clause: In these cases the
contract price is fixed with provision that it will be
increased with increase in price of material, wages
rates and other major costs , and reduced with the
decline in costs.
Continues…………
3. Cost plus Contracts: This method is adopted
where the probable cost of the contract cannot
be ascertained in advance with a reasonable
accuracy. In case of these contracts, no fixed price
is pre-determined for the contract. Contractee
compensates the contractor for all allowable
costs actually incurred by him.
• these costs the contractor is paid a fixed
percentage of the cost as profit or a lump sum
fee of profits.
Example
• The following expenses were incurred on a
contract:
Particulars Amount ($)
Materials purchased 6,000,000
Materials drawn from
1,000,000
stores
Wages 2,250,000
Plant issued 750,000
Chargeable expenses 750,000
Apportioned indirect
250,000
expenses
Total Cost Incurred to date 11,000,000
 Other Information
Item Amount ($)
Contract price 20,000,000

Work certified (up to 30 Nov

13,000,000
2022)

Work not yet certified (up to 31

600,000
Dec 2022)

Materials lying at site (closing

400,000
stock)
Value of plant at site (closing) 300,000
Solution
Step 1 – Total Cost of Contract till 31 Dec 2022
Total cost incurred = $11,000,000$
Less: Closing items (not yet consumed):
Materials lying at site = $400,000$
Plant value at site = $300,000$

Cost of work to date} = 11,000,000 - (400,000 +

300,000) = 10,300,000

Cost of work to date = $10,300,000

Step 2 – Value of Work Done

Description Amount ($)

Work Completed 13,000,000
Work not Completed 600,000
Value of work done to date 13,600,000

Step 3 – Calculate Profit

Profit} = {Value of Work Done} - Cost of Work to
Date}
= 13,600,000 - 10,300,000 = 3,300,000
Step 4 – Amount of Work completed and Cash
Received
Item Amount ($)
Work completed 13,000,000
Cash received 10,400,000
Retention money 2,600,000

Step 5 – Profit to be taken to P&L (since work

certified < 2/3 of contract price)
Percentage of completion based on completed work:
13,000,000/20,000,000 = 65%

Profit to be taken to P&L = 10,300,000

13,000,000 * 2/3*3,300,000=$1,760,000
2. Accounting for normal and
abnormal losses: Spoilage,
Rework, And Scrap
• Managers are focusing increasingly on
improving the quality of and reducing the
defects in their Products, services and activities.
• Managers know that reducing defects reduces
costs and makes their company more
competitive.
• In this part we focus on three types of costs that
arise as a result of defects, spoilage, rework and
scrap, and ways to account for them.
• Spoilage:- is units of production – whether
fully or partially completed - that do not meet
the standards required by customers for good
unit and that are discarded as waste or sold
for reduced prices.
• Rework (Defective units) :- are units of
production that do not meet the standards
required by customers for finished units that
are subsequently repaired and sold as
acceptable finished units
• Scrap:- residual material that results from
manufacturing a product. Scrap has low total
sales value compared with the total sales
value of the product.
2.1. Accounting for Spoilage
Accounting for spoilage aims:
To determine the magnitude of spoilage
costs, and
To distinguish between costs of normal and
abnormal spoilage
Types of Spoilage
1. Normal spoilage
2. Abnormal Spoilage
1. Normal Spoilage
 It is spoilage inherent in a particular
production process that arises even under
efficient operating conditions.
 It is acceptable (unavoidable), planned for and
can be estimated as a percentage of total good
units that pass the inspection point of the
operations
 Costs of normal spoilage are typically included
as a component of the costs of good units
manufactured because good units cannot be
made without also making some units that are
spoiled (i.e., normal spoilage is a product cost)
2. Abnormal Spoilage
• Abnormal Spoilage in excess of what is
considered normal for a particular production
process
• It is not inherent in a particular production
process and would not arise under efficient
operating conditions.
• They arise for unusual or abnormal reasons
such as: machine breakdown and operator
errors, when production line equipment is not
adjusted properly, when inferior raw materials
are purchased, or by fire, explosion, or other
unusual events.
• The cost of spoiled units depends on when
the units are removed from the production
process rather than on when spoilage
actually occurs
• An inspection point is the stage of the
production cycle at which products are
examined to determine whether they are
acceptable or unacceptable units.
• Spoilage is typically assumed to occur at
the production stage or completion where
inspection takes place.
• Example: Anzio Company manufactures a
wooden recycling container in its forming
department. Direct materials for this product are
added at the beginning of the production cycle.
Conversion costs are added evenly during
production. Some units of this product are
spoiled as a result of defects, which are
detectable only upon inspection of finished units.
Normally, spoiled units are 10% of the finished
output of good units. That is, for every 10 good
units produced, there is 1 units of normal
spoilage. Summary data for July 2025 are
Physical Units for July 2025
• Beginning Work in process inventory (July 1)
1,500 units
• Direct Material (100% complete), Conversion
Cost (60% complete) Started during July
8,500 units
• Completed & transferred out in July
7,000 good units
• Work in process, ending inventory (July 31)
2,000 units DM (100% complete) CC (50%
complete)
Solution
(WIP beg. + Units started) = (Goods completed +
WIP end. + spoiled Units)
Total spoilage = (WIP beg. + Units started) –
(Goods units completed + WIP ending)
= (1,500 + 8,500) – (7,000 + 2,000)
= 10,000 – 9,000 = 1,000 units
Normal spoilage is 10% of the 7,000 units of
good output, or 700 units.
Abnormal spoilage = Total spoilage – Normal
spoilage
= 1,000 – 700 = 300 Units
2. Rework (Defective Units)
• The difference between spoiled units and
defective units is that defective units are
reworked to put them into condition to be
sold with good units or to be sold as
irregulars, whereas spoiled units are sold
(at salvage value) without additional work
being performed on them.
• For example if a TV set doesn’t produce any
sound, it can be reworked to correct the
Problem and sold as good units.
• We again distinguish:
1. Normal rework attributable to a specific job,
2. Normal rework common to all jobs, and
3. Abnormal rework.
• The two methods of accounting for normal
rework are based on the same logic used to
account for spoilage.
• Normal rework that is common to all jobs is
treated like any other factory overhead cost.
• Rework caused by a customer’s specifications is
charged to that particular customer’s job.
Example Consider the Hull Machine Shop data
given earlier. Assume the five spoiled parts are
reworked. The journal entry for the $10,000 of
total costs (the details of these costs are assumed)
assigned to the five spoiled units before
considering rework costs is:
Work-in-process control (No.160) 10,000
Material control----------------------------------------4,000
Wages payable control--------------------------------4,000
Manufacturing overhead allocated-----------------2,000
Assume the rework costs equal $3,800 (comprising
$800 direct materials, $2,000 direct manufacturing
labor, and $1,000 manufacturing overhead)
1. Normal Reworks Attributable to a Specific Job
• If the defective units result from unusual job
requirements, the additional rework costs should be
treated as direct costs of that job order
• The journal entry is:
Work-in-process control (No.160)---3,800
Material control ----------------------------------- 800
Wages payable control --------------------------- 2,000
Manufacturing overhead allocated ------------ 1,000
• The cost of all units in job No.160 has increased
because of the rework costs.
2. Normal Rework Common to All Jobs
• If the defective units occur irregularly and are not
the result of the job specifications, the costs should
be treated as a departmental overhead costs
• Actual rework cost is charged to factory overhead
because rework costs have already been charged to
WIP inventory as part of applied FOH.
Manufacturing overhead control
(rework costs) ------------------------3,800
Materials control-------------------------------- 800
Wages payable control-------------------------2,000
Manufacturing overhead allocated----------1,000
3. Abnormal rework
The total cost of reworking abnormal
defective units should be charged to a loss
from abnormal
loss from abnormal rework---3,800
Materials control-------------------------800
Wages payable control-----------------2,000
Manufacturing overhead allocated--1,000
 2.3. Accounting for Scrap
Scrap is material left over when making a
product. Scraps are inevitable and recur
constantly in specific manufacturing processes.
No distinction is made between normal and
abnormal scrap because no cost is attached to
scrap.
Scrap may or may not have a market value. If
scrap materials have sales value, companies
need to control them. Otherwise, if workers see
that a company is not properly accounting for
scrap, they may be tempted to steal it.
Example
Assume the manufacture of aircraft parts
generates scrap and that the scrap from a job has
a net sales value of $900.
1. Recognizing Scrap at the Time of its Sale
• This method is generally used when the dollar
amount of scrap is immaterial, and if it is sold at
irregular intervals. No entry is made in the
accounts until the scrap is sold
• The only journal entry is:
Sales of scrap / Cash or Account Receivable -----900
Scrap Revenues-----------------------------------------------900
2. Scrap Recognized as a Cost reduction (Cost
reduction approach)
• This method is generally used when the dollar
amount of scrap is material and the scrap is sold
quickly after it is produced.
• It regards scrap sales as a reduction of the cost of
producing the product.
• The journal entry in this case is:
Sale of scrap: Cash or Account Receivable --900
Manufacturing overhead control ----------------900
END OF CHAPTER -3
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