1

JOB, BATCH &

SERVICE COSTING
BPP ACCA F2 Study Text, Management
Accounting, Chapter 10
 Unit Objectives
2
(job and batch costing)
 Students should be able to:
 Describe the characteristics of job and batch
costing
 Describe the situations where the use of job or
batch costing would be appropriate
 Prepare cost records and accounts in job and
batch costing situations
 Establish job and batch costs from given
information
 Unit Objectives
3
(service/operation costing)
 Students should be able to:
 Identify situations where the use of
service/operation costing is appropriate

 Illustrate suitable unit cost measures that may be

used in different service/operation situations

 Carry out service cost analysis in simple service

industry situations
 Costing Methods
4

 Designed to suit the ways goods are

processed or manufactured or the way
services are provided.

 Methods in this unit

 Job
 Batch

 Service
 Job Costing
5

 Method applied where

 work is undertaken to customers’ special
requirements
 Each order is of comparatively short duration.

 A job is a cost unit which consists of a single

order or contract
 Job Costing
6

 Work relating to a job moves through

processes and operations as a continuously
identifiable unit.

 Commonly applied within a factory or

workshop but may also be applied to property
repairs and internal capital expenditure.
 Procedure in Jobbing Concerns
7

• Customer indicates requirements of the job

• Our representative agrees precise details with

customer

• We prepare a job estimate (materials, labour,

expenses, overheads, equipment, profit
margin) to quote selling price

• Job is scheduled if terms are accepted

 Job Cost Sheets/Cards
8

• Cost of each job collected on job cost sheet/card

• Separate record maintained for each individual job

as each differs in one or more respects from any
other job

• Contrast with other methods

– Production for inventory (estimates made of
quantities, styles, colours, etc regardless of the
identity of eventual customers)
 Gathering Job Cost Information
9

 Direct materials (value issues from stores +

specially purchased items)

 Direct labour (type of labour, estimated hours

and projected labour rates, including overtime
and bonuses)

 Direct expenses (from suppliers’ quotes)

 Gathering Job Cost Information
10

• Production Overheads (use relevant OAR’s

and the estimated consumption of the relevant
activity levels)
– Inaccurate OAR’s will lead to
• over-pricing (loss of customers) or
• under-pricing (revenue will not cover costs)

• Administration, selling & distribution overheads

(estimates included, e.g. as a %age of full
production cost)
 Rectification Costs
11

• Cost of work done to correct sub-standard

output is treated as a/an

 direct cost where rectification is not a frequent

occurrence…
(Do you remember what we mean by a direct cost?)

 indirect cost where rectification is regarded as a

normal part of work carried out in a department.
Charged to production overheads.
 Work In Progress
12

 The value of work in progress at the end of a

period is the sum of the costs incurred to date
on incomplete jobs

(provided costs are lower than net realizable

value – IAS 2)
 Pricing the Job
13

 The usual method is cost plus pricing

 Therefore, a desired profit is added to total

costs to arrive at the selling price.

 Profit should conform to the requirements of

the organization’s overall business plan.

 Final price is affected by the competitive

environment
 Pricing the Job
14

 Profit on a job may be expressed

 as
a percentage of the cost of the job
(mark-up) or

 asa percentage of the selling price of

the job (margin)
 Pricing the Job
15

• CP + P = SP

• If markup is 25%,
 then CP + 0.25CP = SP

• If margin = 25%,
 then CP + 0.25SP = SP

• There is an approach that resonates with you. Do

whatever is necessary to find it as you will need it.
 Illustration
16
(Calculating the cost of a job)
 A furniture-making business manufactures
quality furniture to customers’ orders. It has 3
production departments (A, B and C) which
have OAR’s per DLH of $12.86, $12.40 and
$14.03 respectively

 Labour rates are as follows:

$3.80 (A); $3.50 (B) and $3.40 (C)
 Illustration
17
(Calculating the cost of a job)
JOB XYZ MNO
Direct material ($) 154 108
Direct labour hours:
Dept A 20 16
Dept B 12 10
Dept C 10 14

Calculate the total cost of each job.

 Illustration
18
(Calculating the cost of a job)
JOB XYZ MNO

Direct material 154 108.00

Direct labour
Dept A 20 x 3.80 76.00 16 x 3.80 60.80
Dept B 12 x 3.50 42.00 10 x 3.50 35.00
Dept C 10 x 3.40 34.00 14 x 3.40 47.60
Total direct cost c/fwd 306.00 251.40
 Illustration
19
(Calculating the cost of a job)
JOB XYZ MNO

Total direct cost b/fwd 306.00 251.40

Overhead
Dept A 20 x 257.20 16 x 205.76
12.86 12.86
Dept B 12 x 148.80 10 x 124.00
12.40 12.40
Dept C 10 x 140.30 14 x 196.42
14.03 14.03
Total cost 852.30 777.58
 Determining Selling Prices
20

 What would the SP of job XYZ be if mark-up

was 20%?

 SP = CP + 0.2CP
 SP = 1.2CP

 SP = 1.2 x 852.30

 SP = $1,022.76
 Determining Selling Prices
21

 What would the SP of job XYZ be if margin

was 20%?

 SP = CP + 0.2SP
 SP – 0.2SP = CP

 0.8SP = 852.30
 SP = 852.30 / 0.8
 SP = $1,065.38
 Question
22
(Calculating WIP)
• A firm uses job costing and recovers overheads
on direct labour cost. Three jobs were worked on
during a period, (see details on the next slide)

• The overheads for the period were exactly as

budgeted, $140,000

• Jobs 1 and 2 were the only incomplete jobs. What

was the value of closing WIP?

A: $81,900 B: $90,175 C: $140,675 D:214,425

 Question
23
(Calculating WIP)
Job # 1 2 3
$ $ $
Opening WIP 8,500 - 46,000

Material in period 17,150 29,025 -

Labour for period 12,500 23,000 4,500

OAR = Budgeted overhead / Budgeted labour cost

= 140,000 / (12,500 + 23,000 + 4,500)
= 350% of direct labour cost
 Question
24
(Calculating WIP)
Job 1 Job 2
$ $
Opening WIP 8,500 0
Material in period 17,150 29,025
Labour for period 12,500 23,000
Overheads (3.50 x12,500) 43,750
Overheads (3.50 x 23,000) 80,500
Closing WIP 81,900 132,525
 Job Costing for Internal Services
25

 Can be used to control the costs of an internal

service department

 Makes it possible to charge user departments

for the cost of specific jobs carried out, rather
than apportioning the total costs of these
service departments to user departments
using an arbitrarily determined apportionment
basis
 Job Costing for Internal Services
26
(Advantages)
 Realistic apportionment – costs borne by
those who incurred them.

 Increased responsibility and awareness –

user departments appreciate the true cost of
the facilities they use
 Job Costing for Internal Services
27
(Advantages)
 Control of service department costs –
service departments restricted to charging
standard costs to users which are compared
with actual costs

 Planning information - will ease the planning

process as the purpose and cost of service
department expenditure can be separately
identified.
 Batch Costing
28

 Similar to job costing in that each batch of

similar articles is separately identified

 The cost per unit is the total batch cost

divided by the number of units in the batch

 A batch is a group of similar articles which

maintains its identity during one or more
stages of production and is treated as a cost
unit
 Service Costing
29

 A costing method concerned with

establishing the costs of services
rendered (not of items of production)

 Service costing is also called function

costing
 Service Costing
30

 Used by companies operating in a service

industry (they do not make or sell tangible
goods)

 Examples
 Electricians
 Car hire services
 Transport services (road, rail, air)
 Hotels
 Accounting firms
 Service Costing
31

 Used by companies wishing to establish the

cost of services carried out by some of their
departments

 Examples
 Costs of motor vehicles used in distribution
 Costs of the computer department

 Costs of the staff canteen

 Service Costing vs. Product
32
Costing

 Cost of direct materials consumed

will be relatively small compared to
the labour, direct expenses and
overhead costs
 Service Costing vs. Product
33
Costing

 Although many services are revenue-

earning, others are not. Purpose of
service costing may not be to establish a
profit/loss but to provide management with
information about the comparative costs
or efficiency of services.
 Service Costing vs. Product
34
Costing

 Helps managers with budgeting and

controlling costs in service departments.

 Procedures for recording material costs, labour

hours and other expenses will vary according
to the nature of the service
 Specific Characteristics of Services
(illustrated by a haircut – “SHIP”)
35

 Simultaneity
 Production and consumption are simultaneous
 Cannot be inspected for quality in advance
 Cannot be returned if unsatisfactory

 Heterogeneity
 Exact service received will vary each time
 2 hairdressers will cut hair differently
 The same hairdresser will not consistently deliver
the same standard haircut
 Specific Characteristics of Services
(illustrated by a haircut – “SHIP”)
36

 Intangibility
 Includes intangible factors such as music in salon
and personality of hairdresser.

 Perishability
 Cannot be stored
 Cannot be bought in bulk

 Low incidence of WIP

 Unit Cost Measures
37

 Main problem is the difficulty in defining a

realistic cost unit that represents a suitable
measure of the service provided

 Frequently, a composite unit is used e.g.,

‘occupied bed-night’ in a hotel, as an
appropriate unit for cost ascertainment and
control.
 Unit Cost Measures
38

Match the following cost units with their

respective service
Service Cost Unit

Canteen Man hour

Education Mile or Ton/Mile

Vans used in distribution Meal served

Maintenance Full-time student

 Unit Cost Measures
39

 Cost per service unit =

______Total costs for period__________

Number of service units in the period
 Service Cost Analysis
40

 Planned costs should be compared with actual

costs

 CPU of service should be calculated

 CPU of service should be used as part of the

control function (compare period/period so unusual
trends can be investigated)
 Service Cost Analysis
41

 Prices should be calculated for services being

sold to 3rd parties
(a mark-up is added to the CPU of service to arrive at a
SP)

 Costs should be analyzed into fixed, variable

and semi-variable to assist with planning,
control and decision-making
 Service Cost Analysis
42
(internal service situations)

 Service department costing is also used to

establish a specific cost for an internal service
which is a service provided by one department
for another, rather than sold externally to
customers, e.g. canteen and maintenance.
 Service Cost Analysis
43
(internal service situations)
 Canteen Services (discussion)
 Some revenue earned when employees pay for
their meals

 Prices paid insufficient to cover costs of the

services

 Company will subsidize the canteen

 Canteen costing seeks to establish the size of the

subsidy
 Service Cost Analysis
44
(internal service situations)
 Service costing elements for the canteen

 Food and drink (issues from stores)

 Labour costs of canteen staff (time sheets)

 Consumable stores (crockery, cutlery, linen,

cleaning materials)
 Service Cost Analysis
45
(internal service situations)
 Service costing elements for the canteen

 Gas and electricity (separately metered or

apportioned)

 Depreciation (ovens, furniture)

 Overheads (apportionment)
 Service Cost Analysis - Canteen
46

Costs and revenues for the month

Food and drink 11,250
Labour 11,250
Heating and lighting 1,875
Repairs and consumable stores 1,125
Financing costs 1,000
Depreciation 750
Other apportioned costs 875
 Service Cost Analysis - Canteen
47

 Revenue = $22,500

 Total cost (previous slide) = $28,125

 Loss to be covered by company = $5,625

 If 37,500 meals are served,

 CPU (meal) = $0.75
 revenue per meal = $0.60
 Subsidy per meal = $0.15
 Unit Summary
48
Job, batch and service costing
 A costing method is designed to suit the way
goods are processed or manufactured or the
way services are provided

 Job costing applied where work is undertaken

to customers’ special requirements

 Costs for each job are collected on a job cost

sheet or job card
 Unit Summary
49
Job, batch and service costing
 Usual method of fixing prices is cost plus pricing

 Batch costing is similar to job costing in that each

batch of similar articles is separately identifiable

 Service costing is used by companies operating in

a service industry or by companies wishing to
establish cost of services carried out by internal
departments
 Unit Summary
50
Job, batch and service costing
 Characteristics of services (SHIP)
 Simultaneity
 Heterogeneity

 Intangibility

 Perishability

 Main problem is defining a realistic cost unit

 Unit Summary
51
Job, batch and service costing

 Service department costing is also used to

establish specific costs for internal services
provided by one department for another, rather
than sold externally to customers.