F2-09 Job, Batch and Service Costing www PDF

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Session 9

Job, Batch and Service Costing FOCUS This session covers the following content from the ACCA Study Guide. B. Cost Accounting Techniques 3. Cost accounting methods a) Job and batch costing i)

Describe the characteristics of job and batch costing.

ii)

Describe the situations where the use of job or batch costing would be appropriate.

iii)

Prepare cost records and accounts in job and batch costing situations.

iv)

Establish job and batch costs from given information.

c) Service/operation costing i)

Identify situations where the use of service/operation costing is appropriate.

ii)

Illustrate suitable unit cost measures that may be used in different service/operation situations.

iii)

Carry out service cost analysis in simple service industry situations.

Session 9 Guidance Read section 1—you have already encountered job costing in relation to labour costs (Session 6). Work Example 1 to test your understanding. Understand that in batch costing (also called "operation costing") the cost of a product will be the average cost of the batch according to the number of homogenous items produced + any specific costs (s.2). Attempt Example 2.

(continued on next page) F2 Management Accounting

Becker Professional Education | ACCA Study System

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VISUAL OVERVIEW Objective: To describe the characteristics of the basic costing methods applicable where work consists of separate jobs or batches.

COSTING RESOURCE OUTPUTS

JOB COSTING

BATCH COSTING

• When Used

• When Used

• Cost Records

• Product Cost

SERVICE COSTING

PROCESS COSTING (Session 10)

• Potential Problems

COST MEASURES/UNITS • Difficulties in Identifying Cost Units • Application to Service Costing

SERVICE COST ANALYSIS • Service Industry • Situations • Internal Service Situations

Session 9 Guidance Note the application of service costing to service industries and internal services (s.3). Note the difficulties in identifying cost units (s.4.2) and attempt Examples 3, 4 and 5.

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9-1

Session 9 • Job, Batch and Service Costing

1

Job Costing

1.1

When Used

F2 Management Accounting

 Work is undertaken according to customers' special requirements and each order is of comparatively short duration (as compared with, say, constructing a new office building).  A wide range of products or jobs are produced, not necessarily within a factory or workshop, and each order is unique and requires different amounts and types of:

Job costing—a form of specific order costing in which costs are attributed to individual jobs.

labour (e.g. skilled and unskilled); materials;  overheads.  Job costing is suited to industries producing specialised or made-to-order outputs. For example:  accounting/legal advice;  property maintenance/landscape gardening;  service engineering/garage repairs.  

1.2

Cost Records

 The cost of each order is calculated separately. Costs are accumulated via a "job card" (or "job cost sheet").

 Direct costs: materials purchases from goods received notes (GRNs)/ suppliers' invoices;  materials from stores requisitions;  direct wages from time sheets;  direct expenses from invoices.  Indirect cost: factory overhead is usually charged at a predetermined overhead rate, for example, on a direct labour hour basis (see Session 7).  Abnormal costs: these are the costs of rectification or re-working. Depending on their cause, they may be:  charged to a job (e.g. if the customer changed the specification); or  written off to a separate account (from where it may be recharged as an overhead). 

1.3

Potential Problems

Material, labour costs, etc must be collected quickly and accurately. The system is clerically expensive due to this data collection.

9-2

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F2 Management Accounting

Session 9 • Job, Batch and Service Costing

Example 1 Job Cost Chipboard collects cost data in a job order cost system. The following data relates to Job 139: Direct Material Issues

$

14 October

Direct Labour Week

Hours

Rate $

2,200

17 October

950 17 October

180

13.00

22 October

450 24 October

140

14.50

Overheads are charged at $9 per direct labour hour. Required: Calculate the cost of Job 139.

Solution $

$

Costs: Direct material Direct labour

Factory overhead applied

Cost of Job 139

2

Batch Costing

2.1

When Used

 Similar articles are manufactured in batches (either for sale or use).  Articles may also have individual as well as common characteristics.  Examples of articles which involve variations of a single design and require a sequence of standardised operations include:  footwear;  clothing;  furniture.

Batch costing—a form of specific order costing in which costs are attributed to batches of products; it is also called "operation cost".

Product Cost

2.2

Product cost =

 the sum of average costs of operations (may be ascertained by process costing techniques) +

 specific costs (if any) of unique operations.

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9-3

Session 9 • Job, Batch and Service Costing

F2 Management Accounting

Example 2 Batch Cost Carrie uses a batch costing system in her cuckoo clock manufacturing business. Last month the following were used in manufacturing a batch of 120 clocks: Direct materials of $17,800 500 labour hours in the clockworks department (Department A) 750 labour hours in the assembly and finishing department (Department B) Direct labour costs of $10 an hour in Department A and $8 an hour in Department B. Production overheads are absorbed at 120% of labour cost. Required: Prepare a batch cost card showing the total cost of the batch and the unit cost of a clock.

Solution $

$

Costs: Materials Labour:

Department A Department B

Production overheads:

Department A Department B

Total factory costs Cost of a clock =

3

Service Costing

3.1

When Used

 To ascertain the cost of providing a unit of service (e.g. on railway networks).  In both private and public sectors.

 Applies to services for resale and provided within organisations.

3.2

Examples

Service costing— the cost accounting for specific services or functions (e.g. service centres and departments).

Examples of service industries and internal services are as follows: Service Industries Electricity/Gas generation Telephone

      

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Transport—road, rail, sea, air Television and broadcasting Hospitals Theatres/museums Hotels and restaurants

Internal Services  Canteens  Training

 Service departments (e.g. stores/ maintenance)

 Staff welfare  Laundry/cleaning  Boiler-house © 2014 DeVry/Becker Educational Development Corp. All rights reserved.

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4

Session 9 • Job, Batch and Service Costing

Cost Measures/Units* *Cost unit is not the

Cost units— objective output measures for comparative purposes (i.e. as "yardsticks").

4.1

same as unit cost. Unit cost is the cost of the unit; cost unit is the output that is costed.

Difficulties in Identifying Cost Units

In manufacturing industries, where there are physical products, identifying an appropriate cost unit is usually straightforward. The most commonly used measure of output is the unit of output, although there are some variations on this (e.g. effective or equivalent units).  In service industries, it is not always obvious what a cost unit is, or should be.  For example, the output of a hospital concerns outpatients treated, beds occupied, operations performed, etc.  Additionally, having identified a cost unit, each unit of output may be slightly different. A hip replacement operation might be expected to be a relatively standardised procedure requiring standard inputs, but emergency procedures for major traumas may have no standard.  For a hotel, the cost unit might be the provision of a room per night. Most guests might leave their rooms quite tidy, requiring less cleaning—but occasionally a guest might wreck a room, requiring extensive redecoration.  In spite of these difficulties, it is necessary to identify a cost unit so targets can be set and comparisons made between different organisations.

4.2

Application to Service Costing

Illustration 1 Cost Measures/Units An analyst wishes to give an example of a cost measure for each of the following services.

Solution Service Hospitals Canteen Theatres/Sports stadiums Freight carriers Electricity industry Accountancy training/Higher education Hotels Restaurants

Cost Measure Example Patient days Meals served Tickets Tonne-kilometres* Kilowatt hours Student-hours Guest days Cover

*"Two-part" units are particularly useful in service industries. For example, a tonne-kilometre represents 1 tonne carried for 1 kilometre. Therefore, 5 tonnes carried for 3 kilometres represents 15 tonne-kilometres.

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9-5

Session 9 • Job, Batch and Service Costing

5

Service Cost Analysis

5.1

Service Industry Situations

F2 Management Accounting

Example 3 Service Industry Cost Analysis Repairs Co charges domestic and commercial customers $35 per hour worked on a job plus consumable materials at cost plus 100% mark-up. The following information is provided for the last quarter: Budget

Actual

$

$

Sales revenue Chargeable hours (@ $35)

2,031,120

Consumable (cost + 100%)

1,880,480

403,200

336,000

2,434,320

2,216,480

201,600

168,000

Cost of sales Consumable materials Wages (plumbers, electricians, etc)

599,040

621,504

1,088,000

1,206,000

1,888,640

1,995,504

Gross service hours paid

74,880

76,752

Chargeable hours to customers

58,032

53,728

Other

Required: (a) Calculate budget and actual: (i) charge-out revenue per service hour paid (ii) wage cost per chargeable hour (b) Comment on the cost measures calculated, suggesting reasons for the differences between actual and budget.

Solution (a) Budget and actual cost measures

Budget (i)

Actual

Charge-out revenue/service hour paid

(ii) Wage cost/chargeable hour

(b) Comment on the cost measures calculated

9-6

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F2 Management Accounting

Session 9 • Job, Batch and Service Costing

Internal Service Situations

5.2

Example 4 Internal Services Cost Analysis A technical department of a firm of certified accountants provides free advice to the firm's partners, managers, clients and trainee accountants. The department is staffed by the technical partner, two managers and three assistants.

Required: (a) Identify SIX elements of cost that can be identified with or assigned to the department. (b)

Suggest THREE cost measures for the department.

Solution (a)

Cost elements

1.

2.

3.

4.

5.

6.

(b)

Cost measures

1.

2.

3.

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9-7

Summary 

Job costing is used for products or services provided to meet customers' special requirements, where the work is of a short duration.

 

Batch costing is used when specific batches of a product are manufactured.



Service costing is used to calculate the cost per unit of a service, in both private and public sectors.



It is necessary to choose an appropriate cost unit for a service (e.g. an hour). An overhead absorption rate is then used to absorb overheads into the cost unit (as for physical products).

For specific order costing situations, separate accounts are kept for each job or batch. Direct costs are debited to each account. Overheads are charged (debited) using overhead absorption rates (Session 7).

Session 9 Quiz Estimated time: 10 minutes

1.

True or false? Job costing can be used only for the costing of goods. (1.1)

2.

State how abnormal costs should be charged. (1.2)

3.

State ONE potential problem with job costing. (1.3)

4.

True or false? Batch costing cannot be used when articles have any common characteristics. (2.1)

5.

State how product cost is calculated in a batch costing system. (2.2)

6.

True or false? Service costing may be applied in the railway industry. (3)

7.

Give THREE difficulties of identifying cost units in service industries. (4.1)

8.

True or false? Service cost analysis is appropriate for external services provided by firms in service industries, but is inappropriate for internal services provided within each of the firms. (5)

Study Question Bank Estimated time: 20 minutes

Priority

Q32

Estimated Time

Printing

Completed

20 minutes

Additional

Q33

9-8

Public transport

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Session 9 EXAMPLE SOLUTIONS Solution 1—Job Cost Costs:

$

$

Direct material ($2,200 + 950 + 450)

3,600

Direct labour 180 hours × $13.00

2,340

140 hours × $14.50

2,030

4,370

Factory overhead applied: 320 hours × $9 Cost of Job 139

2,880 10,850

Solution 2—Batch Cost Costs:

$

Materials Labour:

$ 17,800

Department A (500 hours × $10)

5,000

Department B (750 hours × $8)

6,000 11,000

Production overheads:

Department A ($5,000 × 120%)

6,000

Department B ($6,000 × 120%)

7,200 13,200

Total factory costs

42,000

$42,000 = $350 120 Cost of a clock =

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9-9

Solution 3—Service Industry Cost Analysis (a) Budget and actual cost measures

(i)

Charge-out revenue/service hour paid

(ii) Wage cost/chargeable hour

Budget

Actual

$2,031,120

$1,880,480

74,880

76,752

= $27.12

= $24.50

$599,040

$621,504

58,032

53,728

= $10.32

= $11.57

(b) Comment on the cost measures calculated Charge-out revenue per service hour paid shows the average revenue obtained for each hour worked. In an ideal world, because the price is $35 per hour, the charge-out revenue per service hour would be $35. In practice however, not all service hours worked will be charged to the customer—this could be due to complaints about poor work, or because it is necessary to perform remedial work at no additional cost to the customer. The budgeted revenue per service hour paid is $27.12. This is based on 58,032

the assumption that 77.5%

74,880 be chargeable to customers.

× 100% of hours worked would

The actual revenue per service hour paid is below the budget by 9.7%. $24.50−27.12 $27.12

× 100%

This is due to the fact that the portion of

service hours worked which was charged to customers was only 70.0% 53,728 76,752

× 100% compared with the budgeted 77.5%.

Wage cost per chargeable hour shows the average cost of providing one billable hour to the customer. The cost includes the cost of all labour hours worked, whether productive or non-productive. If a higher portion of hours worked are productive, the wage cost per chargeable hour will be lower. The measure will also be affected by the hourly rate paid for the labour. The actual wage cost per chargeable hour of $11.57 is above the budgeted $10.32 by 12.1%.

$11.57−10.32 $10.32

× 100% .

This is due to two factors: 1.

The portion of hours worked that was actually charged was lower than budget (as noted above).

2.

The wage rate was higher than budgeted as the actual rate was $621,504 compared to a budgeted $8.00 $8.10 per hour 76,752 per hour

$599,040

.

74,880

9-10

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Solution 4—Internal Services Cost Analysis (a) Cost elements 1.

Wages and salaries

2.

Consumable materials

-

stationery, CDs, memory sticks, etc

3.

Premises

-

rent, buildings maintenance,

4.

Equipment

-

computer

-

office furniture

5.

Expenses

-

telephone

insurance (apportioned)

6.

Overheads

-

staff training (e.g. courses)

-

publications

-

professional subscriptions

-

light and heat, office cleaning (apportioned)

-

share of firm's g...