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ACOF 014

Introduction to Costing
Semester 2 2008 / 2009


Learning Outcomes

At the end of this lecture, students should be able to:

 Describe or explain job order costing systems

 Estimate product costs using job bid sheets
 Calculate actual product costs using job cost sheets
 Describe batch costing
 Explain the differences between job order costing & batch costing

What are job order costing (JOC) systems?

• A job order costing system estimates the cost of manufacturing products for
different jobs required for specific customers orders
• Each job may differ in terms of:
- Materials content
- Hours of labor required
- Machine time required
- Demand placed on support activity resources (i.e., manufacturing overhead)
- Special customer needs that require customized production
• With such variety, managers need to understand the costs of individual jobs so that
they can assess product and customer profitability

Bidding using JOC

• Firms are sometimes required to bid on jobs before customers decide to place an
order with them
• Costs need to be estimated for each job in order to prepare a bid
• Job order costing systems provide the means to estimate these costs
• A job bid sheet provides a format for recording the estimated costs:

Panel 1: identifies the customer, the product, and the number of units required

Bid Number: J4369 Date: July 6, 2006

Customer: Michigan Motors
Product: Automobile engine valves (Valve #L181)
Engineering Design Number: JDR-103
Number of Units: 1,500

Materials Quantity
Price Amount
Panel 2: lists
Bar steel all3”
stock the materials required to complete
3,600 the job
RM11.30 RM40,680
Subassembly 1,500
39.00 58,500
Total direct materials


Panel 3: lists the amount of direct labor required for the job
Hours Rate Amount
Lathe operators 480
RM26.00 RM12,480
Assembly workers 900
18.00 16,200
Total direct labor 1,380
Panel 4: contains estimates for support costs / overhead
Support Costs

600 machine-hours @ RM40/hour
1,380 direct labor hours @RM36/hour
Total support costs
Panel 5: summarizes the total costs estimated for the job

Direct material RM 99,180

Direct labor 28,680
Support costs
Total costs
A markup rate is applied to translate the estimated cost into a bid price
Total costs
Add 25% markup
Bid price
Unit cost RM134.36
Unit price RM167.95
JOC & Markup

• Markup rate – percent by which job costs are marked up

• The markup rate depends on a variety of factors:

- The amount of support costs excluded from the cost driver rate
- The target rate of return desired by the corporation
- Competitive intensity
- Past bidding strategies adopted by key competitors
- Demand conditions
- Overall product-market strategies

Recording actual JOC

• Job order cost accounting systems record costs actually incurred on individual jobs as
they are produced
• Copies of all materials requisition notes and worker time cards are forwarded to the
accounting department, which then posts them on a job cost sheet
• The system calculates total costs for the portion of the job completed
• Structure of job cost sheet are almost the same as job bid sheet:

Panel 1: Miscellaneous details

- Panel 2: Direct materials
- Panel 3: Direct labor
- Panel 4: Support costs / Overhead
- Panel 5: Total cost, no. of units produced, cost per unit

Illustration on calculating JOC

Portland Electronics Inc. delivered 1000 custom-designed computer monitors on

February 10 to its customer, Video Shack; they had been ordered on January 1. The
following cost information was compiled in connection with this order:

Direct materials used:

Part A327: 1 unit costing RM60 per monitor
Part B149: 1 unit costing RM120 per monitor

Direct labour used:

Assembly: 6 hours per monitor at the rate of RM10 per hour
Inspection: 1 hour per monitor at the rate of RM12 per hour

In addition, manufacturing support costs are applied to the job at the rate of RM5 per
direct labour hour. The selling price for each monitor is RM350.

Required: Prepare job cost sheet for this job and determine cost per monitor


(a) Portland Electronics, Inc.: Job Cost Sheet

Customer: Video Shack
Product: Computer Monitors, 1,000 units
Direct material Quantity Price Amount
Part A327 1,000 units RM60 RM60,000
Part B149 1,000 units 120 120,000
Total direct material cost RM180,000

Direct labor Hours Rate Amount

Assembly 6,000 RM10 RM60,000
Inspection 1,000 12 12,000
Total direct labor cost 7,000 RM72,000

Support costs Amount

7,000 Direct labor hours
@ RM5 per hour RM35,000

Total cost RM287,000

Number of units produced 1,000

(b) Cost per monitor RM287

Batch Costing

What is it?

• A form of costing which applies where quantity of identical products are

manufactured as a batch
• Occurs when customer orders a quantity of identical items or when an internal
manufacturing order is raised for a batch of identical parts, subassemblies or
product to replenish stocks
• In general, the procedure are similar to job costing
• On completion of the batch the cost per unit can be calculated by dividing the
total batch cost by the number of good units produced

Job Order Costing Batch Costing

Production Each product is produced Mass production
according to job requirement i.e.
customer demand
Production Each product is unique All units has same general
requirements features
Costs & Costs Costs measured for individual job Costs measured for individual

Objects unit (after calculating total cost
for the batch)