Accounting for product costs: Job costing, Batch costing

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Introduction to Accounting for product costs

This chapter looks at how products are costed, depending on whether they are unique products or one of many identical products.

Job costing

Job costing is where a unique item is being made and costs can be specifically traced into that item.

The job could be large (such as building a house or a ship) or small (such as constructing a set of shelving for a room).

Often jobs are given identifying numbers, such as contract numbers or simply job numbers.

All relevant costs are labelled with that number and the total costs can be accumulated.

• Material costs: either invoices for specially bought material or requisitions from stores can be labelled with the job number so that material costs can be accounted for.
• Labour costs: times sheets can be filled in using the job number to track time spent on the job.
• Other expenses: if direct, then the job number will be noted against that cost; if indirect then expenses are often charged to a job on the basis of time and an overhead absorption rate.

Example 1

Job 666 required 20 kgs of a material in stores which cost $15/kg, and also a special component had to be bought at a cost of $150.

30 hours labour were spent on the job where the employees were paid at $9/hour. In addition 3 hours was spent by a supervisor who is paid at $15/hour. Overheads are absorbed at the rate of $4/labour hour.

Calculate the total absorption cost of the job.

Answer to Example 1

Batch costing

In batch costing several identical items are produced as a batch. Each batch will be given a number so that costs can be traced into the batch. The batch costs can be averaged over the units produced.

Example 2 

Batch 7777 used 2000 kgs of a material in stores which cost $10/kg, and also 500 kgs of special material that was bought in at $4/kg.

90 hours labour were spent in Department A where the employees were paid at $12/hour, and 40 hours were spent in department B where employees are paid at 10/hour. Overheads are absorbed at the rate of $3/labour hour.

900 units were produced

Calculate the total absorption cost of the batch and each unit produced.

Answer to example 2