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📚 Learn/ / COSTING — Chapter 6: Job Costing
Microlesson · 5-min read

Job Costing — Collection of Cost for a Job (Material, Labour, Overheads, Spoiled/Defective Work)

# Job Costing — Collecting Cost for a Job

To cost a job accurately, each element of cost must be traced to the specific job or work order. The four elements are handled as follows.

## A. Material Cost

  • Direct materials must be traced to and identified with the specific job. This segregation is achieved by using separate stores requisitions for each job.
  • The summary of each job's material cost is posted to its individual job cost sheet in the Work-in-Progress (WIP) ledger — usually weekly or monthly.
  • Special materials purchased for a particular job are normally charged direct to that job as soon as purchased, without passing through the Stores Ledger.
  • If surplus material is used on another job instead of being returned to stores, a Material Transfer Note is prepared so the cost can be adjusted within the WIP ledger.

## B. Labour (Employee) Cost

  • All direct labour cost must be analysed by individual job or work order, usually by means of job time cards or sheets, where direct labour is booked against specific jobs.
  • The total (or periodical total) for each job is posted to the appropriate job cost card in the WIP ledger.
  • Indirect labour cost is collected from the payroll books and posted against standing order / expense code numbers in the Overhead Expenses ledger.
  • Idle time is booked against an appropriate standing-order expense code — either in each job's time card or on a separate idle time card for each worker.

## C. Overheads

  • Manufacturing overheads are collected under suitable standing order numbers; selling & distribution overheads are collected against cost account numbers.
  • Total overheads are then apportioned to service and production departments on a suitable basis, e.g.:
  • Machine hour
  • Labour hour
  • Percentage of direct wages
  • Percentage of direct materials
  • The method chosen affects the result: different absorption methods give different overhead amounts charged to a job, and hence different total costs.
  • Accurately absorbing the overhead of every cost centre into each job is difficult. The practical solution is to apply a suitable overhead rate to each article or production order — which is essentially an arbitrary method.

## D. Treatment of Spoiled and Defective Work

Circumstance: Where a percentage of defective work is allowed in a batch because it cannot be avoided (a normal rate of defectives has been established).

Treatment: If the actual number of defectives is within (or close to) the normal limit, the cost of rectification is charged to the batch/job (i.e., absorbed as part of normal job cost).

(Note: the source text cuts off here; only the normal-defectives treatment is given.)

Worked example

### Example 1

Choosing the overhead basis changes the job's cost:

Suppose total works overhead is ₹10,000 to be absorbed by a job.

  • On a percentage of direct wages basis the absorbed amount might differ from
  • a machine hour basis or a labour hour basis.

Because each basis distributes the same overhead pool differently, the overhead charged to the individual job — and therefore its total cost — changes depending on the method selected. This is why the choice of absorption basis must be made carefully and consistently.

⚠️ Common exam mistakes

  • Routing special materials bought for a specific job through the Stores Ledger — they are charged direct to the job as soon as purchased.
  • Returning surplus material to stores when it is used directly on another job — instead a Material Transfer Note is prepared and the cost adjusted in the WIP ledger.
  • Treating idle time as part of direct job cost — idle time is booked against a standing-order expense code, not charged directly to the job as productive labour.
  • Assuming overhead absorption gives a single 'correct' figure — different bases (machine hour, labour hour, % of wages, % of materials) yield different overhead amounts and hence different total costs; the method is essentially arbitrary.
  • Charging rectification of defectives that are within the normal allowed limit elsewhere — when defectives are within the established normal rate, the rectification cost is charged to the job/batch itself.
Reference:
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Job Costing — Introduction and
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