INTERNAL RESEARCH ASSIGNMENT

Name of the candidate: MANSI MOHAN

Enrollment no. : 20780303912 Course: MBA 2ND SHIFT B SECTION Batch: 2012 2014 Semester: 1ST

Subject Name: MANGEMENT FOR ACCOUNTING

Subject code: MS 111

Topic of assignment: JOB COSTING AND PROCESS COSTING Subject Teachers name : Ms ETHI JAIN

Date of submission: 15 OCT 2012

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QUES : WHY might an advertising agency use job costing for an advertising campaign by Pepsi, whereas a bank uses process costing to determine the cost of checking account withdrawal ?
An advertising campaign for Pepsi is likely to be very specific to particular individual client. Job costing allows all the specific aspects of each job that has to be be identified. In contrast, the processing of checking account in banks withdrawals is similar for many customers. Here, process costing can be used to compute the cost of each checking account withdrawal in the bank. Cost system design and selection guidelines. different types of product costing systems are available and can be classified by: (1) cost accumulation method -- job or processing costing systems; (2) cost measurement method -- actual, normal, or standard costing systems; (3) overhead assignment method -- traditional or activity-based costing systems. The choice of a particular system depends on (1) the nature of the industry and the product or service that has to be given, (2) the firm's strategy and its management information requirements, and (3) the costs and benefits of acquiring, designing, modifying, and operating a particular system in the organisation.

strategic role of job costing. Job costing systems provide information for managers to make strategic decisions for selection of products and customers, manufacturing methods, pricing decisions, and other long term issues. Job costing is a product costing system that accumulates and assigns costs to a specific job. It is used by industries having a wide variety of products or services such as printing shops, shipbuilders, custom furniture-manufacturing plants, contractors, film-producing companies, accounting firms, law firms, advertising agencies, consulting firms, medical clinics, construction companies, and engineering firms etc. The main importance of the source documents of job cost records is the accuracy of the records. Problems occurring in these areas include incorrect recording of quantity or amounts, materials recorded on one job being borrowed and used on other jobs, and job numbers being assigned to materials or labor inputs.

process costing of checking account withdrawals is similar for many customers. Here,
process costing can be used to compute the cost of each checking account withdrawal. When goods or services are uniform and are mass-produced, tracing product costs to individual Units are generally inefficient, if not impossible. YOU CAN HAVE A BETTER UNDERSTANDING ABOUT BOTH THE CONCEPTS BY STUDINGB THEM IN DETAIL BELOW :

Job Costing involves the calculation of costs involved in a constructing "job" or the
manufacturing of goods done in batches. These costs are recorded in ledger accounts throughout the life of the job or batch and are then summarized in the final trial balance before the preparation of the job cost or batch manufacturing statement. Job costing is the process of recording the expenses incurred on a job against the revenue produced by the organisation. Job costing is an important tool for those who are compairing a relatively high rs volume per customer with a relatively low number of customers. For example, building contractors, subcontractors, architects and consultants often use job costing, whereas a hardware store or convenience store will not use job costing. Job costing using accounting software enables you to record a number of factors and analyze the results to facilitate decision making. A Job costing report helps you ensure that all costs involved in a job have been properly informed to the customer. An Estimates vs. Actuals report compares estimate costs to actual costs, and estimated revenues to actual revenues so that you can analyze any variances between your estimation and the actual result. You can then use the results of your analysis to create more accurate estimates when you decide for future jobs. Through job costing you can identify the most and least profitable areas of your business, so that you can focus on the profitable elements, and try to make the less profitable aspects of your business more efficient for the organisation . It will help you to quote new jobs more accurately, and assist you in managing jobs in progress.

Components of job costing

There are many aspects to job costing: 1. Record the costs involved in the job 2. Make sure that all the costs are invoiced to the customer 3. Produce reports showing details of costs and revenues incurred by the job

Job Costing Example

Xyz ltd co. engaged in job work has completed all the jobs in hand on 30th dec. 2009 except job no. 447. The cost sheet on 30th dec. 2009 showed direct material and direct labour cost of Rs. 40,000 and Rs. 30,000 respectively as having being incurred on job no. 447. The cost incurred by the business on 30st dec. 2009, the last date of the accounting year were as follows :

Direct material Rs. 2000

Direct labour Rs. 8000

Indirect labour Rs. 2000

Misc. Factory overhead Rs. 3000

The company follows the practice to make job absorbed factory overheads on the basis of 120% of direct labour cost. Prepare a cost sheet for the company :

Advantages of Job Costing

1. Job order costing shows a detailed analysis in the form of the costs of materials, labor and overheads and therefore it helps the company in allocating overheads at a predetermined rate. 2. Estimation helps the company in determining the profitability of a job, which in turn will help the company in deciding whether to take a particular job or not. 3. Job order costing facilitates the estimation of the cost of a similar job and therefore it helps the company in avoiding duplication of work because if company has to quote price for a similar job than it can quote it on the basis of previous job costing method.

Disadvantages of Job Costing

1. Job order costing needs a lot of clerical work in recording of transactions related to it and therefore many companies tend to avoid this method of costing. 2. overheads are allocated on estimation this method may not incurr 100 percent accurate result and may lead to errors while quoting the price for a product or service by the company.

Process costing : is an accounting method that traces and accumulates direct costs, and
allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventualy, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite of Job costing which attempts to measure individual costs of production of each unit. Process costing is a type of operation costing which is used to ascertain the cost of a product at each process or stage of manufacture. CIMA defines process costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". Process costing is suitable for industries producing homogeneous products and where production is a continuous flow in the organisation. A process can be referred to as the subunit of an organization specifically defined for cost collection purpose. Costing is an important process that many companies adopt to keep track of where their money is being spent in the production and distribution processes or not. Understanding these

costs is the first step in being able to control them. It is very important that a company chooses the appropriate type of costing system for their product type and industry. One type of costing system that is used in certain industries is process costing that varies from other types of costing. In Process costing unit costs are more like averages, the process-costing system requires less bookkeeping than does a job-order costing system. So, a lot of companies prefer to use process-costing system instead of job costing. The four basic steps in accounting for Process cost:

To Summarize the flow of physical units of output. To Compute output in terms of equivalent units. To Summarize total costs to account for and Compute equivalent unit costs. To Assign total costs to units completed and to units in ending work in process inventory

Advantages of Process Costing:

The main advantage of process costing is the ease and simplicity of accounting. Process Costing is a simple and direct method of cost incurring that collects the overall costs from each department and ignores costs related to specific jobs within a organisational department. This reduces the volume of data, and makes data collection easy and quick. And lowers the burden The analysis is likewise simple and straightforward, and does not require any specialized skills other than normal accounting skills. It Allows budgeting of uniform output and usage costs as standard costs, making it possible to track deviations from such standard costs with ease. It becomes possible to track the inefficiency or discrepancy to a specific process or department without checking each department or process. It facilitates easy and accurate tracking of inventory.

Process costing makes it easy to obtain and predict the average cost of a product, allowing accurate estimates to customers.

Disadvantages of Process Costing:

Process costing is used for homogeneous products, and fails to provide an accurate estimate of product costs when a single process produces many items or different varieties of a same

item. It also remains suitable only for bulk process works and not for customized orders. Since process costing enables budgeting standard costs, the costs obtained are historic and not current, and their use for managerial decision-making remains limited. EXAMPLE OF PROCESS COSTING Abc ltd is a manufacturing organisation with two processes. Information for the period ended 20 august 1995 is as follows: Process 1Process 2 Opening WIP Costs for the period: Material 1000kg costing Labour Overheads Transferred to Process 2 25,650 12,750 5,950 700kg Nil 6950 3475 800kg 150kg Nil 200kg

Transferred to Finished Goods Closing WIP 200kg

Normal losses are expected to be 5% of input for each process. Losses in Process 1 have no scrap value, whilst losses in Process 2 can be sold for 10 per kg. Losses are deemed to arise at the end of the process. Opening WIP is 60% complete with regard to Labour and Overheads. Closing WIP in Process 1 is 100% complete with regard to Material and 50% complete for Labour and Overheads. Closing WIP in Process 2 is 50% complete with regard to Labour and Overheads. Prepare the Process Accounts for each process of the company. Process 1 Transferred to Process 2 700 (1) Material Labour 1,000 25,650 Normal Loss 12,750 Closing WIP 5,950 Abnormal Loss 50 NIL 200 (2) 50 (3)

Overheads

The Normal Loss figure is 5% of the 1000kg input. No cost is assigned to Normal Loss as the cost is absorbed into the "good" units. Abnormal Loss is the difference between the total units on the debit side and the total units on the credit side. Step 2

Material Labour Overhead

Units transferred to Process 2 Abnormal Loss Closing WIP

700 50 200

700 50 100

700 50 100

950 Period Costs (b)

850

850

25,650 12,750 5,950 15 7

Cost per unit (b)/(a) 27

Closing WIP is 50% complete for Labour and Overheads, which is equivalent to 200 x 50% = 100 complete units. Step 3

Material Labour Overhead Total 34,300 (1) 2,450 (3) 7,600 (2)

Units transferred to Process 2 18,900 10,500 4,900 Abnormal Loss Closing WIP 1,350 5,400 750 750

1,500 700

25,650 12,750 5,950

44,350

the total of each column (Material, Labour and Overhead) is the same as the figures appearing in the Process Account for each of these costs.

Step 4 Current costs:

Transferred to Process 2 Material Labour Overheads 1,000 25,650 12,750 5,950 Normal Loss Closing WIP Abnormal Loss

700 50 200 50

34,300 NIL 7,600 2,450

1,000

44,350

1,000

44,350

Step 5 Opening WIP Transferred from Process 1 Labour Overheads 700 300 13,000 Transferred to Finished Goods 34,300 Normal Loss 6,950 3,475 Closing WIP 150 (5) 800 50 (4) 500

1,000

57,725

1,000 (6)

Losses can be sold at 10 per kg, therefore Normal Loss is assigned a monetary value of 50 x 10 = 500. Step 6

Transferred Costs from Process 1 Labour Overhead NIL 120 500 75 120 500 75

Opening WIP

Units started and Completed 500 Closing WIP Total Equiv Units Period Costs Cost per unit 150

650 33,800 52

695

695

6,950 3,475 10 5

Opening WIP is already 60% complete with regard to Labour and Overheads, therefore only 40% remains to be completed in this period. Equivalent units completed in this period are therefore 300 x 40% = 120kg. Labour 1,200 5,000 750 Overhead 600 2,500 375 Total 1,800 33,500 8,925 (*) (*) (5)

6,950

3,475

44,225

Transferred to Finished Goods Normal Loss 800 50 48,300 500

Closing WIP

150

8,925

1,000

57725