JOB AND MARGINAL COSTING

GUIDE:
ONKAR POTDAR

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-1
 Job costing
Job costing is a method of costing applied in industries where
production is measured in terms of completed jobs.
Job costing is a method of costing whereby cost is compiled for a
job or work order.
The production is against customers orders and not for stock.
The cost is not related to the unit of production but is a cost for the
job.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-2
 Costing Approaches
Actual Costing
It allocates indirect costs based on the
actual indirect cost rates (X) the actual activity consumption

Normal Costing allocates:

Indirect costs based on the
budgeted indirect-cost rates (X) the actual activity consumption

Both methods allocate indirect costs to a cost object the same

way: by using INDIRECT-cost rates (X) actual consumption

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-3
 Seven-step Job Costing
1. Identify the Job that is the chosen cost object.
2. Identify the Direct Costs of the Job (DM/DL).
3. Select the Cost-Allocation base(s) to use for allocating Indirect
Costs to the Job.
4. Match Indirect Costs to their respective Cost-Allocation bases.
5. Calculate an Overhead Allocation Rate:
Budgeted OH Costs Budgeted OH Allocation Base.
Actual OH Costs Actual OH Allocation Base.
6. Allocate Overhead Costs to the Job:
OH Allocation Rate x Actual Base Activity For the Job.
7. Compute Total Job Costs by adding all direct and indirect costs
together.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-4
 Journal Entries
Journal entries are made at each step of the production process
The purpose is to have the accounting system closely reflect the
actual state of the business, its inventories and its production
processes.
All Product Costs are accumulated in the Work-in-Process
Control account
Direct Materials used
Direct Labor incurred
Factory Overhead allocated or applied
Actual Indirect Costs (overhead) are accumulated in the
Manufacturing Overhead Control account
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-5
 Accounting for Overhead
Recall that two different overhead accounts were used in the
preceding journal entries:
Manufacturing Overhead Control was debited for the actual
overhead costs incurred.
Manufacturing Overhead Allocated was credited for
estimated (budgeted) overhead applied to production through
the Work-in-Process account.

If Overhead Control > Overhead Allocated, this is called

Under allocated Overhead
If Overhead Control < Overhead Allocated, this is called
Over allocated Overhead

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-6
 Advantages
Profitability of each job can be individually determined.
It provides a basis for estimating the cost of similar jobs which are to
be taken in future.
It provides the detailed analysis of the cost of material, labour and
overheads for each job as and when required.
Plant efficiency can be controlled by confining attention to costs
relating to individual jobs.
Spoilage and defective work can be identified with a specific job and
responsibility for the same may be fixed on individuals.
By adopting pre-determined overhead rates in job costing, we can get
all advantages of budgetary control.
Job costing is essential for cost-plus contract where contract price is
determined directly on the basis of cost.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-7
 Limitations
It is expensive to operate as it requires considerable detailed
clerical work.
With the increase in the clerical work the chances of errors are
increased.
Job order costing cannot be efficiently operated without highly
developed production control system. The job costing requires
intricate factory organization system.
The costs as ascertained are historical as they compiled after
incidence and therefore does not provide control of cost unless it
is used with standard costing system.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-8
 Marginal Cost

Marginal cost is defined as the amount at any given volume of

output by which aggregate costs are changed if the volume of
output is increased or decreased by one unit.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-9
 Need for Marginal Costing
The term cost can be viewed from two angles basically.
Direct Cost and Indirect Cost
Fixed Cost and Variable Cost
If fixed cost is included in the total cost, the per-unit cost varies
from one cost period to another with the fluctuations in level of
activities in two cost periods.
Thus, per unit cost becomes incomparable between two periods.
To avoid this, it will be necessary to eliminate the fixed costs
from the determination of total cost.
This has resulted into concept of Marginal Costing

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-10
 Basics of marginal costing
It is a costing technique where only variable cost or direct cost will
be charged to the cost unit produced. Marginal costing also shows the
effect on profit of changes in volume/type of output by differentiating
between fixed and variable costs.

Marginal costing involves ascertaining marginal costs. Since

marginal costs are direct cost, this costing technique is also known
as direct costing;
In marginal costing, fixed costs are never charged to production.
They are treated as period charge and is written off to the profit
and loss account in the period incurred;
Once marginal cost is ascertained contribution can be computed.
Contribution is the excess of revenue over marginal costs.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-11
 Features Of Marginal Costing
Semi-variable costs are included in comparison of cost
Only variable costs are considered
Fixed costs are written off
Prices are based on variable and marginal contribution

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-12
 Determination Of Marginal Cost
Profit maximization is the short run or long run process by
which a firm determines the price and output level that will
result in the largest profit.
Firms will produce up until the point that marginal cost equals
marginal revenue. This strategy is based on the fact that the total
profit reaches its maximum point where marginal revenue equals
marginal profit .
This is the case because the firm will continue to produce until
marginal profit is equal to zero, and marginal profit equals the
marginal revenue (MR) minus the marginal cost (MC).

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-13
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-14
 Value Of Marginal
Costing To Management
It integrates with other aspects of management accounting.
Management can easily assign the costs to products.
It emphasizes the significance of key factors.
The impact of fixed costs on profits is emphasized.
The profit for a period is not affected by changes in absorption
of fixed expenses.
There is a close relationship between variable costs and
controllable costs classification.
It assists in the provision of relevant costs for decision-making.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-15
 Limitations Of Marginal Costing
To segregate the total cost into fixed and variable components is
a difficult task
Under marginal costing, the fixed costs are eliminated for the
valuation of inventory , in spite of the fact that they might have
been actually incurred.
In the age of increased automation and technological
development, the component of fixed costs in the overall cost
structure may be sizeable.
Marginal costing technique does not provide any standard for
the evaluation of performance.
Fixation of selling price on marginal cost basis may be useful
for short term only.
Marginal costing can be used for assessment of profitability only
in the short run.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-16
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-17