Job Costing and Contract Costing

1. Job costing
2. Job cost card/sheet
3. Collection of costs for a job
4. Accounting of cost for a job
5. Contract costing
6. Recording of contract costs
7. Meaning of the terms used in contract costing
8. Cost plus contract
   
   

CIMA London defines Job Costing as “the category of basic costing methods which is applicable where the work consists of separate contracts, jobs or batches, each of which is authorised by specific order or contract.” According to this method, costs are collected and accumulated according to jobs, contracts, products or work orders. Each job or unit of production is treated as a separate entity for the purpose of costing. Job costing is carried out for the purpose of ascertaining cost of each job and takes into account the cost of materials, employees and overhead etc. The job costing method is also applicable to industries in which production is carried out in batches. Batch production basically is of the same character as the job order production, the difference

being mainly one in the size of different orders.

Principles of Job Costing

The job costing method may be regarded as the principal method of costing since the basic object and purpose of all costing is to:

• Analysis and ascertainment of cost of each unit of production
• Control and regulate cost
• Determine the profitability 

The basic principles enunciated for the job costing method are valid essentially for all types of industry. For example, printing; furniture; hardware; ship-building; heavy machinery; interior decoration, repairs and other similar work.

• Prepare a separate cost sheet for each job
• Disclose cost of materials issued for the job
• Employee costs incurred (on the basis of bill of material and time cards respectively)
• When job is completed, overhead charges are added for ascertaining total expenditure

• When jobs are executed for different customers according to their specifications.
• When no two orders are alike and each order/job needs special treatment.
• Where the work-in-progress differs from period to period on the basis of the number of jobs in hand.

Each job order is asymmetrical to other due to specific and customised requirements. To ascertain cost of a particular job, it is necessary to record all the expenditure related with a job separately. For this purpose, Job Cost card is used. Job cost card is a cost sheet, where the quantity of materials issued, hours spent by different class of employees, amount of other expenses and share of overheads are recorded. This is helpful in knowing the total cost, profitability etc. of a job. The following is an illustrative format of Job Cost card/ sheet.

JOB COST SHEET
Description: Blue Print No.: Material No.: Reference No.:	Job No.: Quantity: Date of delivery: Date commenced: Date finished:

Date	Reference	Details	Material	Labour	Overhead
		Total

Summary of costs	Estimated	Actual	For the job________________ Units produced_____________ Cost/unit_________________ Remarks_________________ Prepared by:______________ Checked by:_______________
Direct material cost
Direct wages
Production overhead
Production cost
Administration and Selling and Distribution Overheads
Total Cost
Profit/Loss
Selling Price

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3. COLLECTION OF COSTS FOR A JOB

An essential requirement of job cost accounting is that direct materials and their cost must be traced to and  identified  with  specific  job  or  work  order. This segregation of materials cost by jobs or work order is brought by the use of separate stores requisitions for each job or work order. Where a bill of material is prepared, it provides the basis for the preparation of these stores requisitions. But when the entire quantity of materials specified in the bill of materials is drawn in one lot or in installments, the bill itself could be made to serve as a substitute for the stores requisition.

After the materials have been issued and the stores requisitions have been priced, it is usual to enter the value of the stores requisition in a material abstract or analysis book. It serves to analyse and collect the cost of all direct materials according to job or work orders and departmental standing orders or expense code numbers. From the abstract book, the summary of materials cost of each job is posted to individual job cost sheets or cards in the Work-in-Progress ledger. The postings are usually made weekly or monthly. Similarly, at periodic intervals, from the material abstract books, summary cost of indirect material is posted to different standing orders or expense code numbers in the Overhead Expenses ledger. If any special material has been purchased for a particular job, it is generally the practice to charge such special material direct to the job concerned without passing it through the Stores Ledger, as soon as it is purchased.

If any surplus material is left over in the case of any job, unless it can be immediately and economically used on some other job, the same is returned to the stores with a proper supporting document/stores Debit Note or Shop Credit, and the relevant job account is credited with the value of excess material returned to the stores. If the surplus material is utilised on some other job, instead of being returned to the stores first, a material transfer note is prepared. The transfer note would show the number of the transfer to job as well as transferee job (or jobs) so that, on that basis, the cost thereof can be adjusted in the Work- in-Progress Ledger.

All direct labour cost must be analysed according to individual jobs or work orders. Similarly, different types of indirect labour cost also must be collected and accumulated under appropriate standing order or expenses code number. The analysis of labour according to jobs or work orders is, usually, made by means of job time cards or sheets. All direct labour is booked against specific jobs in the job time cards or sheets. All the idle time also is booked against appropriate standing order expense code number either in the job time card for each job or on a separate idle time card for each worker (where the job time card is issued job-wise). The time booked or recorded in the job time and idle time cards is valued at appropriate rates and entered in the labour abstract or analysis book. All direct employee cost is accumulated under relevant job or work order numbers, and the total or the periodical total of each job or work order is then posted to the appropriate job cost card or sheet in Work-in- Progress ledger. The postings are usually made at the end of each week or month.

 

The abstraction of idle time costs under suitable standing order or expenses code numbers is likewise done and the amounts are posted to the relevant departmental standing order or expense code number in the Overhead Expenses Ledger at periodical intervals. As regards other items of indirect labour cost these are collected from the payrolls books for the purpose of posting against standing order or expenses code numbers in the Overhead Expenses ledger.

Manufacturing overheads are collected under suitable standing order numbers and selling and distribution overheads against cost accounts numbers. Total overhead expenses so collected are apportioned to service and production departments on some suitable basis. The expenses of service departments are finally transferred to production departments. The total overhead of production departments is then applied to products on some realistic basis, e.g. machine hour; labour hour; percentage of direct wages; percentage of direct materials; etc. It should be remembered that the use of different methods will lead to a different amount being computed for the works overhead charged to a job hence to different total cost. The problem of accurately absorbing, in each individual job or work order, the overhead cost of different cost centres or departments involved in the manufacture is difficult under the job costing method. It is because the cost or the expenses thereof cannot be traced to or identified with any particular job or work order. In such circumstances, the best that can be done is to apply a suitable overhead rate to each individual article manufactured or to each production order. This is essentially an arbitrary method.

Spoiled work is the quantity of production that has been totally rejected and cannot be rectified.

Defective work refers to production that is not as perfect as  the  saleable  product but is capable of being rectified and brought to the required degree of perfection provided some additional expenditure is incurred. Normally, all the manufacturing operations are not fully successful; they result in turning out a certain amount of defective work. Nonetheless, over a period of time it is possible to work out a normal rate of defectives for each manufacturing process which would represent the number of defective articles which a process shall produce in spite of due care. Defects arise in the following circumstances:

Circumstances	Treatment
Where a percentage of defective work is allowed in a particular batch as it annot be avoided.	When normal rate of defectives has already been extablished, if the actual number of defectives is within the normal limit or is near thereto the cost of rectification will be charged to the whole job and spread over the entire output of the batch. If, on the othe rhand, the number of defective units substantially exceed the normal, the cost of rectification of the number which exceed the normal will be written off as a loss in the Costing Profit and Loss Account.
Where defect is due to bad workmanship.	In this case cost of rectification will be abnormal cost.i.e., not a legitimate element of the cost. Therefore, the cost of rectification shall be written off as a loss, unless by an arrangement, it is to be recovered as a penalty from the workman concerned. It is possible, however that the management did provide for a certain proportion of defectives on account of bad workmanship as an unavoidable feature of production. If that be the case, the cost of rectifying to the extent provided for by the management will be treated as a normal cost and charge to the batch.
Where defect is due to the inspection Department wrongly accepting incoming material of poor quality.	In this case the cost of rectification will be charged to the department and will not be considered as cost of amnufacture of the batch. Being an abnormal cost, it will be written off to the Costing Profit and Loss Account.

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4. ACCOUNTING OF COSTS FOR A JOB

1. For purchase of materials-
   Stores Ledger Control A/c Dr.
        To Cost Ledger Control A/c*
   
   
2. For the value of direct materials issued to jobs-
   Work-in-Process Control A/c Dr.
        To Stores Ledger Control A/c
   
   
3. For return of direct materials from jobs-
   Stores Ledger Control A/c Dr.
        To Work-in-Process Control A/c
   
   
4. For return of materials to suppliers –
   Cost Ledger Control A/c Dr.
        To Stores Ledger Control A/c
   
   
5. For indirect materials-
   Factory Overhead Control A/c Dr.
        To Stores Ledger Control A/c
   
   
6. For wages paid-
   Wages Control A/c Dr.
        To Cost Ledger Control A/c
   
   
7. For direct wages incurred on jobs-
   Work-in-Process Control A/c Dr.
        To Wages Control A/c
   
   
8. For indirect wages –
   Factory Overhead Control A/c Dr.
        To Wages Control A/c
   
   
9. For any indirect expense paid-
   Factory Overhead Control A/c Dr.
        To Cost Ledger Control A/c
   
   
10. For charging overhead to jobs-
    Work-in-Process Control A/c Dr.
         To Factory Overhead Control A/c
    
    
11. For the total cost of jobs completed-
    Cost of Sales A/c Dr.
    To Work-in-Progress Control A/c
    
    
12. The balance of Cost of Sales A/c is transferred to Costing Profit and Loss a/c; For such transfer –
    Costing Profit and Loss A/c Dr.
         To Cost of Sales A/c
    
    
13. For the sales value of jobs completed -
    Cost Ledger Control A/c Dr.
         To Costing Profit and Loss A/c**

*General ledger adjustment account is another name of Cost Ledger Control Account.

**The balance of Costing Profit and Loss Account shall now represent profit or loss. The balance of Cost Ledger Control Account shall be carried forwarded. With the balance on all the accounts trial balance can be drawn.

Some of the advantages and disadvantages of Job costing are summarised as below:

Advantages	Disadvantages
The details of Cost of material, labour and overhead for all job is available to control. Profitability of each job can be derived. It facilitates production planning. Budgetary control and Standard Costing can be applied in job costing. Spoilage and detective can be identified and responsibilities can be fixed accordingly.	Job Costiing is costly and laborious method. As lot of clerical process is involved the chances of error is more. This method is not suitablke in inflationary condition. Previous records of costs will be meaningless if there is any change in market condition.

Difference between Job Costing and Process Costing

 

The main points which distinguish job costing and process costing are as below:

Job Costing	Process Costing
A job is carried out or a product is produced by specific orders.	The process of producing the product has a continuous flow and the product produced is homogenous.
Cost are determined for each job.	Costs are compiled on time basis i.e., for production of a given accounting period for each process or department.
Each job or order has a number and costs are collected against the same job number.	The unit cost of process is an average cost for the period.
Each job is seperate and independent of other jobs.	Products lose their individual identity as they are manufactured in a continuous flow.
Costs are computed when a job is completed. The cost of a job may be determined by adding all costs against the job.	Costs are calculated at the end of the cost period. The unit cost of a process may be computed by dividing teh total cost for the period by the output of the process during that period.
As production is not continuous and each job may be different, so more managerial attention is required for effective control.	Process of production is usually standardises and is therefore, quite stable. Hence control here is comparatively easier.

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5. CONTRACT COSTING

Contract costing is a form of specific order costing where job undertaken is relatively large and normally takes period longer than a year to complete. Contract costing is usually adopted by the contractors engaged in any type of contracts like construction of building, road, bridge, erection of tower, setting up of plant etc. Contract costing have the following distinct features:

1. The major part of the work in connection with each contract is ordinarily carried out at the site of the contract.
2. The bulk of the expenses incurred by the contractor are considered as direct.
3. The indirect expenses mostly consist of office expenses, stores and works.
4. A separate account is usually maintained for each contract.
5. The number of contracts undertaken by a contractor at a time is usually few.
6. The cost unit in contract costing is the contract itself.

A contract takes longer period to complete and the result of the contract can be known only after the completion of the contract. To have a better control over the contract and cost, it is necessary to have an idea of profitability of contracts at regular intervals or atleast in a year. For this purpose, a contractor needs to calculate expected profit or notional profit for a contract. It also helps in profit comparison for a period and provide a good basis for performance measurement and evaluation of those who are engaged in the contract. The expected or notional profit in respect of each contract in progress (i.e. incomplete contracts) is transferred to the costing profit and loss account (consolidated) for the year to determine overall profitability of the contractor.

 

All materials supplied from the stores or purchased directly for the contract are debited to the concerned contract account.

Contract Account (Contract No:)              Dr.

        To Stores Ledger Control A/c (Issued from stores) or
        To Cost Ledger Control A/c (Direct purchase)

In the case of transfer of excess material from one contract to another, cost of these excess materials are adjusted on the basis of Material Transfer Note.

Contract Account (Contract No. XYZ)         Dr.

        To Contract Account (Contract No. ABC)

In case the return of surplus material appears uneconomical on account of high cost of transportation, the same is sold and the concerned contract account is credited with the price realised. Any loss or profit arising therefrom is transferred to the Costing Profit and Loss Account.

Cost Ledger Control A/c                   Dr.

Costing Profit & Loss A/c (Loss)        Dr.

          To Contract A/c

          To Costing Profit & Loss A/c (Profit)

Any loss of material due to theft or destruction etc. is transferred to the Costing Profit and Loss Account.

Costing Profit & Loss A/c            Dr.

           To Contract A/c

If any stores items are used for manufacturing tools, the cost of such stores items are charged to the work expenses account.

Works expenses A/c              Dr.

           To Stores Ledger Control A/c
(With amount of stores used for works)

 

Contract A/c                        Dr.

           To Works expenses

(With amount of works used in the contract)

If the contractee has supplied some materials without affecting the contract price, no accounting entries will be made in the contract account, only a note may be given about it.

Workers employed on the site of the contract is regarded as direct employees (irrespective of the nature of the task performed) and the wages paid to them are charged to the concerned contract directly. If an employee is engaged concurrently in other contract also then the total wages paid is apportioned to the contacts on some reasonable basis, usually on time basis.

Contract A/c                      Dr.

          To Wages Control A/c

Direct expenses (if any) are directly charged to the concerned contract account.

Contract A/c                     Dr.

          To Direct Expenses A/c

Indirect expenses (such as expenses of engineers, surveyors, supervisors, corporate office etc.) may be distributed over several contracts on certain reasonable basis as overheads.

Contract A/c                    Dr.

         To Overheads A/c

The value of the plant in a contract may be either debited to contract account and the written down value thereof at the end of the year entered on the credit side for closing the contract account, or only a charge (depreciation) for use of the plant may be debited to the contract account.

Contract A/c                   Dr.

          To Plant and Machinery A/c (with cost)

 

Plant and Machinery A/c (with WDV)        Dr.

          To Contract A/c

Or

Contract A/c                   Dr.

          To Depreciation on Plant and Machinery A/c

Sub-contract costs are also debited to the Contract Account.

Contract A/c                   Dr.

         To Cost of Sub-Contract A/c

Extra work: The extra work amount payable by the contractee should be added to the contract price. If extra work is substantial, it is better to treat it as a separate contract. If it is not substantial, expenses incurred should be debited to the contract account as “Cost of Extra work”.

(i) Work-in-Progress: Work-in-progress in contract costing refers to the contract which is not complete at the reporting date. In Contract Accounts, the value of the work-in-progress consists of

1. the cost of work completed, both certified and uncertified;
2. the cost of work not yet completed; and
3. the amount of estimated/ notional profit.

In the Balance Sheet (prepared for management), the work-in-progress is usually shown under two heads, viz., certified and uncertified. The cost of work completed and certified and the profit credited will appear under the head ‘certified’ work-in-progress, while the completed work not yet certified, cost of material, employee and other expenses which has not yet reached the stage of completion are shown under the head “uncertified” work-in-progress.

(ii) Cost of Work Certified or Value of Work Certified: A contract is a continuous process and to know the cost or value of the work completed as on a particular date; assessment of the completion of work is carried out by an expert (it may be any professional like surveyor, architect, engineer etc.). The expert, based on his assessment, certifies the work completion in terms of percentage of total work. The cost or value of certified portion is calculated and is known as Cost of work certified or Value of work certified respectively.

Mathematically:

1. Value of Work Cerified = Value of Contratc x Work cerified(%)
2. Cost of Work Cerified = Cost of work to date - (Cost of work uncertified + Material in hand + Plant at site)

(iii) Cost of Work Uncertified: It represents the cost of the work which has been carried out by the contractor but has not been certified by the expert. It is always shown at cost price. The cost of uncertified work may be ascertained as follows:

Total Cost to date		xxx
Less: Cost of work cerified	xxx
Material in hand	xxx
Plant at site	xxx	xxx
Cost of work uncertified		xxx

(iv) Progress Payment: A Contractor gets payments for work done on a contract based on work completion. Since, a contract takes longer period to complete and requires large investment in working capital to progress the contract work, hence, it is desirable by the contractor to have periodic payments from the contractee against the work done to avoid working capital shortage. For this a contactor enters into an agreement with the contractee and agrees on payment on some reasonable basis, which generally, includes percentage of work completion as certified by an expert.

Mathematically:

Progress payment = Value of work certified - Retention money - Payment to date

(v) Retention Money: In a contract, a contractee generally keeps some amount payable to contractor with himself as security deposit. In a contract, a contractor undertakes to completed a job work on the basis of pre- determined terms and conditions and work specifications. To ensure that the work carried out by the contractor is as per the plan and specifications, it is monitored periodically by the contractee. To have a cushion against any defect or undesirable work, the contractee upholds some money payable  to  contractor.  This  security money upheld by the contractee is known as retention money. In some  contracts the contractor has to deposit some security money before staring of the contract as a term of contract. This is known as Earnest money. If any deficiency or defect is noticed in the work, it is to be rectified by the contractor before the release of the retention money. Retention money provides a safeguard against the risk of loss due to faulty workmanship.

Mathematically:

Retention Money = Value of work certified - Payment actually made / cash paid

(vi) Cash Received: It is ascertained by deducting the retention money from the value of work certified i.e.

 

Cash received = Value of work certified - Retention money

(vii) Notional Profit: It represents the difference between the value of work certified and cost of work certified. It is determined:

 

Notional profit = Value of work certified - (Cost of work to date - Cost of work not yet certified)

(viii) Estimated Profit: It is the excess of the contract price over the estimated total cost of the contract.

Cost- plus contract is a contract where the value of the contract is determined by adding an agreed percentage of profit to the total cost. These types of contracts are entered into when it is not possible to estimate the contract cost with reasonable accuracy due to unstable condition of factors that affect the cost of material, employees, etc.

Cost plus contracts have the following advantages and disadvantages:

1. The Contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on the contract.
2. It is useful specially when the work to be done is not definitely fixed at the time of making the estimate.
3. Contractee can ensure himself about ‘the cost of the contract’, as he is empowered to examine the books and documents of the contractor to ascertain the veracity of the cost of the contract.

Disadvantages - The contractor may not have any inducement to avoid wastages and effect economy in production to reduce cost.

Escalation clause in a contract empowers a contractor to revise the price of the contract in case of increase in the prices of inputs due to some macro- economic or other agreed reasons. A contract takes longer period to complete and the factors based on which price negotiation is done at the time of entering into the contract may change till the contract completes. This protect the contractor from adverse financial impacts and empowers the contractor to recover the increased prices. As per this clause, the contractor increases the contract price if the cost of materials, employees and other expenses  increase beyond a certain limit. Inclusion of such a clause in a contract deed is called an “Escalation Clause”.