Job and batch costing are two costing systems used by businesses to arrive at the cost of their products and services. While job costing is concerned with ascertaining the cost of specific jobs, batch costing is used when products are capable of being grouped into a batch.
In this post, we have differentiated between these two.
What is Job Costing (or Job Order Costing)?
Job costing is a method of costing in which costs are ascertained in respect of specific jobs or orders. These jobs are not comparable with each other and thus require individual cost ascertainment.
Examples of some industries that generally apply job costing are:
- Printing press
- Repairing shop
- Automobile garage
- House building
- Engine and machine construction, etc.
In these industries, the production is done as per the requirements of a customer. The production is not continuous rather it starts only when orders from customers are received and that too as per the specifications of the customers. Hence, each job is differentiated from the other.
Every job order, in this method of costing, is separate and it is not essential that the same manufacturing operations be carried out or the same set of materials be utilized in respect of each.
Consider a machine tool manufacturer or an automobile repair company, for example. Each order of machine or each repair work requires a variable amount of materials, labor, and overheads. As a result, it is vital to accumulate the expenses for each order or job so that the entire cost can be calculated and proper matching of costs and revenue can be made.
What is the objective of job costing?
The objective of this method is to determine the cost of each job by preparing its Job Cost Sheet. A job can be anything such as a product, sales order, contract, project, batch, service, program, or any other cost object that is distinguishable in terms of materials, labor, and overheads used for it.
How is job costing done?
Under job costing, the cost of a completed job will be the total of materials used for the job, labor employed for the same, and the production and other overheads, if any charged to the job.
While calculating the cost, direct costs are charged directly to the job as they are traceable to the job.
For indirect costs, i.e., overheads, the expenses are charged to the job on some suitable basis.
Let us take an example.
Suppose an automobile repair company receives a job order for repair work for a particular customer. It will first add the direct materials cost traceable to the job order, say its Rs. 2,500.
Next, it will need to compute the labor costs.
If it employs two workers for 6 hours each to complete the repairing work and each worker is paid Rs. 100 per hour, the labor cost will come to 6 x 2 x 100, i.e., Rs. 1,200.
Now, the company would need to compute its overhead rate to allocate the overheads to the job. If during the last month, it paid Rs. 50,000 in overheads between rent, utilities, machinery, etc., it can divide this by an activity driver, say the total number of direct labor hours over the same period, to get an overhead rate.
So, if the company had 340 total direct labor hours, the overhead rate would be Rs. 147.059 per labor hour (Rs. 50,000/340 = Rs. 147.059). Then, it will allocate the overheads to this job by multiplying the overhead rate by the hours spent on the job: Rs. 147.059 x 12 = Rs. 1764.706.
Now, the company will simply add up all these costs to get the total job cost, i.e., Rs. 5,464.706 (Rs. 2,500 + Rs. 1,200 + Rs. 1764.706).
What is Batch Costing?
Batch costing is also a form of job costing. Here, similar products are clubbed together in the form of a batch and this batch is regarded as one job. The cost of the complete batch is ascertained. Further, the cost information of the complete batch then helps to determine the unit cost of the articles produced.
This method of costing is adopted when a large number of components of machines or of other identical articles are to be manufactured. Since a large number of products have to be manufactured together and since they pass through the same process of production, it is convenient to collect their costs of manufacture together.
A few examples of industries in which batch costing is applied are:
- Manufacturing industry for readymade garments
- Manufacturing industry for toys
- Manufacturing industry for Tyres & tubes
What is the objective of batch costing?
Batch costing is helpful in determining the unit cost of a group of similar products that are manufactured together. Sometimes it is not economical to ascertain the cost of every unit of output independently especially when they share the same process of production. In such cases, it is desirable to fetch the cost of a batch consisting of a number of units.
How is batch costing done?
The procedure of batch costing is very similar to job costing.
Each batch is regarded as a job and the costs are computed for the total batch.
Each batch is allotted a number and a separate Job Cost Sheet is maintained for each batch of products. The expenses of raw materials are allocated batch-wise, direct labor is engaged batch-wise, and the overheads are also recovered batch-wise.
Thereafter on completion of production, the cost of each component in the batch is ascertained by dividing the total cost by the number of articles manufactured.
Cost per unit = Total Batch Cost ÷ Total Units in Batch
In the pharmaceutical sector, for example, a batch of tablets is produced rather than a single tablet. This batch will be easy to sell in the market. So, when determining the cost of each batch, we will take into account the material cost per batch, the labor cost per batch, and any other expenses per batch. To compute the cost per unit, we must divide the entire batch cost by the total batch units.
To understand with an illustration, suppose ABC Bakeries Ltd. makes bakery items like cakes and muffins. It received a customer’s order for 600 muffins and it bakes, at the most, 50 units of any item at a time. For processing a batch of 50 muffins, the following cost will be incurred:
Direct materials: Rs. 1,000
Wages: Rs. 500
Oven set-up cost: Rs. 300
ABC Bakeries Ltd. absorbs production overheads at a rate of 20% of direct wages. And it adds 10% to the total production cost of each batch to account for selling and distribution overheads.
If the profit margin is 25% on cost, the selling price for a batch of 600 muffins will be determined as follows:
|Particulars||Cost per batch||Total cost for a batch of 600 muffins|
|Oven set-up cost||300||3,600|
(20% of direct wages)
|Total Production cost||1,900||22,800|
|Selling and distribution overheads|
(10% of production cost)
|Add: Profit margin (25%)||523||6,270|
Selling price per unit of muffin = Rs. 31,350 ÷ 600 = Rs. 52.25
Comparison between the two
The table given below lists the differences between job costing and batch costing:
|Basis||Job Costing||Batch Costing|
|Production process||There are specific job orders, each of which follows a distinctive process of production.||Products are homogeneous and they are produced in a continuous flow.|
|Cost units||In this method of costing, cost units, i.e., jobs are separately identified and need to be separately costed.||Here, a batch is a cost unit that consists of a readily identifiable group of product units.|
|Purpose||The main purpose of job costing is to accumulate all the costs incurred for completing a job.||The main purpose of batch costing is to ascertain the cost of each component produced in a batch. For this, the total cost of one batch is calculated first.|
|Cost determination||Costs are determined on a job basis.||Costs are determined on a batch basis.|
|Adaptability||It is useful in industries that accept orders as per the requirements of the customer.||It is useful in industries where identical products are produced in large quantities.|
|Scope||Job costing includes batch costing.||Batch costing is a variant of job costing. Here, costs are accumulated for specific batches of similar products.|
|Supervision and control||As each job is different, there can’t be any standardization of controls. Careful supervision and strict control are necessary to avoid wastage of materials, machinery, and other resources.||Comparatively, fewer controls are required since products are manufactured in batches and share the same set of resources.|
The main difference between job and batch costing lies in the individuality of cost objects. While each job is independent and different from the other, products produced in a batch are homogenous and lack individuality.
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