A Job Costing Statement is prepared when a business needs to calculate the cost of an individual job or task, for example; fitting double glazing windows, painting a house or designing new furniture.
The job tasks may be customised to suit the individual requirements of the customer. The Job Costing Statement is used to calculate a selling price to the customer, whilst ensuring that the business makes a profit from the job.
Prepare a Job Cost Statement to calculate the selling price of Job 70.
| Material X | 4,000 kg @ £20 per kg |
| Material Y | 10,000 kg @ £10.00 per kg batch costs £60,000 |
| Material Z | 1,500 kg @ £20 per kg |
A total of 27,000 labour hours will be used to complete Job 70. These will be used in departments A, B and C in the ratio of 3:2:1. Labour rates in each department are as follows:
| Dept A | £10 per hour |
| Dept B | £6 per hour |
| Dept C | £8 per hour |
| Dept A | 3,000 hours |
| Dept B | 12,600 hours |
| Dept C | 3,000 hours |
Overheads are recovered on a factory-wide basis of £2 per direct labour hour. Brown plc applies a profit margin of 20% to all jobs.
In job costing, overheads are indirect costs that cannot be traced directly to a specific job. Examples include indirect labour, indirect materials, rent, heating, lighting and depreciation of machinery.
As overheads cannot be charged directly to individual jobs, they must be absorbed using an appropriate basis. This ensures that each job receives a fair share of total overhead costs.
The overhead absorption rate (OAR) is used to allocate overheads to jobs. It is calculated using the following formula:
Overhead Absorption Rate (OAR) = Total Overheads ÷ Total Units of Activity
The units of activity used will depend on the nature of the department:
Once the overhead absorption rate has been calculated, overheads are applied to a job using the following formula:
Overheads Absorbed = OAR × Actual Units Used by the Job
If total overheads for a department are £36,000 and total direct labour hours are 50,000:
OAR = £36,000 ÷ 50,000 = £0.72 per labour hour
If Job 70 uses 10,000 labour hours, the overheads absorbed would be:
Overheads absorbed = 10,000 × £0.72 = £7,200
These overheads are then added to the prime cost to calculate the total cost of the job. A profit margin can then be applied to determine the selling price.
| Job Cost Statement for Job 70 | ||
| Direct Materials | ||
| Material X: 4,000 kg @ £20 per kg | 80,000 | |
| Material Y: 2,000 kg @ £6 per kg | 12,000 | |
| Material Z: 1,500 kg @ £20 per kg | 30,000 | 122,000 |
| Direct Labour | ||
| Dept A: 27,000 hrs × (3/6) @ £10 | 135,000 | |
| Dept B: 27,000 hrs × (2/6) @ £6 | 72,000 | |
| Dept C: 27,000 hrs × (1/6) @ £6 | 27,000 | 234,000 |
| PRIME COST | 356,000 | |
| Overhead: 27,000 hrs × £2 per hour | 54,000 | |
| TOTAL COST | 410,000 | |
| Profit margin (410,000 × 20%) | 102,500 | |
| SELLING PRICE | 512,500 | |