Chapter 9: Job Costing and Process Costing
Different production environments require different costing methods. Job costing tracks costs for individual jobs or batches, while process costing averages costs across continuous production. This chapter covers both methods, their applications, equivalent units, and process cost accounting with normal and abnormal losses.
9.1 Job Costing
Definition: Job costing (also called job order costing) accumulates costs for each individual job, batch, or customer order. Each job is unique and costs are tracked separately using a job cost sheet.
When to Use Job Costing
| Characteristic | Job Costing Suitable | Nepal Examples |
|---|---|---|
| Products are unique/customized | Yes | Custom furniture, wedding catering |
| Jobs are identifiable separately | Yes | Construction projects, printing orders |
| Costs vary significantly between jobs | Yes | Handmade carpets (different sizes/designs) |
| Customer places specific orders | Yes | Advertising agency campaigns |
Job Cost Sheet Format
| Job Cost Sheet — Job No. 101 | |
|---|---|
| Customer: ABC Hotel | Date Started: Jan 5 |
| Description: 50 dining chairs | Date Completed: Jan 25 |
| Direct Materials | NPR 1,50,000 |
| Direct Labor (400 hrs @ NPR 200) | NPR 80,000 |
| Factory OH Applied (400 hrs @ NPR 100) | NPR 40,000 |
| Total Job Cost | NPR 2,70,000 |
| Cost per Chair | NPR 5,400 |
9.2 Process Costing
Definition: Process costing averages costs over large quantities of identical or similar units produced continuously. It is used when products are homogeneous and pass through defined processes or departments.
Job vs Process Costing
| Basis | Job Costing | Process Costing |
|---|---|---|
| Product | Unique, customized | Homogeneous, mass-produced |
| Cost Accumulation | By individual job | By process/department |
| Cost per Unit | Job cost ÷ units in job | Total process cost ÷ equivalent units |
| WIP | Each job may be at different stage | Continuous flow; WIP converted to equivalent units |
| Nepal Examples | Furniture, construction, printing | Cement, sugar, tea processing, noodles |
9.3 Process Costing with Normal and Abnormal Loss
| Concept | Definition | Treatment |
|---|---|---|
| Normal Loss | Expected, unavoidable loss in production (evaporation, scrap) | Cost absorbed by good units (increases cost per unit) |
| Abnormal Loss | Unexpected, avoidable loss beyond normal | Valued at cost per unit and charged to P&L (not to product) |
| Abnormal Gain | Actual loss less than normal loss | Credited to P&L as a gain |
Process Account Example
Data: Input 1,000 units, cost NPR 50,000. Normal loss = 10% (scrap value NPR 5/unit). Actual output = 870 units.
Normal loss = 10% × 1,000 = 100 units
Expected output = 1,000 - 100 = 900 units
Abnormal loss = 900 - 870 = 30 units
Cost per unit = (50,000 - 100×5) / (1,000-100) = 49,500/900 = NPR 55/unit
| Dr. Process A/c | Units | NPR | Cr. Process A/c | Units | NPR |
|---|---|---|---|---|---|
| Input | 1,000 | 50,000 | Normal Loss (scrap) | 100 | 500 |
| Abnormal Loss | 30 | 1,650 | |||
| Output (transferred) | 870 | 47,850 | |||
| Total | 1,000 | 50,000 | Total | 1,000 | 50,000 |
9.4 Equivalent Units
When work-in-progress (WIP) exists at period end, partially completed units must be converted to equivalent completed units for cost calculation.
Equivalent Units = Completed units + (WIP units × % completion)
Example: Started 1,000 units. Completed 800 units. WIP 200 units (60% complete for material, 40% for labor).
Equivalent units (Material) = 800 + (200 × 60%) = 800 + 120 = 920
Equivalent units (Labor) = 800 + (200 × 40%) = 800 + 80 = 880
Cost per equivalent unit = Total cost ÷ Equivalent units (calculated separately for material and labor)
9.5 Process Costing with Opening WIP (FIFO vs Weighted Average)
When there is opening work-in-progress, two methods are used to calculate equivalent units and cost per unit:
| Aspect | Weighted Average | FIFO |
|---|---|---|
| Treatment of Opening WIP | Merged with current period costs | Opening WIP completed first; kept separate |
| Equivalent Units | All completed + Closing WIP (total EU) | Opening WIP completion + Started & completed + Closing WIP |
| Cost per EU | (Opening WIP cost + Current cost) / Total EU | Current period cost only / Current period EU |
| Simplicity | Simpler — one calculation | More complex — separates periods |
| Accuracy | Less accurate (blends old and new costs) | More accurate (current period costs only) |
Weighted Average Method — Worked Example
Data: Opening WIP: 500 units (Material 100%, Conversion 60%). Started: 4,000 units. Completed: 3,800 units. Closing WIP: 700 units (Material 100%, Conversion 40%).
Opening WIP cost: Material NPR 50,000, Conversion NPR 24,000. Current costs: Material NPR 4,00,000, Conversion NPR 3,20,000.
Step 1: Equivalent Units (Weighted Average)
| Material | Conversion | |
|---|---|---|
| Completed & transferred | 3,800 | 3,800 |
| Closing WIP | 700 × 100% = 700 | 700 × 40% = 280 |
| Total Equivalent Units | 4,500 | 4,080 |
Step 2: Cost per Equivalent Unit
| Material | Conversion | |
|---|---|---|
| Opening WIP cost | 50,000 | 24,000 |
| Current period cost | 4,00,000 | 3,20,000 |
| Total cost | 4,50,000 | 3,44,000 |
| ÷ Equivalent units | 4,500 | 4,080 |
| Cost per EU | NPR 100 | NPR 84.31 |
Step 3: Valuation
Completed output: 3,800 × (100 + 84.31) = 3,800 × 184.31 = NPR 7,00,378
Closing WIP: Material (700 × 100) + Conversion (280 × 84.31) = 70,000 + 23,607 = NPR 93,607
Total: 7,00,378 + 93,607 = NPR 7,93,985 ≈ 7,94,000 (= total costs 4,50,000 + 3,44,000 = 7,94,000 ✓)
9.6 Inter-Process Transfers and Multi-Process Costing
Example: Sugar Manufacturing in Nepal (3 Processes)
| Process 1 (Crushing) | Process 2 (Boiling) | Process 3 (Refining) | |
|---|---|---|---|
| Input from previous process | — | From Process 1 | From Process 2 |
| Input quantity | 10,000 kg sugarcane | 8,000 kg juice | 6,000 kg raw sugar |
| Material added this process | NPR 2,00,000 | NPR 50,000 (chemicals) | NPR 30,000 |
| Labor | NPR 80,000 | NPR 60,000 | NPR 70,000 |
| Overheads | NPR 40,000 | NPR 30,000 | NPR 50,000 |
| Normal loss | 20% (2,000 kg) | 25% (2,000 kg) | 10% (600 kg) |
| Output | 8,000 kg juice | 6,000 kg raw sugar | 5,400 kg refined sugar |
| Cost per unit output | (3,20,000)/8,000 = NPR 40/kg | (3,20,000+1,40,000)/6,000 = NPR 76.67/kg | (4,60,000+1,50,000)/5,400 = NPR 113/kg |
Key point: Each process receives the output (and cost) of the previous process. Normal loss in each process increases the cost per unit of good output. Final product (5,400 kg refined sugar) carries cumulative costs from all three processes.
9.7 Joint Products and By-Products
| Concept | Definition | Nepal Example | Cost Treatment |
|---|---|---|---|
| Joint Products | Two or more products from same raw material, similar value | Petroleum refining: petrol, diesel, kerosene | Joint costs apportioned by sales value, physical quantity, or NRV method |
| By-Products | Secondary product with minor value | Sugarcane processing: molasses (by-product of sugar) | Sale value credited to main product cost or shown as other income |
| Split-off Point | Point where joint products become separately identifiable | Crude oil → split into petrol, diesel, LPG | Costs up to split-off are joint costs; after split-off are separable |
Joint Cost Apportionment Methods
Joint cost = NPR 5,00,000. Two products at split-off:
| Product | Quantity (kg) | Sales Value/kg | Total Sales Value |
|---|---|---|---|
| A | 3,000 | NPR 200 | 6,00,000 |
| B | 2,000 | NPR 150 | 3,00,000 |
Physical Quantity Method: A = 5,00,000 × 3,000/5,000 = NPR 3,00,000. B = 5,00,000 × 2,000/5,000 = NPR 2,00,000
Sales Value Method: A = 5,00,000 × 6,00,000/9,00,000 = NPR 3,33,333. B = 5,00,000 × 3,00,000/9,00,000 = NPR 1,66,667
Note: Sales value method is preferred because it matches costs with revenue-generating ability. Product A, generating higher revenue, absorbs more joint cost.
Practice Questions
Short Answer:
1. Distinguish between job costing and process costing.
2. What is a job cost sheet? List its components.
3. Explain normal loss and abnormal loss in process costing.
4. What are equivalent units? Why are they needed?
5. How is cost per unit calculated when there is normal loss?
Long Answer:
6. 2,000 units introduced in Process I @ NPR 80,000. Normal loss 5% (scrap NPR 4/unit). Actual output 1,850 units. Prepare Process I account. (15 marks)
7. Input: 5,000 units @ NPR 10 each. Labor NPR 15,000. OH NPR 10,000. Normal loss 10% (no scrap value). Output 4,200 units. Prepare process account showing normal and abnormal loss. (15 marks)
8. Compare job costing and process costing. Under what circumstances is each appropriate? Give Nepali industry examples. (15 marks)
9. Started 10,000 units. Completed 8,000. WIP 2,000 (material 100%, labor 50%, OH 50%). Costs: Material NPR 5,00,000, Labor NPR 2,70,000, OH NPR 1,80,000. Calculate equivalent units, cost per EU, and value of completed output and WIP. (15 marks)
10. Explain the treatment of normal loss, abnormal loss, and abnormal gain with process accounts. (15 marks)
Exam Tips: ✓ Process accounts must balance (units and value on both sides) ✓ Normal loss cost is borne by good units ✓ Abnormal loss/gain valued at cost per good unit ✓ Equivalent units calculated separately for each cost element ✓ Always check: total input cost = total output value