Job Costing Numericals: Pricing, Profit and Overheads

Understand Job Costing Numericals: Pricing, Profit and Overheads

Key rules to remember

Overhead absorption rate

Rate = Budgeted overheads ÷ Budgeted base (labour hours, machine hours, direct wages etc.)

Use budgeted figures for the rate. Use actual base units of the job to absorb.

Overhead absorbed by a job

Overhead = Rate × Actual base units used by the job

For a percentage-of-wages rate: Rate % = Overheads ÷ Direct wages × 100.

Prime cost

Prime cost = Direct materials + Direct labour + Direct expenses

Direct expenses chargeable to a job, such as a special tool or hire, are added here.

Total cost of a job

Total cost = Prime cost + Factory overhead + Administration and other overheads (as given)

Apply each overhead on the base stated in the question, such as factory cost or prime cost.

Price with profit on cost

Price = Total cost × (1 + Profit %)

Profit on cost of 25% means profit is 25% of cost.

Price with profit on sales

Price = Total cost ÷ (1 − Profit % on sales)

Profit on sales of 20% means cost is 80% of price.

Converting profit percentages

Profit on sales % = Profit on cost % ÷ (100 + Profit on cost %) × 100

25% on cost equals 20% on sales. 20% on cost equals 16⅔% on sales.

Cost per good unit with normal spoilage

Cost per good unit = (Total cost − Scrap value of normal spoilage) ÷ Good units

Abnormal loss is valued at cost per unit started less its scrap value, and goes to Costing P&L, not to the job.

How to solve Job Costing Numericals: Pricing, Profit and Overheads questions

1. 1Read the question for the profit basis (on cost or on sales), the overhead base and whether the job is complete.
2. 2Compute the overhead absorption rate if it is not given. Divide budgeted overheads by the budgeted base.
3. 3List the job's materials, labour and direct expenses, and total them as prime cost. Work out labour as hours × rate.
4. 4Add factory overhead using the rate and the job's actual base units. Then add administration or selling overheads on the stated base.
5. 5Adjust for spoilage, defectives, scrap and WIP. Separate normal from abnormal. Charge normal to the job and abnormal to Costing P&L.
6. 6Find total cost, then add profit using the correct basis to reach the price. Divide by units if a per-unit price is asked.
7. 7Present a neat job cost statement with clear headings, and state the final answer with units and rupees.

Quickest way: Cost statement first, profit last

Common mistakes in Job Costing Numericals: Pricing, Profit and Overheads

• Adding profit as a percentage of cost when the question says profit on sales.

  Students multiply cost by 1.20 out of habit.

  Fix: If profit is on sales, divide cost by (1 − profit %). Check afterwards that profit ÷ price gives the stated percentage.

• Using the budgeted base units instead of the job's actual units to absorb overhead.

  The rate working and the absorption working get mixed up.

  Fix: Rate uses budgeted figures. Absorption = rate × the job's own hours, wages or machine hours.

• Applying administration overhead on the wrong base.

  The base (factory cost, prime cost or sales) is skimmed over.

  Fix: Underline the base in the question. Factory cost means prime cost plus factory overhead.

• Charging abnormal spoilage to the job.

  Students treat all spoilage alike.

  Fix: Normal spoilage cost, net of scrap, stays with the good units. Abnormal loss, net of scrap, goes to Costing Profit and Loss Account.

• Carrying the full job cost to the next period for an incomplete job, or ignoring WIP.

  The period-end position is not read carefully.

  Fix: Value WIP at the cost incurred so far, including absorbed overhead to date. Cost of completed jobs goes to cost of goods sold.

• Forgetting direct expenses or including a general overhead as a direct expense.

  Costs are not classified before totalling.

  Fix: Only costs identifiable with the job are direct expenses. Everything shared goes through the overhead rate.

Worked examples