Standard & job order costing


The standard cost is predetermined scientifically for direct material, direct labor and overheads. Under the standard cost system, unlike the historical cost, the cost is ascertained on the basis of the some predetermined standards for each element of cost.

The cost of the unit of production is ascertained on the basis of such present standards of each element of cost. It is true that actual cost will differ from the standard however the difference between the predetermined standard cost and actual cost is isolated in the accounts. Such differences are known as variances.

Various types of variances are computed for each element of cost and their analysis serves as the basis for managerial decision. As specified in the above paragraphs, the main cost system can be classified s under:

1. Job order costing.
2. Process costing.
3. Standard costing.

Each system is explained in brief in the following paragraphs:

Job Order Costing:

The job-order costing or at times referred as “job costing� is applicable to the manufacturing activities which carry on the production according to specifications of each order. The system operates under the assumption that each job is physically identified during each step of manufacturing process and so it is directly charged with the direct materials consumed by it, direct labor employed on it, and the fair share in the overheads calculated on the basis of some predetermined over head absorption rate.

The difference elements of cost for each job will be ascertained as under:

Direct material:
The materials are issued to the various jobs from the store room upon the presentation of the authentic material requisition. The requisitioning department or the job is charged with the cost of the direct materials issued to it. All material issued to a particular job during a specific period of time signifies the total direct material cost traceable to that particular job. The entries of the materials specifying the date, quantity and amount are recorded in the “production cost sheet� which is prepared for each job.

Direct Labor:
Under the job costing it is essential to keep the detailed records relating to the labor time, rate of pay and the number of the jobs on which the employee worked. This is done through the “time cards� which are maintained for each employee. The time card provides the information pertaining to the direct labor time each employee worked on a particular job. At the time of the completion of the job, the sorting of the time according to job number in a summarized statement provide the information about the total amount of the direct labor cost chargeable to that particular job. The total direct labor cost is entered in “the Production cost sheet� maintained for that particular job.

Manufacturing overheads:
The manufacturing overheads are of common nature and hence are not directly traceable to various jobs in a precise manner. The examples are costs of service departments like power plant, store-room, material handling cost, rent on factory building cost of time-keeping office, lighting, supervision, insurance, depreciation etc. So they are allocated to the various jobs on some acceptable predetermined absorption rates which re devised scientifically. The popular basis for determining the absorption rates are certain percentage of direct material cost or direct labor cost, or labor hour rate or machine hour rate etc. As the allocation of the overheads may distort the precision of cost ascertainment, it is highly desirable to advise the absorption rate based on the past experiences, technical factors, changes in the situation etc.; e.g. the particular job may be allocated the manufacturing overheads at 30% of the direct material cost. As ascertainment of direct materials for each job is easily traceable, the allocation of the overheads to such job on the basis of certain percentage on direct materials would not pose any problem. The relevant overheads will be recorded in the “production cost sheet� on the completion of the job. The details of the production cost sheet will provide the break-up of each element of cost and the total cost of the job on its completion.

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