FINM6221 LU7
FINM6221 LU7 – Job Costing
7.2 Steps Involved in Job Costing
Before you can prepare a quote on a job, the total of all the manufacturing overhead costs
need to be 'absorbed' into the production process. This must be done so that these
overheads will become part of the cost of goods manufactured.
Step 1: Allocate Overhead Costs
Assign overheads to departments responsible for incurring them.
Step 2: Primary Apportionment
Distribute overheads across all production and service departments that benefit from them.
Step3: Secondary Apportionment
Reallocate service department overheads to the production departments they assist.
Step 4: Calculate Total Overheads
Sum the primary and secondary overheads for each production department.
Step 5: Calculate Overhead Absorption Rate
Determine how overheads will be applied using a cost driver (e.g. material cost, units
produced, machine hours, labour hours/cost).
Material cost basis = (budgeted overhead / budgeted direct materials) x 100
= x% of direct materials costs
Units of production = Budgeted overhead / budgeted units of production
= Rx per unit of production
Machine hours basis = Budgeted overhead / budgeted machine hours
= Rx per machine hours
Direct labour hours = Budgeted overhead / budgeted labour hours
= Rx per labour hour
Direct labour cost = Budgeted overhead / budgeted labour cost x 100
= x% of direct labour cost
Step 6: Calculate the cost and selling price of the job
Total Job Cost = Direct materials + Direct labour + Applied overheads
Selling Price = Total cost + Markup percentage
1
, FINM6221 LU7
Example 7.1
Tybo uses a job order cost system. The following info relates the Job 1 undertaken in Aug.
the manufacturing overheads are applied to jobs at a rate of 50% of direct labour cost.
Direct Material Used R40 000
Direct Labour R30 000
The total cost of Job 1 can be calculated:
Direct Materials R40 000
Direct Labour R30 000
Applied factory overheads (50% x R30 000) R15 000
Cost of completed job R85 000
7.3 Work-in-progress
Work-in-progress = products that have been started in a previous period but are not yet
completed.
These unfinished products carry over into the current period. Since they are completed
during the current period, their earlier costs (from when they were started) must be included
in the total cost calculation. Therefore, the opening work-in-process costs must be added to
the costs incurred during the current period to determine the total manufacturing cost.
Example 7.2
Tybo has the following info related to job 1 in Aug:
o Direct material used = R40 000
o Direct labour = R30 000
o Factory overheads are applied to jobs at the rate of 50% of direct labour costs
o Job 1 was started in July. On 31 July, the total cost on this job was R7 500
The total cost of Job 1 can be calculated:
Direct Materials R40 000
Direct Labour R30 000
Applied factory overheads (50% x R30 000) R15 000
Cost of job – Aug R85 000
Work-in-progress – opening R7 500
2
FINM6221 LU7 – Job Costing
7.2 Steps Involved in Job Costing
Before you can prepare a quote on a job, the total of all the manufacturing overhead costs
need to be 'absorbed' into the production process. This must be done so that these
overheads will become part of the cost of goods manufactured.
Step 1: Allocate Overhead Costs
Assign overheads to departments responsible for incurring them.
Step 2: Primary Apportionment
Distribute overheads across all production and service departments that benefit from them.
Step3: Secondary Apportionment
Reallocate service department overheads to the production departments they assist.
Step 4: Calculate Total Overheads
Sum the primary and secondary overheads for each production department.
Step 5: Calculate Overhead Absorption Rate
Determine how overheads will be applied using a cost driver (e.g. material cost, units
produced, machine hours, labour hours/cost).
Material cost basis = (budgeted overhead / budgeted direct materials) x 100
= x% of direct materials costs
Units of production = Budgeted overhead / budgeted units of production
= Rx per unit of production
Machine hours basis = Budgeted overhead / budgeted machine hours
= Rx per machine hours
Direct labour hours = Budgeted overhead / budgeted labour hours
= Rx per labour hour
Direct labour cost = Budgeted overhead / budgeted labour cost x 100
= x% of direct labour cost
Step 6: Calculate the cost and selling price of the job
Total Job Cost = Direct materials + Direct labour + Applied overheads
Selling Price = Total cost + Markup percentage
1
, FINM6221 LU7
Example 7.1
Tybo uses a job order cost system. The following info relates the Job 1 undertaken in Aug.
the manufacturing overheads are applied to jobs at a rate of 50% of direct labour cost.
Direct Material Used R40 000
Direct Labour R30 000
The total cost of Job 1 can be calculated:
Direct Materials R40 000
Direct Labour R30 000
Applied factory overheads (50% x R30 000) R15 000
Cost of completed job R85 000
7.3 Work-in-progress
Work-in-progress = products that have been started in a previous period but are not yet
completed.
These unfinished products carry over into the current period. Since they are completed
during the current period, their earlier costs (from when they were started) must be included
in the total cost calculation. Therefore, the opening work-in-process costs must be added to
the costs incurred during the current period to determine the total manufacturing cost.
Example 7.2
Tybo has the following info related to job 1 in Aug:
o Direct material used = R40 000
o Direct labour = R30 000
o Factory overheads are applied to jobs at the rate of 50% of direct labour costs
o Job 1 was started in July. On 31 July, the total cost on this job was R7 500
The total cost of Job 1 can be calculated:
Direct Materials R40 000
Direct Labour R30 000
Applied factory overheads (50% x R30 000) R15 000
Cost of job – Aug R85 000
Work-in-progress – opening R7 500
2
