Job-order costing and overhead
Job-order costing is used when each order is different (custom furniture, printing, repair). A job cost sheet collects: direct material, direct labour and a share of factory overhead.
Overhead cannot be traced to a job, so we use an overhead rate:
Overhead rate = Overhead pool ÷ Base (for example direct labour hours or machine hours).
Overhead charged to a job = rate × the base used by that job. We use budgeted figures at the start of the year, so jobs can be priced early. The small difference with the real overhead is adjusted at year end.
Departmental job-order costing
Factories have departments that work very differently. A cutting department with costly machines has more overhead per hour than a hand assembly department. One plant-wide rate would hide this.
Departmental costing has three steps:
- Allocate or share overhead to departments (rent by floor area, power by meter, supervisors by number of workers).
- Find a rate for each department using its own base (machine hours for cutting, labour hours for assembly).
- Charge each job: sum of (rate × hours in that department).
Result: a job that uses costly machines carries more overhead. Prices become fairer.
Process costing
Process costing is used when many identical units pass through steps (flour, cement, soap, bottles). We cannot cost one unit alone, so we find the cost of a period for a department and share it over the units.
Some units are only partly done at the end. We turn them into equivalent units: units × percent complete. Example: 40 units that are 50% done equal 20 full units.
- Equivalent units = finished units + (unfinished units × % complete)
- Cost per equivalent unit = Cost of the period ÷ equivalent units
- Finished goods cost = finished units × cost per unit. Work in progress = equivalent units in progress × cost per unit.
The finished units pass to the next department or to the store.
Choosing the right method
| Job-order costing | Process costing | |
|---|---|---|
| Output | Different orders | Identical units, continuous |
| Cost found for | Each job | Each department and period |
| Cost per unit | Job cost ÷ units in job | Period cost ÷ equivalent units |
| Examples | Printing, shipbuilding, repairs | Flour, cement, chemicals |
Key formulas and definitions
- Overhead rate = Overhead pool ÷ Base (hours)
- Overhead charged to a job = Rate × Base used by the job
- Job cost = Direct material + Direct labour + Overhead charged
- Equivalent units = Finished units + (Unfinished units × % complete)
- Cost per equivalent unit = Period cost ÷ Equivalent units
Worked examples
1. Overhead 600 and 300 labour hours. Find the rate. A job uses 40 hours: overhead charged?
Rate = 600 ÷ 300 = 2 per hour. Charged = 40 × 2 = 80.
2. Job A: material 100, labour 120, overhead 80. Job cost?
100 + 120 + 80 = 300.
3. Cutting: overhead 400, 100 machine hours. Assembly: overhead 300, 150 labour hours. Job A uses 10 machine hours and 25 labour hours. Overhead?
Cutting rate 4, assembly rate 2. 10 × 4 + 25 × 2 = 40 + 50 = 90.
4. Job A with the department rates: job cost?
220 + 90 = 310.
5. Cost 900. 160 finished units, 40 units 50% complete. Cost per unit, finished cost, work-in-progress cost?
Equivalent units = 160 + 20 = 180. Cost per unit = 900 ÷ 180 = 5. Finished = 160 × 5 = 800. WIP = 20 × 5 = 100. Total 900.
6. A job of 50 cards costs 310. Cost per card?
310 ÷ 50 = 6.2 per card.
Common mistakes
- Dividing process cost by finished units only and ignoring partly finished units.
- Using one plant-wide rate even when departments use very different machines.
- Using the wrong base (labour hours for a machine-heavy department).
- Forgetting to add overhead to direct cost when finding job cost.