Job and Batch Costing: Tracing Costs to Customer Work

Learning objectives

By the end of this chapter, you should be able to:

• Build a job or batch cost sheet and calculate total and unit costs for bespoke work and small production runs.
• Apply production overhead to jobs using a stated absorption basis (for example labour-hours or machine-hours).
• Record the main journal entries used in job and batch costing: materials and labour charged to production, overhead absorption, completion, sale, and period-end overhead adjustment.
• Use cost-plus pricing to set selling prices and interpret markup and margin correctly.
• Identify and correct common job/batch costing errors, including misclassification of costs, inappropriate absorption bases, and incorrect handling of scrap and overhead variances.

Overview & key concepts

Where production is carried out in identifiable pieces of work—customer orders, repairs, contracts, or short runs—cost information needs to be captured at the level of the job or batch. Job and batch costing provide a structured method to:

• trace direct materials and direct labour to specific work
• attach a fair share of production overhead using a consistent basis
• support inventory valuation (work in progress and finished goods) and profitability analysis
• provide evidence for quotations and cost-plus pricing decisions

Core theory and frameworks

Job costing

Job costing accumulates production costs for a distinct job or customer order. Each job has its own cost record (job cost sheet) showing:

• direct materials charged to the job
• direct labour charged to the job
• production overhead absorbed into the job using a pre-set rate

Until the job is completed, these costs sit in work in progress (WIP). When the job is completed, costs transfer out of WIP into finished goods (or directly to cost of sales if sold immediately).

Batch costing

Batch costing is used where identical units are produced together. Costs are accumulated for the batch as a whole, then a unit cost is calculated by dividing by good output:

Unit cost = Total batch cost ÷ Good units produced

Batch costing is common in small manufacturing runs and situations where units are indistinguishable within a batch.

Job/batch cost sheets

A job or batch cost sheet is the main document used to gather production costs. It typically shows:

• job/batch reference and customer (if relevant)
• direct materials issued (quantity and value)
• direct labour charged (hours and rate)
• overhead absorbed (activity × absorption rate)
• total cost of the job/batch
• for a batch: good units and unit cost

Cost sheets are used both before production (quoting) and after production (profitability review).

Direct materials and direct labour

• Direct materialsare materials that can be traced to a job or batch economically (for example timber and fittings for a named order).
• Direct labouris labour time that can be traced directly to a job or batch (for example technician hours booked to a specific job).

Direct costs charged to production are normally recorded in WIP while the work is in progress.

Production overhead and absorption

Production overhead includes indirect manufacturing costs that support production but cannot be traced economically to a single job (for example factory rent, production supervision, depreciation of manufacturing equipment, factory utilities).

To attach overhead to jobs, organisations use a pre-set overhead absorption rate (OAR) based on a chosen activity driver.

Overhead absorption rate (OAR)

A common approach is:

OAR = Budgeted production overhead ÷ Budgeted activity

Typical activity measures include:

• labour-hours (useful where production is labour-driven)
• machine-hours (useful where production is machine-driven)

Once set, overhead absorbed into a job is:

Overhead absorbed = Job activity × OAR

Important distinction: only production overhead is absorbed into inventory costs. Non-production overheads (for example selling and head office administration) are period costs and are not included in inventory valuation.

Allocation and apportionment

Before overhead can be absorbed into jobs, overhead is often gathered into cost centres to build an appropriate overhead pool for each department or production area.

• Allocation: charging a whole cost to one cost centre (for example a specialised machine lease used by one department only).
• Apportionment: splitting a cost across cost centres using a rational basis (for example rent by floor area, welfare costs by headcount).

This process supports overhead absorption by ensuring the overhead pool and its activity base relate to the same production area.

Scrap and losses in batch costing

When some units are scrapped and cannot be sold, the unit cost depends on whether the loss is expected:

• Normal scrap (expected in efficient production):total batch cost is spread across good output, increasing unit cost.
• Abnormal scrap (unexpected/avoidable):the cost of the abnormal loss is typically treated as a period cost rather than included in inventory unit costs (unless the question instructs otherwise).

Scrap value note: if scrapped units have a disposal value (for example sale of scrap materials), the proceeds are commonly credited against the batch/job cost (reducing the cost borne by good units for normal loss) or treated as specified in the requirement.

Cost-plus pricing: markup and margin

Cost-plus pricing starts with cost and adds profit.

• Markupis expressed as a percentage of cost.
  • Selling price = Cost × (1 + markup)
• Marginis expressed as a percentage of selling price.
  • Margin = Profit ÷ Selling price

Micro-example (conversion):
If cost is £100 and the selling price is £125, profit is £25.

• Markup = £25 ÷ £100 = 25%
• Margin = £25 ÷ £125 = 20%

Under- and over-absorption of overhead

Because overhead is absorbed using pre-set rates, absorbed overhead will rarely equal actual overhead incurred.

• Under-absorption: actual production overhead incurred > overhead absorbed into all jobs/batches for the period
• Over-absorption: overhead absorbed into all jobs/batches for the period > actual production overhead incurred

Period-end treatment depends on materiality and the question requirement. A simple approach is to transfer the difference to cost of sales.

Typical journal entries

Account names vary by organisation; the logic is consistent: production costs flow into WIP, then into finished goods, then into cost of sales.

Materials

Materials purchased

• On credit: Dr Materials inventory; Cr Trade payables
• For cash: Dr Materials inventory; Cr Cash/bank

Direct materials issued to a job/batch

• Dr WIP (job/batch)
• Cr Materials inventory

(Indirect materials are normally included in the overhead pool, not charged directly to WIP.)

Labour

Direct labour charged to production

• Dr WIP (job/batch)
• Cr Wages payable (or Cash/bank if paid immediately)

Overtime premium nuance: if overtime is incurred specifically because a job is urgent or customer-driven, it is often charged to that job. If overtime is a general policy cost or relates to idle capacity/inefficiency, the premium is commonly treated as part of overhead unless instructed otherwise.

Overhead

Actual production overhead incurred (accumulation)

• Dr Production overhead control
• Cr Cash/bank / Payables / Accruals (as appropriate)

Overhead absorbed into jobs

• Dr WIP (job/batch)
• Cr Production overhead absorbed

Completion and sale

Completion of a job/batch

• Dr Finished goods
• Cr WIP

Sale of goods (two entries)

• Revenue: Dr Cash/bankorDr Trade receivables; Cr Revenue
• Cost of sales: Dr Cost of sales; Cr Finished goods

Period-end adjustment for under-/over-absorbed overhead (simple approach)

Transfer overhead variance to cost of sales (if inventories are not material or question requires a simple treatment)

• If under-absorbed: Dr Cost of sales; Cr Production overhead control/variance
• If over-absorbed: Dr Production overhead control/variance; Cr Cost of sales

(If inventories are material, some questions require the variance to be apportioned between WIP, finished goods, and cost of sales.)

Exam workflow for job and batch questions

1. Read the requirements first (costing? pricing? journals? unit cost? overhead variance?).
2. Compute the absorption rate(s) given (check the base: labour-hours vs machine-hours).
3. Build the job/batch cost sheet: materials → labour → absorbed overhead.
4. For batches, calculate unit cost usinggood output(adjust for scrap as instructed).
5. Apply pricing instructions (markup on cost vs margin on selling price).
6. Record journal entries in the correct sequence (WIP → finished goods → cost of sales; revenue separate).
7. Only calculate under/over-absorption when the question providesactual overhead incurredand confirms the scope (the full period’s production).

Worked example

Narrative scenario

ABC Ltd manufactures custom furniture and also produces small runs of identical items.

For February, budgeted production overhead is £48,000 and budgeted direct labour time is 12,000 labour-hours. Overhead for labour-driven work is absorbed using a single labour-hour rate.

In addition, the company operates a separate machine cell that absorbs overhead using a machine-hour rate of £6 per machine-hour.

The following work is undertaken:

Job J101 (custom dining table)

• Direct materials issued: £1,500
• Direct labour: 50 hours at £20 per hour
• Overhead: absorbed using the labour-hour rate

Batch B202 (200 identical chairs)

• Direct materials: £2,000
• Direct labour: 80 hours at £18 per hour
• Machine-hours used: 10 hours
• Overhead: absorbed using the machine-hour rate of £6 per machine-hour
• Batch B202 is processed in the machine cell, so overhead for this batch is absorbed using the machine-hour rate rather than the labour-hour rate
• During production, 10 chairs are scrapped and cannot be sold

Job J103 (rush custom bookshelf)

• Direct materials: £800
• Direct labour: 30 hours at £22 per hour
• Overtime premium: £5 per hour for 10 of the labour-hours
• Overhead: absorbed using the labour-hour rate

Required

1. Calculate the total cost for Job J101 and Batch B202.
2. Determine the unit cost for Batch B202.
3. Prepare journal entries for Job J101 up to and including overhead absorption.
4. Calculate the selling price for Job J103 using a 25% markup on cost.
5. Identify any under-/over-absorption of overhead.

Solution

Step 1: Labour-hour overhead absorption rate

Budgeted overhead = £48,000
Budgeted labour-hours = 12,000

Labour-hour OAR = £48,000 ÷ 12,000 = £4 per labour-hour

Step 2: Total cost for Job J101

Direct materials = £1,500

Direct labour = 50 × £20 = £1,000

Overhead absorbed = 50 × £4 = £200

Total cost (J101) = £1,500 + £1,000 + £200 = £2,700

Step 3: Total and unit cost for Batch B202

Direct materials = £2,000

Direct labour = 80 × £18 = £1,440

Overhead absorbed (machine cell) = 10 machine-hours × £6 = £60

Total batch cost (B202) = £2,000 + £1,440 + £60 = £3,500

Good output = 200 − 10 = 190 chairs

Unit cost = £3,500 ÷ 190 = £18.421… ≈ £18.42 per chair

(Assumption: the scrap is treated as normal and has no disposal value. If scrap proceeds exist, credit the proceeds against the batch cost before dividing by good output, unless instructed otherwise.)

Step 4: Journal entries for Job J101 (materials, labour, overhead absorbed)

Assume materials are issued from stores and wages are accrued.

Direct materials issued to Job J101

• Dr WIP — Job J101 £1,500
• Cr Materials inventory £1,500

Direct labour charged to Job J101

• Dr WIP — Job J101 £1,000
• Cr Wages payable £1,000

Overhead absorbed into Job J101

• Dr WIP — Job J101 £200
• Cr Production overhead absorbed £200

Step 5: Selling price for Job J103 using a 25% markup on cost

Direct materials = £800

Direct labour = 30 × £22 = £660

Overtime premium = 10 × £5 = £50
(Charged to the job here because the premium is linked to the rush requirement. If overtime is not job-specific, the premium is commonly treated as overhead unless the requirement states otherwise.)

Overhead absorbed = 30 × £4 = £120

Total cost (J103) = £800 + £660 + £50 + £120 = £1,630

Selling price (25% markup on cost) = £1,630 × 1.25

Selling price = £2,037.50

Step 6: Under- or over-absorption of overhead (what can be concluded)

Under-/over-absorption is assessed for the whole period by comparing:

• totalactual production overhead incurredfor the period, with
• total overheadabsorbed into all jobs/batchesfor the same period using the pre-set rates.

From the work listed, overhead absorbed is:

• J101: 50 labour-hours × £4 = £200
• J103: 30 labour-hours × £4 = £120
• B202 (machine cell): 10 machine-hours × £6 = £60

Total absorbed on listed work = £380

However, the scenario does not provide actual overhead incurred for February, and it does not confirm that these are the only jobs/batches undertaken in the month. Therefore, a definitive under-/over-absorption figure cannot be determined from the data provided.

(If, purely for illustration, actual February overhead incurred were £48,000 and these were the only jobs, the under-absorption would be £48,000 − £380 = £47,620. A gap of this size would usually imply additional production activity not shown and/or multiple overhead pools across departments.)

Common pitfalls and misunderstandings

Exam traps to watch for

• Start with classification:treat a cost as direct only if it is traceable to the job economically; otherwise it belongs in the overhead pool.
• Separate production from non-production:only production overhead is absorbed into WIP/finished goods; selling and administration costs are period expenses.
• Match the base to the driver:labour-hours suit labour-driven work; machine-hours usually suit automated cells.
• Apply the rate the question intends:if different departments use different bases, keep them separate and do not mix rates.
• Handle losses deliberately:for normal scrap, spread cost over good units; for abnormal loss, recognise it as a period cost unless told otherwise.
• Be precise with profit language:markup is “on cost”; margin is “of selling price”.
• Complete the double entry:production flows WIP → finished goods → cost of sales; sales require both a revenue entry and an inventory release entry.
• Check transaction type:cash vs credit determines whether bank moves now or a receivable/payable is created first.

Summary

Job and batch costing trace direct materials and labour to identifiable work and attach production overhead using absorption rates based on relevant activity measures. Costs accumulate in WIP, transfer to finished goods on completion, and become cost of sales when the output is sold. Batch unit costs must reflect good output, and scrap treatment can change unit cost materially. Cost-plus pricing requires careful interpretation of markup and margin. Under-/over-absorption is a period-wide comparison of actual overhead incurred against total overhead absorbed across all production.

FAQ

When should labour-hours be used instead of machine-hours?

Use labour-hours when production effort is mainly driven by labour time. Use machine-hours when overhead consumption is driven more by machine usage (for example automated production cells).

In batch costing, do I divide by units started or units finished?

Unless instructed otherwise, divide total batch cost by good output (units finished and saleable). Adjust for scrap as required and consider scrap proceeds if given.

What is the quickest way to spot markup vs margin in a requirement?

If profit is described as “X% of cost”, that is markup. If profit is described as “X% of selling price” or “gross margin”, that is margin.

Glossary

Job costing
Costing method where production costs are accumulated for a specific job or customer order.

Batch costing
Costing method where a batch of identical units is costed together and then converted into a unit cost using good output.

Job/batch cost sheet
A record used to accumulate direct materials, direct labour, and absorbed production overhead for a job or batch.

Overhead absorption rate (OAR)
A pre-set rate used to apply production overhead to jobs, calculated as budgeted overhead divided by budgeted activity.

Work in progress (WIP)
Incomplete production work that carries accumulated production costs until completion.

Under-/over-absorption
The period-end difference between actual production overhead incurred and total overhead absorbed into all jobs/batches for the period.