Job, batch and contract costing

In short

Job, batch and contract costing are the three specific order costing methods used when output is made against a customer's order rather than in a continuous flow. A job is one identifiable order (a repair, a die, a wedding order), a batch is a group of identical units treated as one job (tablets, bearings, printed books), and a contract is a large, long-duration job executed mostly at the customer's site (roads, bridges, buildings). The topic matters because cost per order, not cost per period, is what decides quotations, tenders and profitability in engineering, construction and pharma. It is examined in B.Com cost accounting papers, CA/CMA Inter cost and management accounting, and appears in placement rounds for L&T, Tata Projects, NCC, Afcons, Shapoorji Pallonji, cost-audit teams and FP&A roles, where the standard questions are on cost sheets, economic batch quantity and contract account profit transfer.

Explained

Specific order costing: the family and where each fits

• Costing methods split into specific order costing (job, batch, contract) and operation/process costing (process, unit, service costing). The choice follows the nature of production, not management's preference.
• Job costing: production against distinct customer orders, each with its own identity and cost record. Used where work is heterogeneous — foundries, machine shops, repair garages, printing presses, interior fit-outs, consultancy assignments.
• Batch costing: a variant of job costing where the batch is the cost unit; cost per unit = total batch cost ÷ good units in the batch. Used where identical items are economical to make in lots — pharmaceutical formulations, biscuits, readymade garments, electronic components, publishing.
• Contract costing (also terminal costing): a job so large that it is costed as a separate undertaking with its own site, plant and account; spans more than one accounting year, so profit has to be recognised before completion.
• Cost Accounting Standards (CAS) issued by the Institute of Cost Accountants of India (ICMAI) govern the elements fed into these methods — for example CAS-4 (cost of production for captive consumption), CAS-6 (material cost), CAS-7 (employee cost), CAS-3 (production and operation overheads). The Cost Records and Audit Rules, 2014, under Section 148 of the Companies Act, 2013, prescribe maintenance of cost records in CRA-1, which requires job/batch/contract-wise records in the covered industries (construction, engineering, pharmaceuticals among them).

Job costing: procedure and documents

1. Enquiry and estimate: the customer enquires; the costing department prepares an estimate of material, labour and overhead plus profit, and a quotation is sent.
2. Order acceptance and job number: on acceptance, a production/works order is raised and a unique job number allotted — every document thereafter carries it.
3. Material: issued on a material requisition / bill of materials against the job number, priced by FIFO or weighted average (LIFO is not permitted under Ind AS 2 / AS 2). Returns go on a material return note, transfers between jobs on a material transfer note.
4. Labour: booked from job cards / time tickets; direct wages charged to the job, normal idle time and holiday pay to overhead, abnormal idle time to the Costing P&L.
5. Direct expenses (chargeable expenses): hire of a special tool, a design fee, royalty per unit, carriage on a special purchase — charged direct.
6. Overhead: absorbed on a predetermined rate — labour hour, machine hour, percentage of direct wages, or activity-based rates — separately for factory, administration, selling and distribution.
7. Job cost sheet: accumulates all of the above; actual cost is compared with the estimate and the profit or loss per job reported.
8. Accounting: in an integrated system, a Work-in-Progress control account is debited with materials, wages and overhead absorbed; completed jobs are transferred to Finished Goods or Cost of Sales. The sum of individual job cost sheets reconciles to the WIP control balance.
9. Over/under-absorption of overhead arises because the rate is predetermined; a small amount, or one caused by abnormal factors, is written off to the Cost of Sales or Costing Profit and Loss Account, while a large amount arising from normal causes is adjusted over cost of sales, finished goods and WIP through a supplementary rate.
10. Advantages: profitability of each order known; estimates improved by comparison with actuals; basis for quoting and for cost-plus billing; spoilage and idle time traced to the job.
11. Limitations: heavy clerical work and cost; depends on accurate time and material booking; actuals arrive after the quotation has been given; no inter-job comparability where jobs are dissimilar.

Batch costing and the economic batch quantity

• Cost unit is the batch; cost per unit = total cost of batch ÷ number of good units produced. Rejections within normal limits are absorbed by good units; abnormal losses are written off to the Costing P&L.
• Set-up cost (machine setting, cleaning, first-article inspection, die change) is incurred once per batch, so larger batches spread it thinner — but larger batches raise carrying cost (interest, storage, insurance, obsolescence).
• Economic batch quantity (EBQ) balances the two, and is the manufacturing analogue of the EOQ formula: EBQ = √(2DS/C), where D is annual demand, S the set-up cost per batch and C the carrying cost per unit per year.
• Number of batches per year = D ÷ EBQ; total relevant cost at EBQ = √(2DSC), and at that point set-up cost equals carrying cost.
• In pharmaceuticals, batch size is also fixed by GMP and regulatory constraints — Schedule M of the Drugs and Cosmetics Rules requires batch numbering, batch manufacturing records and traceability, so the accounting batch and the regulatory batch coincide.
• Limitation: EBQ assumes constant demand, a known set-up cost and no quantity discounts or capacity ceilings; real batch sizes are also fixed by vessel capacity, shelf life and shift length.

Contract costing: features and the contract account

• Features: long duration; work executed at site; most costs are direct (materials, labour, site supervision, plant, sub-contracts); a separate contract account per contract number; progress payments based on architect's or engineer's certificates; penalties, liquidated damages, defect-liability periods.
• Debits to the contract account: materials purchased/issued to site, direct wages (plus accrued wages), direct and site expenses, sub-contract cost, plant depreciation or plant at cost, apportioned head-office overhead.
• Credits: materials at site and in hand at the end, materials returned or sold, plant at site at written-down value (or at cost if the plant-at-cost method is used), work certified plus work uncertified (closing WIP).
• Plant treatment — two methods: (a) charge the plant to the contract at cost and credit the depreciated value at the year end, used where plant stays on site for long; (b) charge only depreciation (or a hire rate) where plant moves between contracts.
• Materials at site remaining at close are credited; materials stolen or destroyed are charged to the Costing P&L, not to the contract.
• Work certified: value of work approved by the customer's architect/engineer; the contractor is paid this less retention money (commonly 5-10%, released after the defect-liability period). Cash received = work certified − retention.
• Work uncertified: work physically done at the year end but not yet certified; shown at cost.
• Escalation clause: permits the contract price to be raised if material rates, wages or statutory levies rise beyond an agreed base; the claim is computed on the agreed formula and recognised when reasonably certain. Common in Indian government and PSU contracts (CPWD, NHAI, Railways) using published price indices.
• Cost-plus contract: price = allowable cost + agreed percentage or fixed fee. Suits defence, emergency and one-off works where cost cannot be estimated. Advantage: contractor protected from cost rises, buyer gets audited cost. Disadvantage: no incentive for economy; disputes over admissible cost; buyer must have audit rights.
• Target cost / incentive contracts fix a target with gain-sharing on savings, a middle path between fixed-price and cost-plus.
• Sub-contracting: amount paid is a direct charge to the contract; the main contractor remains liable for quality and for GST on the full value.

Profit on incomplete contracts

• Notional profit = (value of work certified + cost of work uncertified) − cost of work to date; it is the profit apparently earned so far, not profit available for distribution in full.
• Estimated total profit = contract price − (cost to date + estimated further cost to complete + estimated contingencies).
• The traditional conservative rules taught in Indian syllabi, based on degree of completion = work certified ÷ contract price:

• Any anticipated loss on the contract as a whole is charged in full and immediately, however small the completion — prudence overrides the stage-based rules.
• The balance of notional profit not transferred is a reserve carried in the contract account and appears with WIP in the balance sheet.
• Standards position (state carefully in exams): AS 7 (Construction Contracts) prescribes the percentage-of-completion method for contractors and prohibits the completed-contract method; revenue and costs are recognised by reference to the stage of completion, measured by cost incurred ÷ total estimated cost, survey of work, or physical proportion. Under Ind AS 115 (Revenue from Contracts with Customers), applicable to Ind AS companies, construction revenue is recognised over time where the performance obligation is satisfied over time, using an input or output method — Ind AS 115 superseded Ind AS 11/18 from 1 April 2018. The 1/3 and 2/3 rules are cost-accounting conventions for internal reporting and exam problems, not financial-reporting rules; where a question asks for the financial statement treatment, the AS 7 / Ind AS 115 proportionate method applies.
• Retention money and unbilled work are presented as contract assets/receivables; the exact presentation depends on the framework the entity follows.

Comparison of the three methods

Key points

• Specific order costing - method for output made to customer order: job, batch and contract costing.
• Job number - the unique code that ties every requisition, job card and voucher to one order.
• Job cost sheet - statement accumulating material, labour, direct expenses and overhead for one job, giving profit per job.
• Material transfer note - document used when material moves job to job without returning to stores.
• Predetermined overhead rate - rate set in advance (per labour hour, machine hour or % of wages) so a job can be costed before actual overhead is known.
• Over/under absorption - gap between absorbed and actual overhead; written off to Cost of Sales or Costing P&L if small or abnormal, adjusted by a supplementary rate if large and normal.
• Batch - group of identical units costed as one job; cost per unit = batch cost ÷ good units.
• Set-up cost - once-per-batch cost; the reason small batches are expensive per unit.
• EBQ = √(2DS/C) - batch size where annual set-up cost equals annual carrying cost.
• Contract account - separate account per contract; mostly direct costs; closed only on completion.
• Work certified - value approved by the architect/engineer, the basis of the progress bill.
• Retention money - part of certified value (commonly 5-10%) withheld until the defect-liability period ends.
• Work uncertified - completed work awaiting certification, carried at cost, not at value.
• Notional profit - work certified + work uncertified − cost of work to date; the pool from which a prudent share is taken.
• Estimated profit - contract price − (cost to date + further cost to complete); used near completion.
• Reserve (profit in suspense) - notional profit not taken to P&L; shown with WIP.
• Anticipated loss - a foreseen loss on the whole contract is charged in full at once, irrespective of stage.
• Escalation clause - contractual right to raise price when input rates rise beyond an agreed base.
• Cost-plus contract - price = audited allowable cost + agreed fee; safe for the contractor, needs audit rights for the buyer.
• AS 7 / Ind AS 115 - percentage-of-completion / over-time recognition for financial statements; the 1/3-2/3 rules are internal conventions.

Formulas and examples

Example 1 — Job cost sheet and quotation (machine shop) Job No. 417: direct material ₹48,000; direct wages 300 hours at ₹120/hour; a special jig hired for ₹6,000. Factory overhead is absorbed at ₹90 per labour hour, administration overhead at 10% of works cost, and selling and distribution at 5% of works cost. The firm quotes to earn 20% on the selling price.

• Profit is 20% of selling price, so cost is 80% of price → Price = 1,34,550 ÷ 0.80 = ₹1,68,187.50.
• Profit = 1,68,187.50 − 1,34,550 = ₹33,637.50 (check: 20% of 1,68,187.50 = 33,637.50 ✓).
• Had profit been 20% on cost, price would be 1,34,550 × 1.20 = ₹1,61,460 — the two bases differ by ₹6,727.50, which is why the basis must be stated.

Example 2 — Batch cost per unit with rejections (pharma) A batch of 50,000 tablets: raw material ₹1,80,000; direct labour ₹60,000; set-up and cleaning ₹15,000; batch-specific QC testing ₹9,000; factory overhead absorbed at 150% of direct labour. 2,000 tablets are rejected at in-process QC (normal rejection, 4%).

• Factory overhead = 150% × 60,000 = ₹90,000.
• Total batch cost = 1,80,000 + 60,000 + 15,000 + 9,000 + 90,000 = ₹3,54,000.
• Good units = 50,000 − 2,000 = 48,000.
• Cost per good tablet = 3,54,000 ÷ 48,000 = ₹7.375, i.e. ₹7.38 (₹73.75 per strip of 10).
• If rejections were wrongly ignored, cost would read 3,54,000 ÷ 50,000 = ₹7.08 — an understatement of ₹0.295 per tablet, about 4%.

Example 3 — Economic batch quantity Annual demand for a bearing component is 48,000 units. Set-up cost per batch is ₹1,200. Carrying cost is ₹7.20 per unit per year. Production is in batches.

• EBQ = √(2 × 48,000 × 1,200 ÷ 7.20) = √(11,52,00,000 ÷ 7.20) = √1,60,00,000 = 4,000 units.
• Number of batches = 48,000 ÷ 4,000 = 12 batches a year (one a month).
• Set-up cost = 12 × 1,200 = ₹14,400; carrying cost on average stock (4,000 ÷ 2) × 7.20 = ₹14,400 — the two are equal at EBQ, as the formula requires.
• Total relevant cost = 14,400 + 14,400 = ₹28,800, which agrees with √(2DSC) = √(2 × 48,000 × 1,200 × 7.20) = √82,94,40,000 = ₹28,800.
• Compare a batch of 8,000: set-up 6 × 1,200 = ₹7,200 + carrying 4,000 × 7.20 = ₹28,800 = ₹36,000 — clearly worse than ₹28,800.

Example 4 — Contract account, 50-90% stage Contract price ₹80,00,000. During the year: materials issued ₹22,00,000; direct wages ₹14,00,000 (plus wages accrued ₹1,00,000); site expenses ₹3,20,000; sub-contract cost ₹4,00,000; plant sent to site at cost ₹6,00,000 (value at year end ₹4,50,000); head-office overhead apportioned ₹1,80,000. Materials at site at close ₹2,00,000. Work certified ₹56,00,000; work uncertified at cost ₹1,40,000. Cash received ₹50,40,000 (10% retention).

• Cost of work to date = 22,00,000 + 15,00,000 (wages incl. accrual) + 3,20,000 + 4,00,000 + 1,80,000 + plant depreciation (6,00,000 − 4,50,000 = 1,50,000) − materials at site 2,00,000 = ₹45,50,000.
• Notional profit = (56,00,000 + 1,40,000) − 45,50,000 = ₹11,90,000.
• Degree of completion = 56,00,000 ÷ 80,00,000 = 70% → the 2/3 rule applies.
• Cash received ÷ work certified = 50,40,000 ÷ 56,00,000 = 0.90.
• Profit to P&L = (2/3) × 11,90,000 × 0.90 = ₹7,14,000.
• Reserve carried forward = 11,90,000 − 7,14,000 = ₹4,76,000.
• Balance sheet (cost approach): WIP = work certified 56,00,000 + work uncertified 1,40,000 − reserve 4,76,000 − cash received 50,40,000 = ₹2,24,000; plant at site ₹4,50,000 and materials at site ₹2,00,000 shown separately; wages accrued ₹1,00,000 as a liability.
• Under AS 7 percentage-of-completion using cost ratio, if estimated further cost were ₹19,50,000, total estimated cost = ₹65,00,000, estimated total profit = ₹15,00,000 and completion = 45,50,000 ÷ 65,00,000 = 70% → profit recognised = ₹10,50,000 — higher than the conservative ₹7,14,000, which shows why the basis asked for must be read carefully.

Example 5 — Contract near completion, and an anticipated loss Contract price ₹1,00,00,000. Cost to date ₹72,00,000; estimated further cost ₹8,00,000; work certified ₹92,00,000; work uncertified ₹1,00,000; cash received ₹82,80,000 (10% retention).

• Degree of completion = 92,00,000 ÷ 1,00,00,000 = 92% → near-completion rule.
• Estimated total cost = 72,00,000 + 8,00,000 = ₹80,00,000 → estimated profit = ₹20,00,000.
• Profit to P&L = 20,00,000 × (92,00,000 ÷ 1,00,00,000) × (82,80,000 ÷ 92,00,000) = 20,00,000 × 0.92 × 0.90 = ₹16,56,000.
• Alternative (cost basis) = 20,00,000 × (72,00,000 ÷ 80,00,000) = ₹18,00,000; state the basis used.
• Now change one figure: if the estimated further cost were ₹32,00,000 instead, total cost = ₹1,04,00,000 against a price of ₹1,00,00,000 → an anticipated loss of ₹4,00,000, which is debited to the P&L in full this year even though the contract is 92% done and notional profit may still look positive.

Where it is used

• Construction and EPC: L&T, Tata Projects, NCC, Afcons, Dilip Buildcon — contract accounts per project, work certified against engineer's certificates, escalation under NHAI/CPWD/Railway clauses, retention and defect-liability tracking.
• Pharmaceuticals and FMCG: Sun Pharma, Cipla, Britannia — batch costing tied to the Schedule M batch manufacturing record; batch cost per strip/pack drives transfer price and MRP build-up.
• Engineering job shops, foundries and tool rooms: per-job cost sheets for dies, moulds, castings and machined parts; quotation rates derived from machine-hour rates.
• Printing, publishing and advertising: print runs costed as batches (plate and make-ready are set-up costs); creative assignments costed as jobs with timesheet-based labour.
• Shipbuilding, defence and heavy fabrication: Cochin Shipyard, BEL, HAL — long-duration contracts, cost-plus and target-cost pricing, cost records audited under the Companies (Cost Records and Audit) Rules, 2014.
• Job roles: cost accountant and cost auditor, project/site accountant and quantity surveyor (billing and certification), estimation and tendering engineer, FP&A analyst on project margins, articled trainees on contract audit.

Interview questions

• Q: What is the essential difference between job costing and process costing? A: Job costing identifies cost with a specific order that is distinguishable from others; process costing averages cost over continuous, homogeneous output of a process for a period.
• Q: When would you use batch costing instead of job costing? A: When identical units are produced in lots and it is uneconomical to cost each unit separately — the batch becomes the job, and cost per unit is the batch cost divided by good units.
• Q: Why does economic batch quantity exist as a concept? A: Because set-up cost falls per unit as the batch grows while carrying cost rises; EBQ = √(2DS/C) is the size where those two annual costs are equal and their total is minimum.
• Q: What is work uncertified and how is it valued? A: Work physically completed at the year end but not yet certified by the architect; it is carried at cost, not at contract value, because no claim for value has been admitted.
• Q: Why is retention money withheld, and does it reduce profit? A: It secures the contractor's performance during the defect-liability period; it does not reduce profit but it reduces cash received, which in turn scales down the profit prudently transferred to P&L.
• Q: Distinguish notional profit from estimated profit. A: Notional profit is work certified plus work uncertified less cost to date — the profit apparently earned so far; estimated profit is the profit expected on the contract as a whole, used when the contract is near completion.
• Q: A contract is 92% complete and shows a notional profit, but the revised cost to complete now exceeds the contract price. What do you do? A: Recognise the entire anticipated loss immediately in the P&L; the prudence requirement overrides any stage-based profit transfer.
• Q: How is plant at site dealt with in a contract account? A: Either charge the plant at cost and credit its depreciated value at the year end, or charge only depreciation or a hire rate where the plant moves between contracts.
• Q: What is an escalation clause and why do Indian infrastructure contracts have it? A: It allows the contract price to be revised when input prices, wages or levies cross an agreed base, usually by a published index formula — it protects the contractor over multi-year projects where steel, cement and fuel prices move sharply.
• Q: What are the risks of a cost-plus contract for the buyer? A: The contractor has no incentive to control cost, admissible-cost disputes are common, and the buyer must have audit rights and a defined cost base to protect itself.
• Q: Do the 1/3 and 2/3 rules apply to published financial statements? A: No — they are conservative cost-accounting conventions for internal reporting and exam problems; AS 7 requires the percentage-of-completion method, and Ind AS 115 companies recognise revenue over time using an input or output measure.
• Q: If material stolen from site is debited to the contract account, what goes wrong? A: The contract's cost and WIP are overstated and its profit understated; abnormal losses must go to the Costing Profit and Loss Account so that contract cost reflects normal performance.
• Q: How do you treat over-absorbed overhead in a job costing system? A: Where the amount is small or arose from abnormal causes, credit it to the Cost of Sales or Costing P&L for the period; where it is large and due to normal causes, adjust it over cost of sales, finished goods and WIP through a supplementary rate.

Common mistakes

• Confusing profit on cost with profit on selling price when converting a job cost into a quotation — 20% on sales needs division by 0.80, not multiplication by 1.20.
• Dividing total batch cost by units started instead of good units produced, which understates unit cost.
• Valuing work uncertified at contract value instead of cost, and forgetting to add it to notional profit.
• Multiplying by work certified ÷ contract price when the formula calls for cash received ÷ work certified, or omitting the cash ratio altogether.
• Transferring the full notional profit to P&L at an early stage, or conversely refusing to recognise an anticipated loss because the contract is incomplete.
• Omitting closing balances — materials at site, plant at written-down value, accrued wages — and so distorting cost of work to date.
• Charging abnormal losses (theft, fire, abnormal idle time) to the job or contract instead of the Costing P&L.
• Quoting the 1/3 and 2/3 rules as the accounting-standard treatment when the question asks for AS 7 or Ind AS 115 recognition.

Related topics

Cost accounting: elements of cost · Process costing · Activity-based costing · Budgeting and standard costing · Cost audit and cost records · Marginal costing and break-even analysis