Job 214 at Meridian PrintWorks
Meridian PrintWorks uses job costing. Job 214, for 12,000 brochures, shows direct materials of ₹86,000. The job used 420 paid direct labour hours, including 60 hours of overtime and 25 hours of idle time caused by a machine breakdown. The normal wage rate is ₹150 per hour and overtime is paid at double time. Overhead is absorbed at ₹120 per productive direct labour hour. Rework on the job cost ₹12,000 in total: ₹7,000 arose because the customer changed the artwork after proof approval, and ₹5,000 arose from internal misregistration. The customer has been told that the job will be priced at cost plus 15%, but the contract is silent on overtime premium and customer-caused rework. The customer has now queried the overtime premium, saying the revised delivery date was accepted ‘subject to capacity’. The sales manager wants to concede the whole overtime premium to protect the relationship; the accountant wants to show the full cost of the job before any negotiation.
1. Compute the cost of Job 214 and the amount chargeable to the customer before any profit mark-up. Show the treatment of overtime premium, idle time and rework.
Read the worked answer
Productive direct labour hours = 420 − 25 idle hours = 395 hours. Direct wages = 420 × ₹150 = ₹63,000. Overtime premium = 60 hours × (₹300 − ₹150) = ₹9,000. Because the overtime arose from the customer’s revised delivery requirement, the premium is charged to the job. Idle time = 25 × ₹150 = ₹3,750; this arose from an abnormal machine breakdown, so it is charged to production overhead or profit and loss, not to Job 214. Overhead absorbed = 395 productive hours × ₹120 = ₹47,400. Customer-caused rework of ₹7,000 is chargeable; internal rework of ₹5,000 is not.
Job cost: direct materials ₹86,000 + direct wages ₹63,000 + overtime premium ₹9,000 + overhead ₹47,400 + customer-caused rework ₹7,000 = ₹2,12,400. Amount chargeable before mark-up = ₹2,12,400. Excluded: idle time ₹3,750 and internal rework ₹5,000.
2. The customer disputes the ₹9,000 overtime premium. Advise the accountant with figures, including the effect of conceding the whole premium or sharing it equally.
Read the worked answer
The premium should be charged to the customer only if the customer’s instruction caused it and there is evidence that the revised date was accepted on the basis that overtime would be recoverable. The contract is silent, so the company’s position is weaker, but the job record and correspondence may support recovery.
If the whole ₹9,000 is conceded, the chargeable job cost falls from ₹2,12,400 to ₹2,03,400. At a 15% mark-up, the quoted price falls from ₹2,44,260 to ₹2,33,910, a revenue loss of ₹10,350. If the premium is shared equally, the concession is ₹4,500 and the revenue loss at 15% mark-up is ₹5,175.
Advice: do not concede automatically. First establish whether the customer’s late change made the overtime unavoidable and whether capacity was available otherwise. If the evidence is weak, a 50:50 share is a defensible commercial compromise; if the customer clearly caused the cost, recover it.
3. Explain how the idle time and the internal rework should be treated in a job costing system, and why charging them to the customer would be inappropriate.
Read the worked answer
The 25 hours of idle time arose from a machine breakdown, which is an abnormal event. It should not be spread over jobs as if it were a normal production cost. Instead, it should be charged to production overhead and then to profit and loss if abnormal, or included in the overhead absorption rate only if it is a normal, unavoidable feature of operations. Charging it to Job 214 would make the customer pay for the company’s machine failure.
The ₹5,000 internal rework arose from misregistration, an internal quality failure. It should be charged to production overhead or a cost-of-quality account, not to the customer. Only the ₹7,000 rework caused by the customer’s artwork change is chargeable. Including internal rework in the job price would hide inefficiency, weaken quality control and could damage the customer relationship if discovered.