Unit 9 costing methods

U N I T 9 M A N A G E M E N T A C C O U N T I N G

Costing methods

Learning Outcome

Use different costing methods

Topics

Review of Last session

Group Reporting

Different Costing Methods

TYPES OF COST

SEATWORKS

Review of Last Session

THE TOTAL MONEY, TIME AND RESOURCES ASSOCIATED

WITH A PURCHASE OR ACTIVITY.

What are Costs?

AN ACCOUNTING SYSTEM ESTABLISHED TO MONITOR A

COMPANY„S COSTS, PROVIDING MANAGEMENT WITH

INFORMATION ON OPERATIONS AND PERFORMANCE

Costing System

job costing;

process costing;

batch costing;

contract costing;

service costing

Widely used Costing Systems

4 - 8

Building-Block Conceptsof Costing Systems

Cost object

Direct costsof a cost object

Indirect costsof a cost object

4 - 9

Building-Block Conceptsof Costing Systems

Cost Assignment

DirectCosts

IndirectCosts

Cost Tracing

Cost Allocation

CostObject

4 - 10

Building-Block Conceptsof Costing Systems

Cost pool

Cost allocation base

JOB COSTING

Job Costing

Job order costing system isgenerally used by companiesthat manufacture a number ofdifferent products. It is a widelyused costing system inmanufacturing

Job cost sheet

document used to record manufacturing costs to compute and allocate costs to products and services.

A separate job cost sheet is prepared for each individual job.

Includes job number, product name, starting date, completing date, number of units completed etc.

materials requisition number, cost of direct materials issued, time tickets, direct labor hours, direct labor rate per hour and total cost, manufacturing overhead rate per direct labor or machine hour and total cost etc.

Job cost sheet is not only used to charge cost to jobs but is also a part of the company‟s accounting record. It is used as a subsidiary ledger to the work in process account because it contains all details about the job in process.

;

Pre Determined Overhead Rate (machine hours)

Predetermined overhead rate is computed at the beginning of the year using projected expenses over projected hours

Predetermined rate = total projected cost / projected hours

Manufacturing overhead applied to production = Actual machine hours × Predetermined overhead rate

Manufacturing Overhead

Manufacturing overhead is applied or added to each job while it is in process.

There are three kinds of overhead costs consider:

Estimated overhead cost - used only in the pre-determined overhead rate calculation

Actual overhead cost which is incurred periodically throughout the year and debited to the manufacturing overhead account

Applied overhead cost which is added to jobs in the work-in-process inventory account throughout the year and credited to the manufacturing overhead account

Manufacturing Overhead

Actual overhead costs flow into the account as they are incurred

Applied overhead costs flow out of the account as the jobs flow through the production process.

The account balance may be either underapplied or overapplied.

Underapplied overhead represents an expense which must be transferred to cost of goods sold.

Overapplied overhead represents a reduction of expense charged to jobs which must be transferred to cost of goods sold.

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Product Costing Proceduresin Organizations

Process

Costing

Job-order

Costing

Distinct jobs or batches of units.

• Costs accumulated separately by job.

•Typical job order cost applications:• Special-order printing• Building construction

• Also used in service industry• Hospitals• Law firms

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Job-Order Costing

TheJob

Direct

labor

Direct

materials

Manufacturing

overhead (MOVH)

Applied (added) to

each

job using a

predetermined

rate

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Job-Order Costing

Part of the

job cost

Materials

Requisition and

Time tickets

Direct

materials

and labor

Indirect

materials

and labor

Manufacturing

Overhead

Control

Account

Raw materials could be used as direct or indirect

product cost.

An employee’s

time may be either

direct or indirect.

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Job-Order Costing

wages

Job-Order

Cost

Sheets

Material

usage

Other

Actual OH

Charges

Indirect

Materials

Indirect

Labor

Applied

Overhead

Manufacturing

Overhead

Control

Account

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Job-Order Cost Sheet

XYZ Job-Order Cost Sheet

Job Number A - 143 Date Initiated 17 September 2008

Date Completed

Department A4 Units Completed 2

Item Steel water tank

Direct Materials Direct Labor Manufacturing Overhead

Req. No. Amount Ticket Hours Amount Hours Rate Amount

MR 1041 1,200$ 20 8 160$ 8 6 48

Cost Summary Units Shipped

Direct Materials 1,200$ Date Number Balance

Direct Labor 160$

Manufacturing Overhead 48

Total Cost 1408

Unit Cost 704 11/17/08 1 1

17-Nov-08

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Job-Order System Cost Flows

Direct

Labor

Mfg. Overhead

Salaries and Wages Payable

Work-in-Process(Job Cost Sheet)

Direct

Materials

Overhead

Applied to

Work in

Process

IndirectLabor

Direct

LaborOverhead

Applied

Indirect

Labor

Indirect

Materials

Actual Applied If actual and applied

manufacturing overhead

are not equal, a year-end

adjustment is required.

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Job-Order System Cost Flows

Cost of

Goods

Mfd.

Finished Goods

Cost of

Goods

Sold

Cost of

Goods

Mfd.

Cost of Goods Sold

Cost of

Goods

Sold

Work-in-Process(Job Cost Sheet)

Direct

Materials

Direct

LaborOverhead

Applied

Sample Problem

The RC manufacturing company uses job order costing system. The company uses machine hours to apply overhead cost to jobs. At the beginning of Y1, the company estimated that 150,000 machine hours would be worked and $900,000 overhead cost would be incurred during Y1.

Materials were requisitioned for use in production, $760,000 ($720,000 direct materials and $40,000 indirect materials).

Direct labor, $150,000; indirect labor, $220,000; RC manufacturing company worked 160,000 machine

hours. Manufacturing overhead was applied to production.

Sales commission, $180,000; and administrative salaries, $400,000.

Sales travel costs were $34,000.

Utility costs incurred in the factory, $86,000.

Advertising expenses were $360,000.

Depreciation for the year was $700,000 ($560,000 relates to factory and $140,000 relates to selling and administrative activities).

Insurance expired during the year, $20,000 ($14,000 relates to factory operations and $6,000 relates to selling and administrative activities).

Goods costing $1,800,000 were completed during the year.

The goods costing $1,740,000 were sold to customers for $3,000,000.

Required

Prepare a Job Order Sheet

Process Costing

Process Costing

one method for collecting andassigning manufacturing costs tothe units produced. Processing costis used when nearly identical unitsare mass produced.

Processing Departments

an organizational unit where work isperformed on a product and wherematerials, labor, or overhead costs areadded to the product.

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Product Costing Proceduresin Organizations

Process

Costing

Job-order

Costing

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill

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Process Costing

Identical units of product are producedin a continuous flow through a series of

manufacturing steps or processes.

Costs are assigned to completed units transferred out of the process and to incomplete units

remaining in the process.

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Costs are accumulated for a period of time for products in work-in-process inventory.

Equivalent units is a concept expressing these partially completed products as a smaller

number of fully completed products.

Process Costing

Sample

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Two one-half completed products are

equivalent to one completed product.

+ =

So, 8,000 units 70 percent complete

are equivalent to 5,600 complete units.

Equivalent Units

Process Costing Flows

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For the current period, Ames started 15,000

units and completed 10,000 units, leaving

5,000 units in process 30 percent complete.

How many equivalent units of production did

Ames have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Equivalent Units Question

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For the current period, Ames started 15,000

units and completed 10,000 units, leaving

5,000 units in process 30 percent complete.

How many equivalent units of production did

Ames have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

10,000 units + (5,000 units × .30)

= 11,500 equivalent units

Equivalent Units Question

Similarities between Job-Order and Process Costing

Both systems have the same basic purposes—to assign material, labor, and manufacturing overhead costs to products and to provide a mechanism for computing unit product costs.

Both systems use the same basic manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.

The flow of costs through the manufacturing accounts is basically the same in both systems.

Differences between Job-Order and Process Costing

Batch Costing

Batch Costing

The identification and assignment ofcosts related to producing aset amount of goods. This includes allfixed and variable costs for producingthe batch. The unit cost of a batch ofgoods can be calculated by dividing thebatch cost by the number of unitsproduced.

Batch Costing

In Batch Costing, a lot of similar units which comprise the batch may be used as a cost unit for ascertainment of cost.

Separate Cost Sheet is maintained for each batch by assigning a batch number.

Cost per unit of product is determined by dividing the total cost of a batch by the number of units of that batch.

Batch costing is used in number drug industries, ready made garment industries, electronic componentsmanufacture, TV sets, radio etc.

Batch Costing

“the form of specific order costing which applieswhere similar articles are manufactured in batcheseither for sale or for use within the company”-ICMA

This system to be utilized when a firm manufactureproducts in readily identifiable batches or definitelots.

“A batch is a cost unit which consist of a group ofsimilar articles, which maintain its identitythroughout one or more stages of production”

Features

Variant of job costing

Job costing is tailored to meet the customers‟ specifications whereas batch costing produced inventory for future sale to customers.

Furniture making, Small tool making, clothing & toys and food processing undertakings.

Contract Costing

Contract Costing

A way of providing a cost forespecially large and long termprojects that will usually beperformed over a number ofaccounting periods.

Contract Costing

Variant of job costing,

Applies to construction works,

Individual cost unit (individual jobs)& cost centre (department or process),

Service Costing

Service Costing

The cost associated withhaving an entity perform avaluable task for whichspecialized expertise maybe required.

Service Cost Perspective

Out-sourcing of Services

The Organization as the Service Company

With service-based costing, organizations calculate the full cost of their products and services.

They propose a budget that includes not just the expected "keep the lights on" services, but also the many things clients have requested.

Full Service Cost

Direct costs (labor and vendor costs specific to that project or service) are straightforward to assign to services.

Indirect Costs:

Unbillable time

External indirect costs

Internal indirect costs

Overhead

Group Work

Which method for assigning costs to products would be more appropriate in each of the following cases?

a) Cruise ship builder

b) Cornflakes factory

c) Law firm

d) Dentists office

e) Beverage bottling company

Group Work

ABC Company uses job-order costing. It incurred the following costs for job M301: 20 pounds of raw materials (all direct) were issued to be used for job M301 at a cost of $7/pound.

Three people were assigned to work on Job M301 at a rate of $12 per hour. Records show that a total of 25 direct labor-hours were worked on Job M301.

Manufacturing overhead is applied based on direct labor-hours. At the beginning of the year, estimated total manufacturing overhead was $450,000 and the total direct labor hours incurred would be 50,000.

Required: Determine the cost assigned to Job M301.

Group Work

Company XYZ makes custom motor boats. It incurred the following costs for the just completed job B011. 500 pounds of direct materials were used at a cost per pound of $25. The job cost sheet indicates that a total of 90 direct labor-hours incurred on job B011. The workers were paid at a rate of $18 per hour. The company applies overhead based on machine hours. At the beginning of the year, it was estimated that the total amount of overhead would be $180,000 and a total of 30,000 machine hours would be incurred. Job B011 required 150 machine hours.

Required: Determine the total cost assigned to Job B011.

Home Assignment

Taken from a cocktail store:

Sales: US$ 1,750,000.00 Juice inventory cost : US$

45,000.00 Cocktails: US$5,000.00 Cups: US$ 2,500.00 Inventory Purchases (same

number of inventory per purchase) January US$ 200.00 April US$ 300.00 July US$ 250.00 October US$ 400.00

Barista salaries: US$ 35,000.00

Electricity: US$ 1,000.00

Machines Purchased: US$ 150,000.00

Vehicles purchased: US$ 20,000.00

Water: US$ 500.00

Advertising US$ 7,500.00

Freight US$ 5,000.00

Retainer Accountant US$ 6,000.00

Admin officer US$7,500.00

Required

Classify the different type of costs given in the case

Recommend and explain at least 2 different costing methods applicable to the company

Topics for Research

Cost measurement:

o absorption and marginal costing;

o traditional overhead absorption

o activity-based costing;

o stock valuation methods

(FIFO, LIFO, AVCO, standard

costing)

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Required

Calculate costs using appropriate techniques

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End of Session