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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)
Go Top
Required
Calculate costs using appropriate techniques
Go Top
End of Session
