Cost accounting tutorial - · PDF fileJOB COSTING •Job costings are ... OVERHEAD EXAMPLE Mt Barker Surfboards make custom surfboards for clients all over the world. Each client can

COST ACCOUNTING

WHAT IS COST ACCOUNTING

• This is to look at the way that a business will put it's job costings together.

• A cost object can be defined as anything in a business that generates costs

DIRECT VS INDIRECT COSTS

• A direct cost can be linked to a particular product or cost object. An example of this would be the materials used to make a particular product.

• An indirect cost generally has a more wide scope across a business and can't be easily linked to one product. An example of this would be a factory supervisor who oversees the production of a number of products.

PRODUCT VS PERIOD COSTS

•Product costs deal with the manufacture or purchase of a particular product while period costs can't be allocated to a single product, similar to direct vs indirect costs.

•Product costs can be broken up into 3 different categories which are direct material, direct labour and factory overheads

DIRECT MATERIALS

•Examples of direct material costs could be as follows:

•Wood

•Metal

•Materials such as cloth for fashion or bricks for bricklaying

DIRECT LABOUR

•This is the cost of the wages of the employees who either manufacture the product or provide the service to customers

FACTORY OVERHEADS

• Factory overhead is all other factory costs and can include some of the following:

• Rent

• Electricity

• Depreciation

• Repairs

RELEVANT COSTS

• These are future costs linked to a particular project

SUNK COSTS

• Sunk costs are those which have occurred in the past and will not be changed in the future regardless of whether the project goes ahead or not.

JOB COSTING

• Job costings are done by businesses that manufacture small identical types of products.

• It can also be used by businesses that provide services as well

EXAMPLE 1

• Albany Bibs and Bobs have decided to make clothes for young babies. They have signed a new contract with a major retailer for their clothes and need to calculate the cost price of the clothes.

• The direct material to make the clothes is $7.50

• The direct labour paid to make the clothes is $16.00.

• The business has estimated that its factory overheads for the next 12 months will be $15,000. The business believes that it will have 6,000 direct labour hours over the time period and aims to have a profit margin of 30%.

EXAMPLE 1 SOLUTION

Cost Driver Figures

Calculating OverheadsCalculating Overheads

EXAMPLE 1 SOLUTION

Cost Driver Figures

Direct Materials $7.50

Direct Labour $16

Factory Overheads $2.50

Cost $26.00

Profit Margin $7.80

Final Cost $33.80

Calculating Overheads15,000

$2.50Calculating Overheads6,000

$2.50

PRACTICE QUESTION 1

• Albany Bibs and Bobs have decided to make hats for young teenagers. They have signed a new contract with a major retailer for their hats and need to calculate the cost price of the clothes.

• The direct material to make the clothes is $12.00

• The direct labour paid to make the clothes is $9.00.

• The business has estimated that its factory overheads for the next 12 months will be $12,000. The business believes that it will have 4,000 direct labour hours over the time period and aims to have a profit margin of 30%.

PRACTICE QUESTION 1 SOLUTION

Cost Driver Figures

Direct Materials $12.00

Direct Labour $9.00

Factory Overheads $3.00

Cost $24.00

Profit Margin $7.20

Final Cost $31.20



$3.00

DEPARTMENTAL OVERHEADS•There are times when a job has to be allocated to a number of departments depending on the type of job that needs to be completed.

•If this is the case, then the overheads will be allocated to each department separately to ensure that the costs are allocated accurately and the business doesn’t lose money.

•They can be allocated via labour hours or machine hours.

DEPT. OVERHEAD EXAMPLEMt Barker Surfboards make custom surfboards for clients all over the world. Each client can custom make their board using their own design.The materials required to make a standard board cost $80 and the labour costs to make the standard board amounts to 5 hours of shaping at $60 per hour per board.Mt Barker Surfboards has given the following information to calculate its overheads for a standard board:

Item Design Shaping

Estimated Overheads for each area 36,000 52,000

Estimated Direct Labour Hours 1,440 2,600

Estimated Direct Machine Hours 2,000 1,625

The boards require 3 hours of design work using labour hours and the boards are calculated using 5 machine hours

DEPT. OVERHEAD SOLUTIONDesign OverheadsDesign Overheads

36,000$25 x 3 hours = $75

1,440$25 x 3 hours = $75

Shaping OverheadsShaping Overheads

52,000$32 x 5 hours = $160

1,625$32 x 5 hours = $160

Overall CostOverall Cost

Direct Labour $300

Direct Materials $80

Design Overheads $75

Shaping Overheads $160

Total Cost $615

PRACTICE EXAMPLE 2Geraldton Surfboards make custom skateboards for clients all over the world. Each client can custom make their board using their own design.The materials required to make a standard board cost $50 and the labour costs to make the standard board amounts to 2 hours of shaping at $80 per hour per board.Geraldton Surfboards has given the following information to calculate its overheads for a standard board:

Item Design Shaping

Estimated Overheads for each area 17,920 18,000

Estimated Direct Labour Hours 560 400

Estimated Direct Machine Hours 2,000 1,625

The boards require 3 hours of design work using labour hours and the boards shaping are calculated using 4 machine hours

PRACTICE EXAMPLE 2 SOLUTIONDesign OverheadsDesign Overheads

17,920$32

560$32

Shaping OverheadsShaping Overheads

18,000$11.08

1,600$11.08

Overall CostOverall Cost

Direct Labour $50

Direct Materials $80 x 2 = $160

Design Overheads $32 x 3 = $96

Shaping Overheads $11.08 x 4 = $44.32

Total Cost $350.32

SERVICE BUSINESS EXAMPLENot every type of service business will use direct materials such as accountants but others will such as painters.

Walpole Bookkeeping Services has just opened and has been asked to prepare a quote to maintain a businesses books for them over the next 6 months. It is estimated that it will take 8 hours each month to maintain the books.The business is looking to charge its clients $40 per hour, along with 20% profit and has the following overhead costs:

Secretary Wages 40,000

Rent 12,000

Insurance 1,200

Advertising 2,400

Telephone 820

The business expects to have 1,820 direct labour hours this year. What is the monthly charge?

SERVICE BUSINESS SOLUTION

Cost Driver Figures

Direct Labour

Factory Overheads

Cost

Profit Margin

Final Cost


SERVICE BUSINESS SOLUTION

Cost Driver Figures

Direct Labour $320

Factory Overheads $248

Cost $568

Profit Margin $113.60

Final Cost $681.60


$31Calculating Overheads1,820

$31

PRACTICE EXAMPLE 3Walpole Timber Supplies have started to polish timber floors to expand their business with a 20% profit margin and take 8 hours to finish the job. The business will have the following expenses directly related to the job:

Secretary Wages 20,000

Van Expenses 6,000

Insurance 500

Advertising 1,200

Telephone 1,500

The business expects to have 1,600 direct labour hours this year. What is the cost per job?

Glue and Oil $120

Direct Labour $300

PRACTICE EXAMPLE 3 SOLUTION

Cost Driver Figures

Direct Labour

Direct Materials

Factory Overheads

Cost

Profit Margin

Final Cost


PRACTICE EXAMPLE 3 SOLUTION

Cost Driver Figures

Direct Labour $300

Direct Materials $120

Factory Overheads $146

Cost $566

Profit Margin $113.20

Final Cost $679.20



$18.25

Example 4: Calculating a Job Cost

COST ITEM COST

Direct Materials:Spare Part ASpare Part BSpare Part C

$50$25$10

Direct Labour - per hour $20

Overheads - per hour $12

COST ITEM COSTDirect Materials:

Spare Part ASpare Part BSpare Part C

$50$25$10



Mr Maile brings in his motor vehicle for a repair and the following is recorded on his job card.

Item Quantity

Spare Part A 1

Spare Part B 2

Direct Labour 3 hours

Calculate the cost of the job if themarkup on the total cost is 20%.

COST ITEM COST

Direct Materials:Spare Part ASpare Part BSpare Part C

$50$25$10



Item Quantity

Spare Part A 1

Spare Part B 2


ITEM CALCULATION TOTAL COST

Spare Part A

Spare Part B

Direct Labour

Overheads

Total Cost

SO WHAT IS THE SELLING PRICE?


Spare Part A

Spare Part B

Direct Labour

Overheads

Cost

Profit Margin

Total Cost

COST ITEM COSTDirect Materials:

Spare Part ASpare Part BSpare Part C

$50$25$10



Item Quantity

Spare Part A 1

Spare Part B 2



Spare Part A 1 @ $50 50

Spare Part B 2 @ $25 50

Direct Labour 3 @ $20 60

Overheads 3 @ $12 36

Total Cost $196

SO WHAT IS THE SELLING PRICE?


Spare Part A 1 @ $50 50

Spare Part B 2 @ $25 2050

Direct Labour 3 @ $20 60

Overheads 3 @ $12 36

Cost 196

Profit Margin 39.20

Total Cost $235.20

Documents

Cost accounting tutorial - · PDF fileJOB COSTING •Job costings are ... OVERHEAD EXAMPLE Mt Barker Surfboards make custom surfboards for clients all over the world. Each client can