MA Slides Lecture 5 Solutions _ Costing Methods

8/10/2019 MA Slides Lecture 5 Solutions _ Costing Methods

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Diploma inAccountancy Studies

Management Accounting

Lecture 5

Costing Methods

Instructor: Anne Chia (Ms.)

[email protected]

Reference: Cost Accounting, A Managerial Emphasis

Charles Horngren, Srikant Datar, Madhav Rajan

Chapter 17 Process Costing

Chapter 18 Spoilage, Rework and Scrap


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Job costing

Features:

- Based on customers specifications

- One job = one unit

- Usually of short duration

- When to use Job Costing?

- Unique products or services with unique costcomponents

- E.g. movies, hospitals, car repair workshop etc.


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The cost to produce a unit of product includes:

Direct material (DM)Direct labor (DL)

Manufacturing overhead (MOH):Indirect material

Indirect laborOverhead

Three Types of Manufacturing Costs


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ManufacturingOverhead(estimate)

Job No. 1

Job No. 2

Job No. 3

Charge directmaterial anddirect labor

costs to each

job as work isperformed

Direct Materials

(actual)

Direct Labor

(actual)

Job-Order Costing

Apply overheadto each job

using apredetermined

rate


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Job costing

Typical procedures:1. Prospective customer approaches the

supplier and indicates the requirements ofthe job.

2. Officer agrees with customers on precisedetails of the items to be supplied, e.g.colour, design, date of delivery, etc.

3. Estimating department prepares job costsheet.

4. Desired profit margin set, selling pricedetermined.


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ExampleLS is involved in drilling and boring business. A certain

job requires shafts to be drilled and bored and thefollowing costs have been estimated.

Machine hours Labour hours

Dept C 200 500

Dept L 675 750

Workers are paid $10 per hour in Department C and $8in Department L. Direct materials should cost $6,400. LS

uses a cost plus system and sets selling price at amarkup of 20% on total cost. Administration costs areabsorbed at a rate of 10% total production cost. Factoryoverheads are absorbed at $12 per direct labour inDepartment C and $10 per direct machine hour inDepartment L.


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Example

Prepare a job cost statement clearly showing:

- Total production cost

- Total cost

- Selling price


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Job cost statement:$

Direct materials 6,400

Direct labour- Department C 500 x $10 5,000-Department L 750 x $8 6,000

Prime cost 17,400

Factory overheads- Department C $12 x 500 6,000 {$12 per DLH}- Department L $10 x 675 6,750 {$10 per MH}

Total production cost 30,150

Administration costs 3,015 {10% x 30,150}Total costs 33,165Profit 20% x 33,165 6,633Selling price $39,798

Prime Cost = Direct Materials + Direct Labour


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Example

Refer to the example on LS, the drilling andboring business. Suppose the firms markup

is 10% of selling price instead, then:

Total cost $33,165 90%

Profit $ 3,685 10%Selling price $36,850 100%

SP x 10%


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Process costing

Process costing applies where goods orservices result from a sequence of continuousor repetitive operations or processes. Costs areaveragedover the units produced during the

period. NO individual costing for each product.

E.g. manufacturing cars, canning, drinks, pills

The product or service moves from one stageof a process to another, then another until theproduct is complete.


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Illustration of Process Costing


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Losses

Normal loss

Unavoidable, a natural consequence of theproduction process.

Occurs even when production process is operating inan efficient manner.

E.g. Trimming edges (wood scraps, cloth scraps),

chemical reaction.

Normal loss is always valued based on its scrapvalue.


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Losses

Abnormal loss

Losses in excess of what is expected.

Usually due to poor management of resources, couldhave been avoided. E.g. operator errors.

Abnormal loss is given same value as the good units.

Note: If output is MORE than what is expected, wehave an abnormal gain.

Ref: Study Guide p.61 Lecture Notes


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Example 1

1,000 units of materials worth $1,000 wereput into process. Labour costs of $2,000 andoverheads costing $1,700 were incurred.

Normal yield is 90% of input. Output fromthe process amounted to 900 units. Theseloss units can be sold for $2 per unit.

Prepare the process account, showingclearly the average cost per unit.


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Example 1 - Solution

inputs outputs

Scrap value $200 debited to Cash or Accounts Receivables

Total Product Cost , classified as

Inventory in the Balance Sheet

Standard Formula for Unit Product Cost computation:Total Manufacturing CostNormal Loss Scrap Value

Total Input UnitsNormal Loss Units

$4,700 - $200 = $4,500 = $5 per unit1 000100 units 900 units

$5 x 900 units


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Example 2

2,000 units of materials, valued at $4,000were put into process. Labour andoverheads cost $8,000 and $6,000

respectively. Actual output was 1,700 units.The normal loss was 10% of input. Lossunits can normally be sold for $1.80.

Prepare the process account.


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2,000 units x 10% = 200

200u x $1.80 = $360

Abnormal loss $980 charged to

Expenses in the Income Statement,

Account Loss from Abnormal Spoilage

Account.


Total Input UnitsNormal Loss Units

$18,000 - $360 = $17,640 = $9.80 per unit

2,000200 units 1,800 units


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Example 3

1,000 units of materials valued at $1,000were put into a process. Labour cost was$2,000 and overheads $1,700. Normal loss

is 10% of input and actual output turned outto be 930 units. Loss units can be sold for$2 per unit.



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Normal loss

1,000 units x 10%

Charged to Gain account (credit balance) in the Income

Statement. Similar to Other Income.

Abnormal Gain: $5 per unit x 30 units = $150


Total Input UnitsNormal Loss Units$4,850 - $200 = $4,650 = $5 per unit (rounded)

1,000100 units 900 units


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Work in progress

Equivalent units

= Notional whole units representing

incomplete work.

E.g. 200 units that are only 50% complete

are equivalent to 100 fully completed units.


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Supplementary - Equivalent Units

For e.g. 10,000 units 70 percent complete areequivalent to 7,000 complete units.

Four one-half filled cups are equivalentto two full cups.

=


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Example 1

An organisation spent $9,000 inputting 1,000 units intoa process, together with $5,040 worth of labour and$5,394 worth of overheads. At the end of the period,900 completed units were recorded as having finished,

and 100 units remained in the work in progress closinginventory. The stage of completion of the WIP was:

Material 100%

Labour 60%Overheads 30%

Prepare the process account, showing clearly theaverage cost per unit.


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Example 1 - SolutionWIP Inventory

100 physical units

Finished Goods Inventory

(inventory in B/S)

Work In Process

Inventory

(inventory in B/S)

100%

60%30%

E.g. Labour

WIP inventory x % of completion

100 physical units x 60% = 60 Equiv Units

Double-check accuracy of computation

Finished Goods value + Closing WIP value

$18,045 + $1,389 = $19,434 same as Total Cost $19,434 ($9k + $5,040 + $5,394)


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Example 2In the manufacture of paper the costs incurred in theprocess in a period were:

Direct materials $77,840

Conversion costs $28,350 (next slide for definition)

There was no work-in-progress at the beginning of theperiod. 24,600 units were completed during the periodand a further 3,200 units remained in the process at

the end of the period, complete for materials but only75% complete for conversion costs.



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SupplementaryCost Terms

Prime Costs = Direct Materials + Direct Labour

Conversion Costs = Direct Labour + Overheads

To convert Raw Materials into Finished Goods


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3,200 units x 75% completion = 2,400 E.U.


WIP Inventory

3,200 physical units


Work In Process Inventory


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RecapPatacake Ltd produces a certain food item in a

manufacturing process. On 1 November, there was noopening stock of work in progress. During November,500 units of material were input into the process,costing $9,000. Direct labour costs were $3,840.

Production overhead was absorbed at the rate of200% of direct labour costs.

Closing work in progress on 30 November consisted of

100 units which were 100% complete as to materialsand 80% complete as to labour and overheads. Therewas no loss in process.


l i


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Recap - SolutionStarted 500 unitsEnd WIP (100 units)

Completed 400 unitsDL costs $3,840 (given

OH costs 200% of DL costs = $3,840 x 2

= $7,680

Conversion = DL + OH = $11,520


Work In Process Inventory


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Additional Self-Practice Question

Process Costing

Chapter 17 Problem 17-30 Larsen Company

Hint: add beginning WIP amounts to current months costs.

Key answers:1. Direct materials EU 25k, Conversion costs EU 24,250

2. Total production cost $8,490,250, DM $230/EU, CC $113/EU

3. Completed/Finished Goods $7,717,500

Ending Work In Process $772,750

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MA Slides Lecture 5 Solutions _ Costing Methods