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Unit 9 costing methods

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Unit 9 costing methods

  1. 1. Costing methods UNIT 9 MANAGEMENT ACCOUNTING
  2. 2. Learning Outcome Use different costing methods
  3. 3. Topics Review of Last session Group Reporting Different Costing Methods
  4. 4. Review of Last Session TYPES OF COST SEATWORKS
  5. 5. What are Costs? THE TOTAL MONEY, TIME AND RESOURCES ASSOCIATED WITH A PURCHASE OR ACTIVITY.
  6. 6. Costing System AN ACCOUNTING SYSTEM ESTABLISHED TO MONITOR A COMPANY„S COSTS, PROVIDING MANAGEMENT WITH INFORMATION ON OPERATIONS AND PERFORMANCE
  7. 7. Widely used Costing Systems job costing; process costing; batch costing; contract costing; service costing
  8. 8. Building-Block Concepts of Costing Systems Cost object Direct costs of a cost object Indirect costs of a cost object 4-8
  9. 9. Building-Block Concepts of Costing Systems Cost Assignment Direct Costs Indirect Costs Cost Tracing Cost Allocation Cost Object 4-9
  10. 10. Building-Block Concepts of Costing Systems Cost pool Cost allocation base 4 - 10
  11. 11. JOB COSTING
  12. 12. Job Costing Job order costing system is generally used by companies that manufacture a number of different products. It is a widely used costing system in manufacturing
  13. 13. 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.
  14. 14. ;
  15. 15. 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
  16. 16. 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 predetermined 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
  17. 17. 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.
  18. 18. Product Costing Procedures in Organizations 18/3 7 Process Costing Job-order Costing  Distinct jobs or batches of units. Mugan • Costs accumulated separately by job. •Typical job order cost applications: • Special-order printing • Building construction • Also used in service industry • Hospitals • Law firms Fall 2010
  19. 19. Job-Order Costing 19/3 7 Manufacturing overhead (MOVH) Applied (added) to each job using a predetermined rate Direct materials The Job Direct labor Mugan Fall 2010
  20. 20. Job-Order Costing 20/ 37 Raw materials could be used as direct or indirect product cost. Direct materials and labor Part of the job cost Materials Requisition and Time tickets An employee’s time may be either direct or indirect. Mugan Indirect materials and labor Manufacturing Overhead Control Account Fall 2010
  21. 21. Job-Order Costing 21/3 7 wages Other Actual OH Charges Material usage Mugan Indirect Labor Manufacturing Applied Overhead Overhead Control Account Job-Order Cost Sheets Indirect Materials Fall 2010
  22. 22. Job-Order Cost Sheet 22/ 37 XYZ Job-Order Cost Sheet Job Number A - 143 Department A4 Item Steel water tank Direct Materials Req. No. Amount MR 1041 $ 1,200 Direct Labor Manufacturing Overhead Ticket Hours Amount Hours Rate Amount 20 8 $ 160 8 6 48 Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Cost Mugan Date Initiated 17 September 2008 Date Completed 17-Nov-08 Units Completed 2 $ 1,200 Units Shipped Date Number Balance $ 160 48 1408 704 11/17/08 1 1 Fall 2010
  23. 23. Job-Order System Cost Flows 23/ 37 Salaries and Wages Payable Direct Labor Indirect Labor  Mfg. Overhead Mugan Actual Applied Indirect Overhead Materials Applied to Indirect Work in Labor Process Work-in-Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied  If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Fall 2010
  24. 24. Job-Order System Cost Flows 24/ 37 Work-in-Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied  Cost of Goods Mfd.  Finished Goods Cost of Goods Mfd.  Cost of Goods Sold  Cost of Goods Sold Cost of Goods Sold  Mugan Fall 2010
  25. 25. 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.
  26. 26.  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.
  27. 27. Required  Prepare a Job Order Sheet
  28. 28. Process Costing
  29. 29. Process Costing  one method for collecting and assigning manufacturing costs to the units produced. Processing cost is used when nearly identical units are mass produced.
  30. 30. Processing Departments  an organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product.
  31. 31. Product Costing Procedures in Organizations 31/3 7 Process Costing Job-order Costing Typical process cost applications:   Paint manufacturer  Mugan Petrochemical refinery Paper mill Fall 2010
  32. 32. Process Costing 32/ 37 Identical units of product are produced in 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. Mugan Fall 2010
  33. 33. Process Costing 33/ 37 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. Mugan Fall 2010
  34. 34. Sample
  35. 35. Equivalent Units 35/ 37 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. Mugan Fall 2010
  36. 36. Process Costing Flows
  37. 37. Equivalent Units Question 37/ 37 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 Mugan Fall 2010
  38. 38. Equivalent Units Question 38/ 37 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 10,000 units + (5,000 units × .30) b. 11,500 = 11,500 equivalent units c. 13,500 d. 15,000 Mugan Fall 2010
  39. 39. 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.
  40. 40. Differences between Job-Order and Process Costing
  41. 41. Batch Costing
  42. 42. Batch Costing  The identification and assignment of costs related to producing a set amount of goods. This includes all fixed and variable costs for producing the batch. The unit cost of a batch of goods can be calculated by dividing the batch cost by the number of units produced.
  43. 43. 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.
  44. 44. Batch Costing  “the form of specific order costing which applies where similar articles are manufactured in batches either for sale or for use within the company”-ICMA  This system to be utilized when a firm manufacture products in readily identifiable batches or definite lots.  “A batch is a cost unit which consist of a group of similar articles, which maintain its identity throughout one or more stages of production”
  45. 45. 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.
  46. 46. Contract Costing
  47. 47. Contract Costing A way of providing a cost for especially large and long term projects that will usually be performed over a number of accounting periods.
  48. 48. Contract Costing  Variant of job costing,  Applies to construction works,  Individual cost unit (individual jobs)& cost centre (department or process),
  49. 49. Service Costing
  50. 50. Service Costing The cost associated with having an entity perform a valuable task for which specialized expertise may be required.
  51. 51. Service Cost Perspective Out-sourcing of Services The Organization as the Service Company
  52. 52.  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.
  53. 53. 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 
  54. 54. 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
  55. 55. 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 laborhours. 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.
  56. 56. 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 $180,000 and a total of 30,000 machine hours would be incurred. Job B011 required 150 machine hours.  Required: Determine the total cost assigned to Job B011.
  57. 57. Home Assignment Taken from a cocktail store:  Sales: US$ 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
  58. 58. Required  Classify the different type of costs given in the case  Recommend and explain at least 2 different costing methods applicable to the company
  59. 59. 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
  60. 60. Required Calculate costs using appropriate techniques Go Top
  61. 61. End of Session

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