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COSTING

COSTING. What is costing. In cost accounting we analyse costs and calculate the cost for each unit of production Cost depends upon the judgement of the cost accountant in each situation The cost of a product purchased for resale is the price we pay

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COSTING

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  1. COSTING

  2. What is costing • In cost accounting we analyse costs and calculate the cost for each unit of production • Cost depends upon the judgement of the cost accountant in each situation • The cost of a product purchased for resale is the price we pay • If we make the product the cost of the product includes Material, Labour and Overheads (other costs) • The cost of those units of a product sold is not the same as the total cost of materials, labour and overhead since some of those costs may relate to unsold units

  3. Example • Cost of one product: Product X £ Material – 3 tons @ £5 per ton 15 Labour – 5 hours @ £1 per hour 5 20 Overhead – 5 hours @£2 per hour10 £30 Variable Costs Fixed Costs The overhead is Estimated and added to the cost of material and labour to give the total cost of Product X

  4. Classification of Costs • Costs can be classified into the following areas • Fixed Costs; Variable Costs; Semi variable costs; Direct costs; Indirect Costs • Exercise 1 Complete the definitions below • Fixed costs • These are costs which will not vary with output but may change over time. eg Rent & Rates, Heating, Depreciation. • Variable Costs • These are costs which WILL vary with output. The more produced, the greater the cost eg material, labour, royalties

  5. Classification of Costs • Semi Variable Costs • These costs have a FIXED and a VARIABLE part eg maintenance costs will have a fixed level for standard repairs but will also include a variable element for unscheduled repairs • Direct Costs • These are costs that can be traced back to a certain product – eg cost of raw materials. They can be traced to a specific cost unit – eg wages

  6. Classification of Costs • Indirect costs • These are costs which can’t be traced back to any individual product – eg electricity, rent and rates etc • In deciding the cost and possible selling price of a job, the direct costs of labour and material are easy to identify. • The main problems arise in charging appropriate amounts for overhead and profit

  7. Costing • To determine a fair manufacturing overhead for a job we find a relationship between the total manufacturing overhead cost and some known direct costs. • For example the overhead could be made up of a % of direct labour or of prime cost • We may then add a profit % to the total cost to calculate the estimate selling price • However • The customer and the market for the product decide the actual selling price of the job

  8. Job Costing • Used to calculate manufacturing costs when the organisation is making different product for different customers • Where each job is different • Used by Contractors, builders, engineers

  9. Job Costing • Before an order for a job is placed the customer is given an estimate of the total cost which includes an estimate for materials and labour • It is simpler to estimate material costs than it is labour costs

  10. Exercise 2 • Job 366X. The direct labour cost in Department A (where 20 hours work is involved) is £30 • The direct labour cost in Dept B (where 8 hours of work is involved) is £5. • The direct material cost is £20 • Production department overheads are recovered at the rate of £1 per hour in Department A and at a rate of £2 per hour in Department B. • What is the manufacturing cost of the job • Answer • Labour (Department A + Dept B) £35 • Direct material Cost £20 £55 Overhead Department A (£1 x 20 hours) £20 Overhead Department B (£2 x 8 hours) £16 Manufacturing cost of job 366X £91

  11. Exercise 3 • A job has direct labour costs of £10 • Direct material costs of £20 • Fixed manufacturing overhead of £15 • Fixed selling and administrative overhead of £12 • Its selling price is £75 • What is the profit of the job • Answer £ • Direct labour 10 • Direct material 20 Manufacturing overhead 15 Selling & Administrative overhead 12 Variable Manufacturing Overhead 10 Manufacturing cost of job67 Selling price 75 Profit on job8

  12. Job Costing Card / Statement This is prepared to keep a record of all the costs incurred in the job being undertaken. • It includes the following details: • Job No • Customer Order No • Customer's Name • Job Description • Materials used and their cost • Labour - time and cost • Overhead charged • Profit • Total Price

  13. Job Costing Card / Statement • Job Cards record actual labour time – taken from Clock cards and time sheets From this actual labour costs can be calculated • Material costs – taken from issue notes from stores or from invoices for material purchased specifically for a job • Factory overheads - charged on an overhead absorption basis using one of the predetermined overhead absorption rate eg rate per machine hour • Administration, selling and distribution overheads will also have to be charged. • A percentage is added to the total cost for profit and to find the final price to charge the customer. • An invoice will be prepared to bill the customer, it will include the information on the Job Cost Card.

  14. Calculating Profit • The profit can be calculated EITHER • as a percentage of total cost (mark-up) OR • as a percentage of the selling price of the job (margin).

  15. Mark-up and Margin (Calculating profit) • The profit of a job is calculated on either the % of the cost price or on the selling price • This means that a distinction must be made between the % Margin and the % Markup • % Markup • Gross profit Cost price % Margin Gross profit Selling price Selling Price = Cost + Markup =£500 + 25% Selling Price £625 £500 Less Cost £125 Profit Profit = Selling price * Margin = £625 * 20% Selling Price £625 £500 Less Cost £125 Profit

  16. Job Cost Statement – Question 1 £105.00 £22.50 £127.50 £137.50 £180.00 £445.00 £75.00 £520.00 £104.00 £624.00

  17. Job Cost Statement – Question 2 £1800.00 £1125.00 £2925.00 £2500.00 £324.00 £1350.00 £4174.00 £7099.00 £675.00 £7774.00 £1166.10 £8940.10

  18. Job Cost Statement – Question 3

  19. Job Cost Statement – Question 4

  20. Job Cost Statement – Question 5 £975.00 £20000.00 £300.00 £21275.00 £180.00 (80%) £21455.00 £5363.75 £26818.80 Cost + Margin = SP Cost + 20% = 100% Cost = 80% SP = 100% Profit margin = 20% Margin = Cost/80 x 20 = £5363.75

  21. Job Cost Statement – Question 5b) Delivery = 1,000 tons x £0.50 per ton Delivery = £500 Profit will decrease by this amount Profit = £5363.75 - £500 =£4863.75

  22. Job Cost Statement – Question 6 66.6 % (2/3) Margin 33.3 % (1/3) £2325 100% (3/3) £6975

  23. Job Cost Statement – Question 7

  24. Job Cost Statement – Question 8 a)

  25. Job Cost Statement – Question 8 b)

  26. Costs Material Costs • Costs in buying the parts (raw materials) necessary to produce the cost unit Labour Costs • Wages of ALL of the workers who make the goods and services (Assembly line workers etc AND managers etc) Overheads • The other costs of the running of the business – eg rent, heat etc

  27. CALCULATING LABOUR COSTS Various records are used in the calculation of wages: • Personnel Records • Salaries of workers • Time Sheets/clock cards • No of hours worked by employee • Job Cards • Time spent on a job and no of units produced • Payroll • Record of hours worked/ pay/ deductions to date

  28. CALCULATING LABOUR COSTS TIME RATE • Fixed hourly rate Cost of one unit = Hrs worked on the cost unit x Hrly rate EG 40 HOURS PER WEEK @ £8 PER HOUR = £320

  29. CALCULATING LABOUR COSTS PIECE RATE • Workers are paid for EACH ITEM produced No of items produced x Rate per unit EG - A worker produces 500 items the rate per unit is £0.50 Wage = 500 × £0.50 = £250

  30. CALCULATING LABOUR COSTS BONUS SCHEME • Paid in addition to hourly rate as an incentive for meeting targets No of items produced x Rate per unit If production of 5000 units are exceeded then a bonus of £0.20 per unit is paid Therefore if 6000 units are produced then the bonus will be (6000 - 5000) × £0.20 = £200

  31. CALCULATING LABOUR COSTS OVERTIME PREMIUM • Paid over and above hourly rate for extra hours worked • Can be time and ½ or double time EG If Hourly rate = £8 per hour • Time and a Half = £8 × 1.5 for each hour of overtime worked • Double Time = £8 × 2 for each overtime hour worked.

  32. STOCK CONTROL All forms of stock have a cost to the Business: • Purchase price • Storage costs e.g. warehousing costs - wages, heat and light • Buying costs e.g. administration • Insurance • Pilferage (theft)/spoilage/damage • Obsolescence - stock may go out of date and never be sold • Opportunity Cost of the money used to buy the stock - i.e. what else could have been bought with that money

  33. FIFO This form of costing the direct materials used in any job values them at the same price as the OLDEST BATCH first • Eg The first stock received into the warehouse will be the first stock to be used up • If a stock room had • 200 units at £5 = £1000 – received 1/1/ 12 • 200 units at £10 = £2000 – received 5/1/12 • If a job requires 300 units it will be issued 200 units @ £5 and 100 units at £10 • The cost of materials for the job would be £2000 • The balance would be 100 units at £10 = £1000

  34. LIFO This form of costing the direct materials used in any job values them at the same price as the NEWEST BATCH first • Eg The most recent stock received into the warehouse will be the first stock to be used up • If a stock room had • 200 units at £5 = £1000 – received 1/1/ 12 • 200 units at £10 = £2000 – received 5/1/12 • If a job requires 300 units it will be issued 200 units @ £10 and 100 units at £5 • The cost for materials would be £1500 • The balance would be 100 units at £5 = £500

  35. AVCO • This form of costing the direct materials used in any job values them at the AVERAGE PRICE of all materials available • (Existing units x p price)+(New units x p Price) • Total number of units in stock • Eg The most recent stock received into the warehouse will be the first stock to be used up • If a stock room had • 200 units at £5 = £1000 – received 1/1/ 12 • 200 units at £10 = £2000 – received 5/1/12 All units in stock would be valued at £7.50 • (200 x £5)+(200 x £10) • 400 • If a job requires 300 units it will be issued 300 units @ £7.50 • The cost for materials would be £2250 • The balance would be 100 units @ £7.50 = £750

  36. Sample Exercise Below is the receipts and issues of stock for Splash Cans engineering company. Calculate the value of their stock at the 31 December 2011 using the following methods: FIFO and LIFO On 1 January 2011 the stock of Splash Cans on hand comprised of 7 cans with a total value of £96.60

  37. Splash Cans (FIFO) 1/1 7 13.80 96.60 7 13.80 96.60 20 14.00 280.00 10/1 20 14.00 280.00 7 13.80 96.60 28/2 8 14.00 112.00 12 14.00 168.00 4/4 10 14.00 140.00 22 14.00 308.00 8/5 6 14.00 84.00 16 14.00 224.00 2/6 12 14.30 171.60 16 14.00 224.00 12 14.30 171.60 20/7 14 14.00 196.00 2 14.00 28.00 12 14.30 171.60

  38. Splash Cans (FIFO Cont) 20/7 2 14.00 28.00 12 14.30 171.60 2 14.00 28.00 22/9 20 15.10 302.00 12 14.30 171.60 20 15.10 302.00 14.00 28.00 2 11/10 14.30 171.60 12 16 15.10 241.60 15.10 60.40 4 16 15.10 241.60 14 212.80 15.20 9/11 14 15.20 212.80 241.60 16 15.10 3/12 10 15.20 152.00 4 60.80 15.20

  39. Splash Cans (LIFO) 1/1 7 13.80 96.60 7 13.80 96.60 20 14.00 280.00 10/1 20 14.00 280.00 15 14.00 210.00 7 13.80 96.60 28/2 5 14.00 70.00 7 13.80 96.60 4/4 10 14.00 140.00 15 14.00 210.00 7 13.80 96.60 8/5 6 14.00 84.00 9 14.00 126.00 7 13.80 96.60 2/6 12 14.30 171.60 9 14.00 126.00 12 14.30 171.60

  40. Splash Cans (LIFO Cont) 7 13.80 96.60 2/6 9 14.00 126.00 12 14.30 171.60 12 14.30 171.60 7 13.80 96.60 20/7 2 14.00 28.00 7 14.00 98.00 7 13.80 96.60 22/9 20 15.10 302.00 7 14.00 98.00 20 15.10 302.00 15.10 271.80 13.80 96.60 18 7 11/10 14.00 98.00 7 2 15.10 30.20 14 15.20 212.80 7 13.80 96.60 9/11 7 14.00 98.00 30.20 2 15.10 14 15.20 212.80 7 13.80 96.60 14 15.20 212.80 3/12 30.20 2 15.10 3 14.00 42.00 56.00 4 14.00

  41. Charles plc(AVCO) 1/3 1000 1.00 1000.00 1.00 1000.00 1000 2000 1.05 2100.00 1000 1.10 1100.00 4/3 600 1.05 630.00 1400 1.05 1470.00 6/3 800 630.00 1.05 1.05 840.00 600 8/3 15/3 1200 1.32 1.50 1800.00 2000 2640.00 1716.00 700 16/3 1300 1.32 1.32 924.00 1026.00 17/3 1.71 600 1.50 1300 1950.00 18/3 1.50 1.50 600 700 900.00 1050.00 20/3 300 1.80 540.00 1.59 1000 1590.00

  42. OVERHEAD (INDIRECT) COSTING These are costs related to the general production process itself Examples: • Materials not used in production of cost units • Supervisors and non production labour wages • General manufacturing expenses – rent/ rates etc Therefore: • Overheads are traced back (allocated) or shared out (apportioned) to COST CENTRES (areas which created the overheads and through which jobs will pass) • Apportionment can be on a Blanket/standard rate or Departmenatl rates.

  43. APPORTIONMENT (Sharing Out) Overheads are SHARED FAIRLY between the cost centres which benefit from them eg:

  44. APPORTIONMENTNon traceable overheads to production and service departments Department value for basis for apportionment Total value for basis of apportionment (eg total area) x Total value of overhead being reapportioned For Example Factory Rent £100,000 Area of Dept A 40,000 m2 Area of Dept B 10,000 m2 Total Area 50,000 m2 Apportioined to Dept A = 40,000 / 50,000 x £100,000 = £80,000 Apportioined to Dept B= 10,000 / 50,000 x £100,000 = £20,000

  45. Reapportionment • Overheads of service depts to production departments • Done to show the benefit each Production dept gets from the service depts

  46. Reapportion OH of Service Depts to production Depts Department value for basis for apportionment (eg area) Total value for basis of apportionment (eg total area) x Total value of service dept OH being reapportioned For Example Stores Overheads £90,000 Raw materials used by Dept A 10,000 units Raw materials used by Dept B 20,000 units Total Materials 30,000 units Apportioined to Dept A = 10,000 / 30,000 x £90,000 = £30,000 Apportioined to Dept B= 20,000 / 30,000 x £90,000 = £60,000

  47. Overhead Absorption rates • Calculated AFTER allocation and apportionment to production depts • Calculated in a manner which best represents the way that a job makes use of the departments resources

  48. Overhead Absorption rate = Dept Overhead absorption rate per machine or direct labour hour (£) Total Dept Overheads Total number of machine or direct labour hours For Example Finishing Depts Overheads £100,000 Total Machine Hours 25,000 hr Total Labour hours 5,000 hours 100,000/25,000 = £4 per machine hour

  49. Exercise 1 Area 90,000 22,500 37,500 Value of machinery 3,500 1,000 2,000 54,000 No of Employees 24,000 12,000 7,000 12,250 58,500 64,500 21,000 80,250 3.18 mach hr 4.01 lab hr

  50. Exercise 1 Continued 2,000.00 180.00 750.00 19.08 32.08 745.29 3726.45

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