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Operating Statement: Job Costing

Operating Statement: Job Costing. Profit: A Reminder. Revenue – Costs = Profit OR Revenue = Profit + Costs. Factory Ltd. Selling/Distribution Department. Admin Department. Shop Floor/Production. Production Department. Factory Ltd. Selling/Distribution Department. Admin Department.

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Operating Statement: Job Costing

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  1. Operating Statement: Job Costing

  2. Profit: A Reminder Revenue – Costs = Profit OR Revenue = Profit + Costs

  3. Factory Ltd Selling/Distribution Department Admin Department Shop Floor/Production Production Department

  4. Factory Ltd Selling/Distribution Department Admin Department Shop Floor/Production Production Department

  5. Factory Ltd All these costs must be accounted for in the price that the customer pays for the product Total Costs + Profit = Selling Price Selling/Distribution Department Admin Department Shop Floor/Production Production Department

  6. Different Types of Cost Selling and Distribution Overheads Admin Overheads Fixed Costs Indirect Costs Variable Costs Direct Costs Production Overheads

  7. Cost Statement (per unit or Job) Direct Labour + Direct Materials + Direct Expenses = PRIME COST (A) Production Overheads (B) PRODUCTION COST (A + B) Admin Overheads (C)) Selling and Distribution Overheads (D) TOTAL COST (A, B, C, D) Profit (E) SELLING PRICE (A, B, C, D, E)

  8. Cost Statement (per unit or Job) DIRECT COSTS VARIABLE COSTS Direct Labour + Direct Materials + Direct Expenses = PRIME COST (A) Production Overheads (B) PRODUCTION COST (A + B) Admin Overheads (C)) Selling and Distribution Overheads (D) TOTAL COST (A, B, C, D) Profit SELLING PRICE

  9. Cost Statement (per unit or Job) Direct Labour + Direct Materials + Direct Expenses = PRIME COST (A) Production Overheads (B) PRODUCTION COST (A + B) Admin Overheads (C)) Selling and Distribution Overheads (D) TOTAL COST (A, B, C, D) Profit SELLING PRICE INDIRECT COSTS FIXED COSTS PRODUCTION OVERHEADS

  10. Cost Statement (per unit or Job) Direct Labour + Direct Materials + Direct Expenses = PRIME COST (A) Production Overheads (B) PRODUCTION COST (A + B) Admin Overheads (C)) Selling and Distribution Overheads (D) TOTAL COST (A, B, C, D) Profit SELLING PRICE INDIRECT COSTS FIXED COSTS ADMIN/S&D OVERHEADS

  11. Factory Ltd: Prime Cost Each chair needs 2 kg of material @ £4.00 per kg Each chair takes ½ hour of labour to make at £8.00 per hour Prime cost for 100 chairs Direct Material £800 Direct Labour £400 PRIME COST £1200 Shop Floor/Production

  12. Factory Ltd: Production Overheads Production Overheads are FIXED COSTS Eg £20,000 for the whole year Overheads are divided between products on the basis of either the: Machine Hours OR Labour Hours that are used to make the product Production Department

  13. Machine Hours Divide the £20,000 Production Overheads into the total number of machine hours that the factory can use for the year: Eg: Total machine hours = 2880 Production Department

  14. Machine Hours Divide the £20,000 Production Overheads into the total number of machine hours that the factory can use for the year: Eg: Total machine hours = 2880 2 machines working 6 hours a day, 5 days a week, 48 weeks a year Production Department

  15. Machine Hours Divide the £20,000 Production Overheads into the total number of machine hours that the factory can use for the year: Eg: Total machine hours = 2880 Overhead Absorption Rate (OAR) = 20,000/2880 OAR = £6.94 per machine hour Production Department

  16. Machine Hours Meaning that every time a machine works for an hour, it ‘absorbs’ £6.94 of production overheads Divide the £20,000 Production Overheads into the total number of machine hours that the factory can use for the year: Eg: Total machine hours = 2880 Overhead Absorption Rate (OAR) = 20,000/2880 OAR = £6.94 per machine hour Production Department

  17. Machine Hours Divide the £20,000 Production Overheads into the total number of machine hours that the factory can use for the year: Eg: Total machine hours = 2880 Overhead Absorption Rate (OAR) = 20,000/2880 OAR = £6.94 per machine hour If producing a chair uses half an hour of machine time, then the production overhead added to the cost statement is 0.5 x 6.94 = £3.47 Production Department

  18. Factory Ltd Cost for 100 chairs Direct Material £800 Direct Labour £400 PRIME COST £1200 Production Overhead £347 (using machine hours as OAR) PRODUCTION COST £1547 Shop Floor/Production

  19. Labour Hours Another way of apportioning Production Overheads is by using Labour hours Divide the £20,000 Production Overheads into the total number of labour hours that the factory can use for the year: Eg: Total labour hours = 5760 Production Department

  20. Machine Hours Divide the £20,000 Production Overheads into the total number of labour hours that the factory can use for the year: Eg: Total labour hours = 5760 4 workers working 6 hours a day, 5 days a week, 48 weeks a year Production Department

  21. Labour Hours Divide the £20,000 Production Overheads into the total number of labour hours that the factory can use for the year: Eg: Total labour hours = 5760 Overhead absorption rate (OAR) = 20,000/5760 OAR = £3.47 per labour hour Production Department

  22. Labour Hours Meaning that every time a worker works for an hour, he/she ‘absorbs’ £3.47 of production overheads Divide the £20,000 Production Overheads into the total number of labour hours that the factory can use for the year: Eg: Total labour hours = 5760 Overhead absorption rate (OAR) = 20,000/5760 OAR = £3.47 per labour hour Production Department

  23. Labour Hours Divide the £20,000 Production Overheads into the total number of labour hours that the factory can use for the year: Eg: Total labour hours = 5760 Overhead absorption rate (OAR) = 20,000/5760 OAR = £3.47 per labour hour Each chair takes ½ of labour to make, so each chair ‘absorbs’ £1.74 of production overheads Production Department

  24. Factory Ltd Cost for 100 chairs Direct Material £800 Direct Labour £400 PRIME COST £1200 Production Overhead £174 (using labour hours as OAR) PRODUCTION COST £1374 Shop Floor/Production

  25. Factory Ltd: Admin and Selling/Distribution Overheads Admin and Selling / Distribution Overheads are FIXED COSTS Eg £10,000 Admin costs for the year £15,000 S&D costs for the year These are divided into the products based on: % of prime cost OR % of production cost Selling/Distribution Department Admin Department

  26. Factory Ltd Cost for 100 chairs Direct Material £800 Direct Labour £400 PRIME COST £1200 Production Overhead £174 (using labour hours as OAR) PRODUCTION COST £1374 Admin Cost £60 (based on 5% of prime cost) S&D Cost £55 (based on 4% of Production cost) TOTAL COST £1489 Shop Floor/Production

  27. Profit Companies will apply a ‘mark-up’ to the cost, eg 20% Total cost = £1489 Mark up = 1489 x 20% = £298

  28. Factory Ltd Cost for 100 chairs Direct Material £800 Direct Labour £400 PRIME COST £1200 Production Overhead £174 (using labour hours as OAR) PRODUCTION COST £1374 Admin Cost £60 (based on 5% of prime cost) S&D Cost £55 (based on 4% of Production cost) TOTAL COST £1489 Profit £298 Selling price £1787 Shop Floor/Production

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