COSTING OF MANUFACTURING OPERATIONS

DEPARTMENTAL AND ABC TECHNIQUES

COST ACCOUNTING SYSTEM

It consists of techniques, personnel, forms and accounting records used to develop timely information regarding the cost of providing products or services

Divisions of Management Accounting:

Cost Accounting , Managerial Planning

Why need for costing ?

1. For Pricing purpose

2. For Income measurement

DIRECT COSTS INDIRECT COSTS

FULL COST OF THE UNIT 

MANUFACTURING COSTS

DIRECT COSTS

1. Direct material

2. Direct labor

INDIRECT COSTS

Indirect material

Indirect labor

Equipment repair

Depreciation

FULL COSTING

(Absorption Costing)

MARGINAL COSTING

TYPES OF COSTINGCosting is the process of charging costs against each unit.

ACCOUNTING FOR MANUFACTURING OPERATIONS

Manufacturing Manufacturing Manufacturing

Inputs process Outputs

MaterialDirect Indirect

Work in Progress

PPU

Finished Goods

Inventory

FLOW OF COSTS Raw material a/cCost of Direct Cost of directMaterials material used

Cost of Cost of indirect indirect materials usedMaterials

Wages Payable WIP Finished Goods Cost Goods sold Cost of Cost of direct Cost of direct Cost of Cost of Cost of cost of Direct labor labor used materials used completed Completed products products products products sold soldCost of Cost of indirect Cost of direct Indirect labor used labor used Labor Applied factory overhead

Factory Overhead

Cost of indirect Applied factory Labor used Overhead

Cost of indirect Materials used

UtilitiesDepreciation

Finished Goods

PPU

Cost of Goods sold

Balance Sheet Trading Account

Assets Liabilities Purchases Sales

Matching Principle

Manufacturing costs should be reported on the income statement only and to the extent to which they match to the sales revenue.

Builder can not show any cost of houses built in his trading a/c unless they are sold

1. Single Product ( Process costing )Produce steady stream of identical products like Oil refineries, flour mills and breweries

1. Multi-product ( Job costing ) Process of charging full cost when products

differ from each other.

FULL COSTING

Job Order Costing

Job Order cost Sheet

It is a subsidiary ledger showing the manufacturing costs charged to each job.

Costs in these sheets in respect of all jobs being carried are debited to WIP a/c

Upon completion of each job the respective amount would be transferred from WIP a/c to the Finished Goods Inventory a/c

  

 

Job Order Cost Sheet

Product Description Kit Kate Chocolate Bars Job Order Number 101

Notes Rush Order !!! Units required 250 Special Sizing &Packaging Date Started Jan 10 Date completed Jan 1

   

Direct Materials 

Direct Labor 

Factory Overhead

 Date  

 10-01        11-01

 

Request Number  541       549

 

Cost  Rs 350        Rs 735       

 

 Time Card Number  380381382383384387388389 400401405407408409411412

 

 Cost 

Rs 84 96 96 84 90 96 72 96 Rs 96 90 96 84 96 78 96 96

   

 125 hrs @ Rs 3.16 = Rs 395

Rs. 1085 Rs 1500 Rs 395 Summary of Costs Direct Material Rs 1085 Direct Labor Rs 1500 Factory Overhead Rs 395 TOTAL JOB COST Rs 2980

How a company applies raw material cost to jobs ?

Raw material requisition form and summary

From Purchases a/c to WIP a/c as the work on any job progresses

How a company applies Direct labor costs to jobs?

Time Cards and Tickets

Transfer from Direct Labor Cost a/c to WIP a/c

How a company applies factory overhead cost to jobs?

These costs are for the general benefit of all manufacturing activities/jobs hence are difficult to be charged.

Basis of Charging indirect costs in Multi-product operations

1. Departmental Basis

* Cost center: is area or activity for which expense is identified ( Department )

* Direct costs are allocated and indirect costs are apportioned

* Costs of service centers are apportioned to production centers

    

 

Co

Costs accumulated

 

 

Preparation department

Machining department

Finishing department

Finished goods store

DEPARTMENTAL BASIS OF FULL COSTING

Activity Based Costing

1. Cost Drivers

2. Cost Pools

Why preferred ?

Job Costing in Service Industry

Gather costs of serving a particular customer

The overlap of Managerial and Financial Accounting

Accounting for manufacturing operations is a typical example