• Summary of last weeks lecture

• Job order costing (Chapter 3)

P
r
o
g • Process costing (Chapter 4)
r
a
m
 • direct – indirect (assignment)
• fixed – variable (behavior)
• manufacturing – marketing (function)
C
o
• total – unit (level of aggregation)
s
t

Different costing (systems) for different

purposes
C
o
s
t
a Direct cost Indirect cost
s
s
• cost of materials; • company public
I
g Variable • packaging relations;
n
m cost • transport;
• phone (partly)
e
n
t
a
• depreciation mach. • wages staff employees;
X; • insurance;
n
Fixed cost
• wages sales repr. • taxes
d

b prod. Y
e
h
a
v
I
o
r
 Product cost:
C labor (direct)
o
s
t
materials (direct)
f production overhead (indirect, assigned)
u
n
c
manufacturing cost
t
I
o direct marketing cost
n

indirect marketing cost (assigned)

Product cost
J
o
b

C
o
s
t
• Production:
i
n  (individual) Job
g

&
 (mass) Process
P
r
o
c • Costing systems
e
s
s
 Cost calculation for each Job
C
o
 Cost calculation for each Process
s
t Different Costing Systems for different
i
n
Production Systems
g
J
o
b

C
o
s
t
i
n
Hybrid-costing Process-costing
g
Job-costing
systems systems
& systems
P Distinct, Masses of similar
r
o
identifiable unit of product units or
c a product or service units.
e
s service.
s

C
o
s
t
i
n
g
 • What are the costs of an assignment/product/service/job

J
that is being performed once?
o
b

C
• Once: how reliable is the outcome of the calculation of
o the budgeted cost?
s
t
i
n
g
• Are decisions made by managers based on the results of
calculations or are the decisions based on gut-feeling
(marketing/strategic arguments)?
 Cost assignment:
J • direct cost:
o
b • cost tracing
C
o
s
t
i • indirect cost:
n
g • cost allocation
 Indirect Variable Fixed Variable Fixed
Cost Manufacturing Manufacturing Marketing Marketing
Pools Overhead Overhead Overhead Overhead

J
o Indirect Cost
b
Allocation Machine hours Machine hours Dir. Mkting labour Units Sold
C Base
o
s
t
i
Cost Indirect Cost
n Object
Direct Cost
g

Direct
Cost
Direct Direct
Direct Manufacturing Marketing
Materials Labour Labour
 Calculation and allocation of fixed cost:
F
i
x
e €
d

C
o
s
t

Fixed cost
Average FC
1 volume
 Determine fixed cost per unit of performance:
• tariff is based on budgeted level of activities
• user is charged based on actual usage
F
I
x
e
d
€
C
o
s
t Allocated FC

FC

Tariff: FC/N Av.FC

N volume
A
l
l Difference between Actual cost and Allocated
o
c
Cost
a
t Reasons:
i
o
n
• Numerator reason:
(u
n
cost level is in/decreased in the recent
d period;
e
r • Denominator reason:
a
n budgeted
Cost sales level is not the same as the
Allocation
d
actual level. Department
o
v
e
r)
Consequence:
• Over or under allocation
A
l
l
o
c
Cost Department Allocation
a
t
i
Budgeted cost Budgeted allocation
o € 12.000 € 12.000
n

o
f
Work in process
t
h
e
Department Finished Goods
Cost of Goods Sold
r
e Actual cost Actual allocation
s
u
€ 10.000 € 12.000
l
t
s € 2.000
What to do with the (in this case) positive result ?
A
l
l
o
c Work in process
a
t
i
Department Finished Goods
o
n
Cost of Goods Sold
Actual cost Actual allocation
o
f € 10.000 € 12.000 € 10.000
t
h
e
€ 2.000
r What to do with the (in this case) positive result ?
e
s
u
l Adjusted Allocation Rate approach:
t
s Calculate the cost of each job on the basis of
actual cost.
Question: Does it matter what the cause of the result was?
A
l
l
o Actual cost Actual allocation
c
a € 10.000 € 12.000
t
i
o
n
€ 2.000
o
What to do with the (in this case) positive result ?
f

t
h Proration approach:
e
Assign the result to WiP, FG and CoGs on a
r
e basis of
s
u
•usage of indirect cost
l
t
•ending balance of WiP, FG and CoGs
s

Another method: just bring it under period costs

P Process
r
o
c
• repeating
e
s • extends to more then one period
s
• products in different stages in the process
C
o
s
t
i
n
g
 Conversion cost Conversion cost added
added evenly during evenly during process
P process
r
o Finished
c Assembly Testing
e Goods
s
s

C Direct materials Direct materials

o added at added at the end
s
t beginning
i What to do, at the end of the period, with the
n
g
determination of the value of
• goods still in the process;
• goods in Finished Goods inventory;
• goods that are already sold?
P Establish the value of products on a basis of
r
o
c
• Weighted Average
e
s • First In First Out (FIFO)
s

C
o
s
t
i Is there a lot of difference?
n
g
 Process Costing Hilton example (1)

Unit flow Percentage of completion

during Direct
Conversion
period materials
Units in Work in process beginning of period 20,000
Units started during the period 30,000
Total units to account for 50,000

Units completed during the period 40,000 100% 100%

Units in Work in process end of period 10,000 100% 50%
Total units accounted for 50,000
 Process Costing example (2)

Equivalent units
Direct
Conversion
materials
Units completed during the period 40,000 40,000
Units in Work in process end of period 10,000 5,000
50,000 45,000

10.000 units @
50%
 Process Costing example (3)

Direct
Conversion Total
materials
Costs in Work in process beginning of period € 50,000 € 7,200 € 57,200
Costs incurred during period € 90,000 € 193,500 € 283,500
Total cost to account for € 140,000 € 200,700 € 340,700

Cost per equivalent unit € 2.80 € 4.46 € 7.26

Cost of Goods completed € 112,000 € 178,400 € 290,400

Cost of Work in process end of period € 28,000 € 22,300 € 50,300
Total cost to account for € 140,000 € 200,700 € 340,700

€ 140.000 / 50.000
e.u.
40.000 e.u. completed during
period @ € 2,80

Weighted
average
 Process Costing example (4)

Percentage of
completion beginning
inventory is relevant

Percentage of
completion
Direct
Conversion
Unit flow during period materials
Units in Work in process beginning of period 20,000 100% 10%
Units started during the period 30,000
Total units to account for 50,000

Units completed from beginning WIP 20,000

Units completed during the period 20,000 100% 100%
Units in Work in process end of period 10,000 100% 50%
Total units accounted for 50,000

Same example but now: First In First Out method

 Process Costing example (5)

20.000 units beginning

inventory @ (1-10%)

Equivalent units
Direct
Conversion
materials
Units completed from beginning WIP 0 18000
Units completed during the period 20,000 20,000
Units in Work in process end of period 10,000 5,000
30,000 43,000

10.000 units in ending

inventory @ 50%

Same example but now: First In First Out method

 Process Costing example (6)

Direct
Conversion Total
materials
Costs in Work in process beginning of period € 50,000 € 7,200 € 57,200
Costs incurred during period € 90,000 € 193,500 € 283,500
Total cost to account for € 140,000 € 200,700 € 340,700

Cost per equivalent unit € 3.00 € 4.50 € 7.50

Costs incurred during

period (€193.500) / total
e.u.(43.000)

Same example but now: First In First Out method

 Process Costing example (7)

Costs are given

WIP beginning € 50,000 € 7,200 € 57,200

Cost to complete WIP beginning € - € 81,000 € 81,000
Cost of goods completed from beginning WIP € 50,000 € 88,200 € 138,200
Started and completed this period € 60,000 € 90,000 € 150,000
Cost of Work in process end of period € 30,000 € 22,500 € 52,500
Total cost to account for € 140,000 € 200,700 € 340,700

Units completed from beginning

inventory (18.000) @ € 4,50

Units started and completed during period @ €

4,50

Same example but now: First In First Out method

J
o
b Conclusion
C
Difference between two systems: in practice
o often a mixture.
s
t
i Cost tracing essential to stay alive in a
n
g
competitive environment.
& Cost allocation for assigning indirect cost to cost-
P objects.
r
o
c Job-costing Hybrid-costing Process-costing
e systems systems systems
s
s Distinct, identifiable Masses of similar
C
o
unit product units or
s of a product or service units.
t service.
i
n
g