Costing Systems Design

Traditional systems of calculating costs-based on the
production size
– A process costing system (pl: kalkulacja procesowa) (ch.4)
– A job order costing system (pl: kalkulacja zleceniowa) (ch.3)
1
Calculation of product costs



The task of calculating product costs:
– Valuing the goods produced or services rendered according to
manufacturing costs
Calculating a unit cost in order to:
– Allow for correct valuation of asset components e.g. inventory
– To control the costs incurred
– To determine profitability of individual products
Object of calculation :
– Defining and presenting a product in a number from
– Usually the manufacturing cost is assigned to appropriately
chosen unit of a psychical good (e.g. a piece, ton, kilogram,
m3)
2
Calculation and organization of the
manufacturing process
 Manufacturing types:
– Mass production
 Homogenous goods are produced continuously
– Series production
 Homogenous goods are produced in batches
– Unit production
 Production of heterogeneous goods; manufacturing
process can be repeated
3
Traditional systems of calculating costs


A job-order costing
– Used in enterprises producing heterogeneous products
– Production in units or series
– Production process and use of resources are defined separately for
each good or series
A process costing
– Used in manufacturing of homogenous products
– Mass production
 There is one type of goods produced
 Different products are produced from the same raw materials
using the same machines and technology
4
Assumptions of job-order processing




Separately calculate the costs of each cost object (final product,
e.g. single product, series)
For each cost object, a job cost sheet is opened, to gather costs
Direct costs are directly related to cost object and registered
based on accounting documents
Indirect costs are allocated through an allocation process using
a cost driver (pl: klucz rozliczeniowy)
– Traditional methods of assigning costs assume that level of indirect
(overhead) costs changes with changes in manufacturing quantity
– Easiest way: allocate all indirect (overhead) costs using the same
method
– Another way: assign in direct costs to different departments
5
Transfer of costs in job-order costing
Direct raw materials
Direct labor
Relating costs directly
Relating costs directly
COST
OBJECT
Overhead costs
Overhead labor
Amortization
Energy
COST
OBJECT
Assigning
overhead costs
product,
order
department
Other department costs
6
Calculating costs under job-order costing



Calculating direct raw materials
– Documented e.g. in the computer system or materials requisition
from, in which a type and quantity of materials drawn from a
storeroom is specified along with an order (job) number
– (e.g. see p. 72)
Calculating use of direct labor
– Based on manual or computerized employee time ticket on which a
value (an amount) of direct labor is recorded and charged to
specific order (job)
– (e.g. see p. 73)
Calculating indirect manufacturing costs
– Costs of raw materials used with separate costs by type are
assigned
– Total of departmental costs over a given period is transferred to
(using a cost driver) job cost sheet
7
Cost drivers of indirect costs


Most common cost drivers:
–
–
–
–
Quantity or weight of produced goods
Direct labor hours (DHL)
Machine-hours (MH)
Quantity of hours (time) used by machines or equipment
Ratio for computing pre-determined overhead cost
Ratio of indirect (overhead)
costs

=
(Estimated) total manufacturing
indirect (overhead)
(Estimated)
total units incosts
the base (cost
driver)
Indirect (overhead) costs assigned to a cost object
Indirect costs assigned to a
cost object
=
Ratio of indirect
costs
x
Quantity of cost driver
used
8
Example of completed job cost sheet
- See p.77
9
Assumptions of process costing




The characteristic of process costing is a continuity of
manufacturing process
The manufacturing process may go through one or more
departments (parallel processing)
The cost is calculated per "manufactured unit" over a period of
time
When assigning unit costs we consider:
– Direct raw materials
– Direct labor
– Indirect manufacturing costs (overhead costs)
10
Transfer of costs in process costing
Direct materials
Indirect labor
Overhead costs
Work-in-process
Work-in-process
Department A
Department B
COST
OBJECT
Finished
goods
11
A simple process costing

A simple process costing
– Depends on dividing the costs over a given period by a quantity of
equivalent units
Unit manufacturing cost

=
Manufacturing costs incurred in a given month
Number of equivalent units
– It is used in an enterprises with mass production of homogenous
products that equally uses raw materials of the enterprise
A process costing with ratios
– It is used with heterogeneous production, when manufactured
goods unevenly use raw materials
– Requires use of ratios, which express a difference in costs among
goods
12
Example: A simple process costing
- no inventory
Production Report – DEPARTMENT A
Calculation
Direct materials
Direct labor
Overhead manufacturing costs
Costs transferred to Department B
Production of 100 units
Period costs
2 000
700
1 100
20
7
11
3 800
38
3 800
38
Production Report – DEPARTMENT B
Calculation
Direct materials
Direct labor
Overhead manufacturing costs
Manufacturing
Costs per unit
Production of 100 units
Period costs
Manufacturing
Costs per unit
500
300
400
5
3
4
Costs transferred from Department A
3 800
38
Wyroby gotowe przekazane do
magazynuFinnished goods transferred to
storeroom
5 000
50
13
Example: a simple process costing - parallel



Question: what quantity of incurred costs pertains to finished
goods and what quantity to goods in process
– One should calculate percentage progress of manufacturing process
– Calculate quantity of goods in process in terms of finished goods
– We get information about the quantity manufactured in a given period
e.g. an equivalent amount of finished goods
Equivalent units
– it's an equivalent amount of units, which could be manufactured in
100% with appropriate engagement of materials and capacity
Equivalent manufactured amount
– It's an amount manufactured over a given period resulting from a
work-in-process and finished goods
14
Rules of preparing process costing with ratio




Determine the ratio for every good
Determine the number of "ratio units" as a multiple of physical
units and applicable ratios
Determine the costs of manufacturing a ratio unit, which is
calculated by dividing manufacturing costs by ratio units
Calculate unit manufacturing cost which is determined by
multiplying unit ratio cost by its ratio
15
Example: Process costing with ratio

Enterprise manufactures chocolate blocks (tables) of 100 g. and 150g.
Average monthly manufacture amounts to 50000 tables of 100 g. and
20000 tables of 150 g.
Monthly manufacturing costs amount to 48000 zl and are as follows:

– Raw materials
30 000 zł
– Manufacturing (work-in-process) 18 000 zł

What is the cost of making chocolate?
Cost
object
Physical
units
Ratio
100 g
50 000
1,0
150 g
20 000
1,5
Total
Number of
unit ratios
Cost of unit
ratio
Cost of the
object
Manufacturig
costs
48 000
16
Example: Process costing with ratios (1)
- different ratios for calculating costs


Enterprise manufactures products A and B. Products differ in weigh and
hours needed to produce them
– One should determine ratios for direct materials and manufacturing costs
Assume that ratios and costs in a given period are as follows:
direct raw materials
– Product A
– Product B
– Cost incurred in a
given period

manufacturing cost
1
2
3
4
40 000
8 000
Calculation of equivalent units :
– Product A:
– Product B:
200 units @ 100% = 200
60 units @ 100% = 60
100 units @ 40% = 40
17
Example: Process costing with ratios (2)
- different ratios for calculating costs
Cost
object
Equivalent
units
Ratio
2
3
1
Number of
unit ratios
(col. 2 x 3)
Cost of unit
ratio*
Unit cost
(col. 3 x 5)
Cost of
equivalent
unit
(col. 2 x 6)
4
5
6
7
Direct materials
Product A
200
1,0
200
100
100
20 000
Product B
100
2,0
200
100
200
20 000
Total
-
-
400
100
-
40 000
Manufacturing costs
Product A
200
3,0
600
8
24
4 800
Product B
100
4,0
400
8
32
3 200
Total
-
-
1 000
8
-
8 000
*manufacturing costs/number of unit ratios
18
Example: Process costing with ratios (3)
- different ratios for calculating costs
Product A:
200 units at 100%: 200 szt. x (100+24) = 24 800
Product B:
60 units at 100%: 60 szt. x (200+32) = 13 920
100 units at 40%: 40 szt. x (200+32) = 9 280
Total period costs:
48 000
19