Costing Systems
1.
1.1
Job Costing
Introduction

A job costing system is a
system of cost accumulation which is
appropriate to a business which provides
specialized (dissimilar) products or makes
items to order.

The activity in such business
is usually specified in terms of a job of work
or produced in batches of similar items.

The system adopts a job order
or a batch of similar items as a Cost Object
and channels all costs to be recorded,
particularly for each individual job.

The job cost records show the
costs of direct materials, direct labour and
overhead incurred on a particular job.
COSTING SYSTEMS
13-1
1.2
Job cost records

Each job will have a job
number which will enter on all stores
requisitions so that materials can be traced.

Hours worked will be
collected from employee time sheets which
show each job under its number.

Production overhead costs will
be shared among the jobs which they relate
on the basis of burden rate and burden basis
in each of the production cost centers where
the items of the job have been produced.

Unit cost will be worked out
on an average basis by dividing total job cost
by volume of completed items produced as
defined by the job order.

Exhibit 19.2.
COSTING SYSTEMS
13-2
2.
2.1
Process Costing
Introduction

Implemented where there is a
continuous flow of production of similar
units of product.

In process costing, items in
production flow from one process to the next
until they are completed.

In process costing, the Cost
Object is the volume of items produced in a
particular process within a predetermined
reporting period (i.e. one month).

Collecting data requires
information on the quantities of materials,
labour and other resources put into the
process and the quantities of products
emerging from the process in the reporting
period of time
(input and output).
COSTING SYSTEMS
13-3
2.2
Allocating of costs to products

Because of the continuous
nature of any process, it is likely that some
products will be partly completed at the end
(and beginning) of the period work-inprogress.

Labour and overhead cost can
be referred to collectively as Conversion
Costs.

Physical flows into and out of
the process have to be identified.

Process costing requires
several stages of analysis:
(1)
Collect the data for
the period.
(2)
Prepare a statement
of physical flows and equivalent units of
output (partly completed output
expressed in terms of whole units).
(3)
Ascertain the total
costs to be accounted for the reported
period.
(4)
Calculate the cost
per equivalent unit.
(5)
Apportion the cost
between finished output and work-inprogress.
COSTING SYSTEMS
13-4
(6)
Check that all costs
are accounted for.

Exhibit 20.2
COSTING SYSTEMS
13-5
2.3
Process costing where there is
Work-In-Progress at the beginning
of the period (opening W.I.P.)

Opening W.I.P. carries costs
from the end of one period to the beginning
of the next.

The problem faced can be
dealt within two possible courses of action:
(1)
To add the cost of
the opening W.I.P.
to the current costs and spread them all
over the equivalent units of output
(the weighted average method).
(2)
To distinguish
between beginning W.I.P. which has to
be completed in the current period and
the units started and completed in the
current period
(the first-in-first-out method).

Exhibit 20.3 (average).

Exhibit
COSTING SYSTEMS
(FIFO)
13-6
COSTING SYSTEMS
13-7
3.
Short Term Decision Making
3.1 Introduction

Imperative to know how costs
and revenues behave in the short term, as the
volume of activity changes (cost-volume-
profit analysis).

Short term decision making
use the distinction between variable costs
and fixed costs.

Useable in situations of
special orders, abandonment of a product line
and the existence of limited factors etc.

Pricing decisions will be
analyzed whether they match up to the cost of
the sellable product or service.
COSTING SYSTEMS
13-8
3.2 Cost behaviour

The profit of a business is
measured by comparing costs with revenues.

Over a short time scale and a
relatively limited range of activity, we use a
straight line curve (Exhibit 21.6) to represent
the total cost.

Sales line always start from
the zero point of the graph and to a certain
extent is below the cost line (Exhibit 21.7)
crossing the cost line when the activity
reaches a certain point.

For activity below the above
point the business will make a loss.

At the above point of activity,
the business makes neither profit or loss.

This point is called the
Breakeven Point (BEP).

Beyond the BEP, the business
makes a profit. The amount of the profit is
measured by the vertical difference between
the sales and cost lines (Exhibit 21-8).
COSTING SYSTEMS
13-9
3.3 Breakeven analysis

A technique of management
accounting which is based on
calculating the BEP and analyzing
the consequences of changes in
various factors.

Determining BEP by algebra:
At the BEP - Sales = FC + TVC
Q · SP (Selling price) = FC + QVC
(Variable cost per unit)
Q · SP - QVC = FC
FC
Q (BEP) =
SP - VC

SP-VC = the amount by which the
product’s selling price exceeds its
variable cost. It is called The
Contribution. It measures the
contribution made by each item of
output to the fixed costs and profit
of the organization.

The business does not begin to
make a profit until the fixed costs
COSTING SYSTEMS
13-10
are covered, so the formula is
applied as:
Fixed costs
BEP =
Contribution per unit
3.4 Using breakeven analysis

May be used to answer the
following type of questions:
(1)
What level of sales is needed
to cover fixed costs and make a specified
profit.
(2)
What is the effect of
contribution per unit beyond the breakeven
point.
(3)
What happens to the
breakeven point when the elements of the
formula change:




Selling price
Variable cost per unit
Fixed costs
Q1 - Add the FC together with the
desired profit and divide by the
contribution per unit.
COSTING SYSTEMS
13-11
(Exhibition 21- 4.1)

Q2 - Beyond the breakeven point,
the sales of further units are making
a contribution to profit. The higher
the contribution per unit, the
greater the profit from any
particular level of activity.
(Exhibition 21- 13).

Q3 - Exhibit 21.4.4 - 21.4.6.
3.5 Application of contribution analysis

Accepting a special order to
use up a
spare capacity
Acceptable provided the sales price per item
covers the variable costs per item and
provided there is no better alternative to use
the spare capacity which could result a higher
contribution.

Abandonment of a line of
business
In the short term, it is worth continuing if it
makes a contribution. If nothing better will
take place after abandonment, the
COSTING SYSTEMS
13-12
contribution is lost but the fixed cost run on
regardless.

In-house activity versus
bought-in activity Decision should be based
on comparison of variable costs per unit
relating this to the difference in fixed costs
between the options.

Existence of a limiting factor
Maximization of profit will occur if the
activity chosen gives the highest contribution
per unit of Limiting Factor.
COSTING SYSTEMS
13-13