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Costing Systems DesignCosting Systems DesignCosting Systems DesignCosting 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)

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Calculation of product costsCalculation of product costsCalculation of product costsCalculation 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)

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Calculation and organization of the Calculation and organization of the manufacturing process manufacturing process Calculation and organization of the Calculation and organization of the manufacturing process 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

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Traditional systems of calculating costsTraditional systems of calculating costsTraditional systems of calculating costsTraditional 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

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Assumptions of job-order processingAssumptions of job-order processingAssumptions of job-order processingAssumptions 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

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Transfer of costs in job-order costingTransfer of costs in job-order costingTransfer of costs in job-order costingTransfer of costs in job-order costing

Direct raw materialsDirect raw materials

Direct laborDirect labor

EnergyEnergy

Overhead costsOverhead costs

Overhead laborOverhead labor

AmortizationAmortization

Other department costsOther department costs

COST OBJECT

department

COST OBJECT

department

COST OBJECT

product,order

COST OBJECT

product,order

Relating costs directly

Relating costs directly

Assigning overhead costs

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Calculating costs under job-order costing Calculating costs under job-order costing Calculating costs under job-order costing 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

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Cost drivers of indirect costs Cost drivers of indirect costs Cost drivers of indirect costs 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) costs(Estimated) total units in the base (cost

driver)

=

Indirect (overhead) costs assigned to a cost object

Ratio of indirect costs=

Indirect costs assigned to a cost object

Quantity of cost driverusedx

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Example of completed job cost sheet Example of completed job cost sheet - See p.77 - See p.77Example of completed job cost sheet Example of completed job cost sheet - See p.77 - See p.77

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Assumptions of process costingAssumptions of process costingAssumptions of process costingAssumptions 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)

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Transfer of costs in process costingTransfer of costs in process costingTransfer of costs in process costingTransfer of costs in process costing

Direct materialsDirect materials

Indirect laborIndirect labor

Overhead costsOverhead costs

COST OBJECT

Finished goods

COST OBJECT

Finished goods

Work-in-process

Department A

Work-in-process

Department A

Work-in-process

Department B

Work-in-process

Department B

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A simple process costingA simple process costingA simple process costingA 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

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Example: A simple process costingExample: A simple process costing - - no inventoryno inventoryExample: A simple process costingExample: A simple process costing - - no inventoryno inventory

Production Report – DEPARTMENT A Production of 100 units

Calculation Period costs Manufacturing

Costs per unit

Direct materials

Direct labor

Overhead manufacturing costs

2 000

700

1 100

20

7

11

3 800 38

Costs transferred to Department B 3 800 38

Production Report – DEPARTMENT B Production of 100 units

Calculation Period costs Manufacturing

Costs per unit

Direct materials

Direct labor

Overhead manufacturing costs

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

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Example: a simple process costing - parallel Example: a simple process costing - parallel Example: a simple process costing - parallel 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

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Rules of preparing process costing with ratioRules of preparing process costing with ratioRules of preparing process costing with ratioRules 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

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Example: Process costing with ratioExample: Process costing with ratio Example: Process costing with ratioExample: 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

Number of unit ratios

Cost of unit ratio Cost of the

objectManufacturig

costs

100 g 50 000 1,0

150 g 20 000 1,5

Total 48 000

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Example: Process costing with ratios (1) Example: Process costing with ratios (1) - different ratios for calculating costs - different ratios for calculating costsExample: Process costing with ratios (1) Example: Process costing with ratios (1) - different ratios for calculating costs - 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 manufacturing cost

– Product A 1 3– Product B 2 4– Cost incurred in a given period 40 000 8 000

Calculation of equivalent units :– Product A: 200 units @ 100% = 200– Product B: 60 units @ 100% = 60

100 units @ 40% = 40

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Example: Process costing with ratios (2) Example: Process costing with ratios (2) - different ratios for calculating costs - different ratios for calculating costsExample: Process costing with ratios (2) Example: Process costing with ratios (2) - different ratios for calculating costs - different ratios for calculating costs

Cost

objectEquivalent

units

RatioNumber 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)

1 2 3 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

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Example: Process costing with ratios (3) Example: Process costing with ratios (3) -- different ratios for calculating costs different ratios for calculating costsExample: Process costing with ratios (3) Example: Process costing with ratios (3) -- different ratios for calculating costs 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