Lecture Notes Store Costing

8/18/2019 Lecture Notes Store Costing

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Student lecture notes

CHAPTER 18

PRODUCT COSTS: MATERIALS, LABOUR AND OVERHEADS

Statement of cost of a production item ..........

£ £

Direct material !!!

Direct la"#$r !!!

Ot%er &irect c#t !!!

'''''''''' !!!

I(&irect material !!!

I(&irect la"#$r !!!

Ot%er i(&irect c#t !!!

Pr#&$cti#( #)er%ea& !!!

'''''''''' !!!

Definition

A job costing *tem i a *tem #+ '''''''''''''''' -%ere t%ere i a(

i&e(ti+ia"le acti)it* +#r -%ic% c#t ma* "e c#llecte& T%e acti)it* i $$all* .eci+ie& i( term #+ a

'''''''' #r a ''''''''''' c#(tri"$ti(/ t# a ta/e i( t%e .r#&$cti#( #r

er)ice .r#ce

T#tal .r#&$ct c#t 0 '''''''''''''''''''''''''''

Collecting the details for the job cost record

Material

• r#m ''''''''': 2$a(tit* #+ material i$e&

• r#m '''''''''': .rice .er $(it c%ar/e& "* t%e $..lier

La"#$r

• r#m '''''''''': %#$r -#r3e&

• r#m '''''''''': %#$rl* rate

Direct e!.e(e

• r#m '''''''''''

Financial and Management Accounting, Third Edition St$&e(t (#te 181P 4eetma( a(& P 5#r( C#.*ri/%t 6 Pear#( E&$cati#( Limite& 79


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Accounting for materials costs

Materials control procedures

Pr#&$cti#( ma(a/er &eci&e #( mi(im$m le)el #+ t#c3 t# "e %el&

êSt#re3ee.er ma3e re/$lar c%ec3 #+ .%*ical t#c3 le)el a/ai(t mi(im$m re2$ireme(t

ê

4%e( t#c3 %a +alle( t# mi(im$m le)el, t#re3ee.er e(& a re2$et

t# t%e "$*i(/ &e.artme(t +#r re.laceme(t item t# "e .$rc%ae&

ê

B$*i(/ &e.artme(t e(& a( #r&er t# $..lier

ê

5##& arri)e a(& are recei)e& "* t#re3ee.er

ê

S$..lier i()#ice recei)e& "* acc#$(t &e.t

ê

St#re3ee.er i$e /##& t# .r#&$cti#( &e.artme(t #( t%e "ai #+ a re2$iiti#( (#te

Materials handling and control documents

• .$rc%ae re2$iiti#(

• .$rc%ae #r&er

• &eli)er* (#te

• /##& recei)e& (#te• $..lier; i()#ice

• t#re re2$iiti#(

Documentation in materials control procedures

P$rc%ae re2$iiti#(

Origin Destination Use

St#re3ee.er #r .r#&$cti#(

ma(a/er

B$*i(/ &e.artme(t

P$rc%ae #r&er


B$*i(/ &e.artme(t 1 S$..lier

7 St#re3ee.er



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Deli)er* (#te


Deli)er* &ri)er St#re3ee.er

Material recei)e& (#teOrigin Destination Use

St#re3ee.er 1 B$*i(/ &e.artme(t

7 Acc#$(t &e.artme(t

S$..lier; i()#ice


S$..lier Acc#$(t &e.artme(t

St#re re2$iiti#(


Pr#&$cti#( &e.artme(t 1 St#re3ee.er

7 Acc#$(t &e.artme(t

Materials costs when input prices are changing

First!nFirstOut "F!FO#

A$me t%at t%e /##& -%ic% arri)e& ''''' are i$e& '''''

$ast!nFirstOut "$!FO#

A$me t%at t%e /##& -%ic% arri)e& '''' are i$e& ''''''

A%erage cost

A$me t%at all /##& are i$e& at t%e '''''''' #+ t%e t#c3 %el&



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Basic data

Date &ecei%ed Unit price 'rice paid !ssued to production

U(it £ £ U(it

1


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Production overheads

E!am.le are:

I( a ma($+act$ri(/ "$i(e:

''''''''''''''''''

''''''''''''''''''

''''''''''''''''''

I( a er)ice "$i(e:

''''''''''''''''''

''''''''''''''''''

''''''''''''''''''

All t%e .r#&$cti#( #)er%ea& c#t %a)e t# "e all#cate& t# t%e .r#&$ct

Allocation and apportionment

''''''''''''''''''''

'''''''''''''''''''

''''''''''''''''''''

''''''''''''''''''''

Allocate mea( ai/( -%#le item #+ c#t t# i(/le c#t $(it

Apportion mea( .rea& c#t #)er t-# #r m#re c#t $(it

E>amples of methods of apportionment of costs o%er cost centres

?ost item Method of apportionment to cost centres

Re(t #+ "$il&i(/

Li/%ti(/

P#-er +#r mac%i(e

Pr#&$cti#( $.er)i#r; alar*

Ca(tee( c#tDe.reciati#( a(& i($ra(ce #+

mac%i(er*



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E>amples of methods of allocating total costs of ser%ice cost centres o%er production

centres

Ser%ice cost centre Method of allocation to production cost

centresMai(te(a(ce &e.artme(t

Em.l#*ee; reta$ra(t a(& c#++ee "ar

St#re &e.artme(t

i(i%e& /##& 2$alit* i(.ecti#(

Sa+et* i(.ect#r

Absorbing costs into product

Met%#& #+ a"#r"i(/ #)er%ea& ee ecti#( 18??

• C#t .er &irect la"#$r %#$r

• C#t .er mac%i(e %#$r

• C#t .er £ #+ la"#$r c#t

• C#t .er $(it

Pre&etermi(e& #)er%ea& rate see ecti#( 18?>

C#t &ri)er see ecti#( 18?@

M#re 2$eti#( see ecti#( 18?@

!llustration of the calculation of an o%erhead cost rate

Table 1 Indirect costs

?ost item Total cost this month

£

I(&irect material 9@,

I(&irect la"#$r ?,

Re(t 1,

I($ra(ce 1,@

De.reciati#( 7,

Total 5*,2**



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Table Information about each department

Assembl Finishing Maintenance

Direct material $e& +#r .r#&$cti#( £?, £>, (#t a..lica"le

N# #+ em.l#*ee 1 7> >

l##r area 9 2 +t @ 2 +t 9 2 +t

Val$e #+ mac%i(er* £9, £>, £7, N##+ &irect la"#$r %#$r -#r3e& #(

.r#&$cti#(

>>, @?, (#t a..lica"le

Step ( Apportioning costs o%er departments using a suitable method for each

Table !

Total Assembl Finishing Maintenance

£ £ £ £

I(&irect material1

9@,I(&irect la"#$r 7 ?,

Re(t9 1,

I($ra(ce? 1,@

De.reciati#(> 7,

Total 5*,2**

1 0 "ai i &irect material ? : >

7 0 "ai i em.l#*ee 1 : 7> : >

9 0 "ai i .ace 9 : @ : 9

? 0 "ai i )al$e 9 : > : 7

> 0 "ai i )al$e 9 : > : 7

Step 1 Apportioning ser%ice department costs o%er production departments on the

basis of %alue of machines in each department

Pr#.#rti#( '''''' : '''''''''

× >, 0

× >, 0

Table "

Total Assembl Finishing Maintenance

= = = =

T#tal c#t .er &e.t 8,@ 7,99 ?,9 >,

Tra(+er Mai(te(a(ce t#

Aem"l* a(& i(i%i(/

T#tal .er &e.t 8,@



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Step + Absorbing total o%erhead costs of each production department into units

produced during the period

Di)i&e t%e t#tal c#t #+ eac% &e.artme(t "* t%e ($m"er #+ &irect la"#$r %#$r:

Aem"l*: £'''F'''' %#$r 0 '' .e(ce .er &irect la"#$r %#$r

i(i%i(/: £'''F'''' %#$r 0 '' .e(ce .er &irect la"#$r %#$r

Step 3 Finding the o%erhead costs of an job

Table #

Department ?alculation =

Aem"l*

i(i%i(/

T#tal #)er%ea& c#t

Methods of allocating overhead costs to jobs

#$r .#i"le met%#& #+ all#cati(/ #)er%ea& c#t t# .r#&$ct are:

• C#t .er &irect la"#$r %#$r

• C#t .er mac%i(e %#$r

• C#t .er £ #+ la"#$r c#t

• C#t .er $(it

Predetermined overhead cost rates

Etimate& at t%e tart #+ a re.#rti(/ .eri#&

A&G$te& t# act$al at t%e e(& #+ t%e .eri#&

Use of a predetermined fi>ed o%erhead cost rate

Etimate& la"#$r %#$r +#r (#rmal acti)it* 1, %#$r

Etimate& +i!e& #)er%ea& c#t i( t#tal £>,

Pre&etermi(e& #)er%ea& c#t rate

Act$al %#$r -#r3e& #( G#" 8, %#$r

O)er%ea& c#t a..lie& t# G#" c#ti(/ rec#r&

Act$al +i!e& #)er%ea& i(c$rre& ca% "##3 £>,

U(&erJa..lie& +i!e& #)er%ea&



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Activit$%based costing

A met%#& #+ all#cati(/ ''''''''''''''''' t# .r#&$ct a(&

er)ice

A3 t%e 2$eti#(: 4%at &'''''''' c#tK;

E!am.le: S#cial -#r3 &e.artme(t #+ l#cal a$t%#rit*

De.artme(t A $e ta!i +#r tra)el t# clie(t -#r3 De.artme(t B ta3e "$ #r -al3

O)er%ea& c#t #+ tra)el ta!i .l$ "$ i %are& acr# A a(& B "* ($m"er #+ .e#.le

i( eac% &e.artme(t

4%at &ri)e c#t #+ ta!iK '''''''''''''

#$r ta/e

1 I&e(ti+* a'''''''

7 I&e(ti+* c''''''' &'''''''' t%at i(+l$e(ce t%e c#t #+ a(

acti)it*

9 Create a c'''.''''' +#r eac% acti)it*

? All#cate c#t t# .r#&$ct $i(/ &'''''' +#r eac% acti)it*

Tracing costs of Products A& B and C in a single cost centre

Step ( Direct tracing of direct costs

Step 1 Sharing of indirect costs "o%erhead# b apportionment to products



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Traditional approach to flow of overhead costs

!dentif o%erhead costs and identif cost centres that accumulate costs

Step (@ Allocate indirect costs to cost centres

Step 1@ Apportion ser%ice cost centre to production cost centres

Step +@ Absorb o%erhead costs into product

Traditional product cost allocation Acti%itbased costing

I&e(ti+* cost centres i( -%ic% c#t ma*

"e acc$m$late& C#t ce(tre are

&etermi(e& "* t%e (at$re #+ t%eir

+$(cti#( e/ .r#&$cti#( #r er)ice

&e.artme(t c#t ce(tre

I&e(ti+* t%e -a* i( -%ic% .r#&$ct &ri)e

t%e acti)it* #+ t%e "$i(e a(& &e+i(e

$ita"le cost pools +#r c#llecti(/ t%e

c#t relati(/ t# eac% acti)it* Acti)it*

.##l are &etermi(e& "* t%e acti)itie

-%ic% &ri)e t%e c#t e/ #"tai(i(/ (e-

c$t#mer, (e/#tiati(/ c$t#mer

c#(tract

C#llect c#t i( c#t ce(tre C#llect c#t i( acti)it* c#t .##l

Determi(e a( o%erhead cost rate +#r

eac% .r#&$cti#( c#t ce(tre e/ c#t .er

&irect la"#$r %#$r

Determi(e a cost dri%er rate +#r eac%

c#t acti)it* .##l, e/ a c#t .er

c$t#mer c#(tract, c#t .er c$t#mer

#r&er recei)e&



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All#cate c#t t# .r#&$ct $i(/ t%e

calc$late& c#t rate a(& t%e mea$re #+

t%e products consumption of that

departments cost e/ ($m"er #+ la"#$r

%#$r re2$ire&

All#cate c#t t# .r#&$ct acc#r&i(/ t#

t%e products demand for the acti%it

-%ic% &ri)e c#t


Lecture Notes Store Costing

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