three manufacturing costs direct material cost: consist of all those material that can be identified...
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Three manufacturing costsThree manufacturing costsDirect material cost:
Consist of all those material that can be identified with a specific product. Example: wood used in manufacturing of a table.
Direct labor cost :Consist of all those cost that can be specifically traced or
identified with a particular product. Example: wages of workers working on that table.
Overhead (indirect) cost: overhead refers to the cost pool used to accumulate all
indirect manufacturing costs. Indirect costs are allocated to the cost object using of cost allocation method. Example: heat, light and power for the factory, rent on factory building, property taxes on factory building, and all kind of depreciation.
Factory OverheadFactory Overhead
Overhead consists of many individual cost items. These are costs that
can’t be measured or traced for a specific product. Factory overhead
costs are both fixed and variable. The factory overhead controlling
account is debited when costs are incurred and credited when factory
overhead is applied to various job orders. i.e indirect material and
labor, utility costs, depreciation of equipment and salaries of factory
administrative personnel.
Plant-wide (blanket) overhead Plant-wide (blanket) overhead ratesrates
The most simplistic traditional costing system assigns
indirect costs to cost objects using a single overhead rate for
the organization as a whole. The terms blanket overhead
rate or plant-wide rate are used to describe a single
overhead rate that is established for the organization as a
whole.
Job Order CostingJob Order Costing
A job is a production run for a specific product. A relatively small
number of units generally comprise a job. Job order costing
system record actual and estimated production costs in the
formal accounting system leading to manufacturing statements.
Construction firms use a variation of job order costing. Some
overhead is applied to each job so that the contractor can recoup
its general production costs which apply to all jobs but which are
not traceable to any specific job.
Benefits of job costingBenefits of job costing1. You will know on an ongoing basis which projects are profitable
and which ones aren’t.
2. You will be able to get paid on a timely basis as you complete
the job.
3. You can avoid committing resources to projects.
If you manufacture products:
1. You will know what it cost to make each item
2. You will be able to set selling prices that cover your costs and
earn a fair profit
3. You will know what product lines to expand because they’re
profitable, and what product line to drop because they’re
unprofitable.
General approach to job General approach to job costingcosting
1. Identify the job that is chosen cost object
The cost object can be chosen through the job cost record.
Companies keep a job cost record for every specific job. A job
cost record, also called a job cost sheet records and
accumulates all the costs assigned to a specific job, starting
when work begins.
2. Identify the Direct costs of the job: Robinson identified two direct manufacturing cost categories, direct material and direct manufacturing labour. Example can
be seen for the direct costs for the specific job.
3. Select the cost allocation bases to use for allocating indirect cost to the job.
Indirect costs can’t be allocated to a specific product. It will be impossible to complete a job without incurring indirect cost such as supervision, manufacturing engineering, utilities and repairs. Multiple cost allocation bases are used to allocate a indirect cost because different indirect cost have different cost drivers. Example : depreciation or repair of machines is closely related to machine hours so machine hours can be used as a cost driver.
4. Identify the indirect cost associated with each cost allocation base.
Now that the allocation bases has been identified, all indirect cost are now identified for that allocation base. In our example from the Robinson company they use indirect manufacturing costs to machinery hours used.
5. Compute the rate per unit of each cost allocation base used to allocate indirect costs to the job.
Actual manufacturing overhead costs
Actual total quantity of cost allocation baseActual manufacturing overhead rate =
$1215000
27000 direct manufacturing labor hoursActual manufacturing overhead rate =
$45 per direct manufacturing labor hour=
6. Compute the indirect costs allocated to the job.
Indirect cost allocated to a job=actual quantity of each different allocation base x indirect cost rate of each allocation base
7. Compute the total cost of the job by adding all direct and indirect costs assigned to the job.
Total cost= Direct cost + Indirect cost
JOB NO: CUSTOMER:
Date Started: Date Completed:
WPP 298
Feb. 3, 2006 Feb. 28, 2006
JOB-COST RECORD
Western Pulp and Paper
DIRECT MATERIALS
DateReceived
MaterialsRequisition No. Part No.
QuantityUsed
UnitCost
TotalCosts
Feb. 3, 2006
Feb. 3, 2006
2006: 198
2006: 199
MB 468-A
TB 267-F
8
12
$ 14
63
$ 112
756
••
$4,606TotalDIRECT MANUFACTURING LABOR
PeriodCovered
Labor-TimeRecord No.
Employee No.
HoursUsed
HourlyRate
TotalCosts
Feb. 3-9, 2006
Feb. 3-9, 2006
LT 232
LT 247
551-87-3076
287-31-4671
25
5
$ 18
19
$ 450
95
••
$1,579TotalMANUFACTURING OVERHEAD
DateCost poolCategory Allocation-Base
Allocation-BaseUnits Used
Allocation-Base Rate
TotalCosts
Dec. 31, 2006 Manufacturing Direct Manufacturing 88 hours $ 45 $ 3,960Labor-Hours
Total $ 3,960$ 10,145TOTAL MANUFACTURING COST OF JOB
MATERIALS-REQUISITION RECORD
Materials-Requisition Record No:Job No.:
PartNo.
MB 468-A
WPP 298Part
DescriptionMetal
Brackets
Date:
Quantity
8
2006: 198Feb. 3, 2006Unit TotalCost Cost
$14 $112
Issued By:B. ClydeReceived By: L. Daley
Date:Date:
Feb. 3, 2006Feb. 3, 2006
Panel 1
Job Number: J4369 Date: July 6, 2000Customer: Michigan MotorsProduct: Automobile engine valves (Valve #L181)Engineering Design Number: JDR-103Number of Units: 1,500
Panel 2
MaterialRequisitionNumber Description Quantity Rate Amount 47624 Bar steel 720 lbs $11.50 $8,280.00 Stock 3”A35161 Subassemblies 290 units 38.00 $11,020.00
Total direct materials cost $19,300.00
Panel 3
Dates Number Hours Rate Amount8/2, 8/3, 8/4, 8/5 M16 24 $28.00 $672.008/2, 8/3, 8/4, 8/5 M18, M19, M20 64 26.00 1,664.008/6, 8/7, 8/8, 8/9, 8/10 A25, A26, A27 120 18.00 2,160.008/6, 8/7, 8/8, 8/9, 8/10 A32, A34, A35 60 17.00 1,020.00Total direct labor cost 268 $5,516.00
Panel 4
Support Cost Amount117 Machine hours @ $40 per hour $ 4,680.00268 Direct labor hours @ 36 per hour 9,648.00
Total overhead cost $14,328.00
Directcosts
Indirectcosts
Cost Tracing
Cost Allocation
CostObject
Cost Assignment
Concept of Costing System
Assigning direct and indirect costsAssigning direct and indirect costs
A cost allocation is the process of assigning costs when a direct measure
does not exist for the quantity of resources consumed by a particular cost
object. Example: consider an activity such as receiving incoming materials.
Assuming that the depreciation of the machine is strongly related to the
number of hours machine was used. The basis that is used to allocate costs
to cost objects is called an allocation base or cost driver.
Two types of systems can be used to assign indirect costs to cost objects.
They are traditional costing system and activity-based-costing(ABC) systems.
Traditional costing systems
ABC systems
Directcosts
Indirectcosts
Cost tracing
Cost allocations
Costobjects
Cost Allocations and Cost Tracing
Traditional Costing Systems
Overhead cost accounts(for each individual category of expenses)
Costcenter
1(Normally
departments)
Costcenter
2(Normally
departments)
Costcenter
N(Normally
departments)
Cost objects (Products, services and customers)
First stage allocations
Second stageallocations
(Direct labour ormachine hour)
Directcost
Applying the three-stage allocation process requires the following four steps:
1.Assigning all manufacturing overheads to production and service
cost centres;
2.Reallocating the cost assigned to service cost centres to
production cost centres;
3.Computing separate overhead rates for each production cost
centre;
4.Assigning cost centre overheads to products or other chosen cost
objects.
An illustration of the three-stage An illustration of the three-stage process for a traditional costing systemprocess for a traditional costing system
• Inexpensive to operate
• Extensive use of arbitrary
cost allocations
• Low levels of accuracy
• High cost of errors
Simplistic systems
Traditional Costing System Levels of Sophistication
Servicedept
S1 S2 S3 S4
ProducingdeptDM
DLFO
DMDLFO
DMDLFO
Conceptual view of the separate
department overhead
rates
Costobjects
Costobjects
Costobjects
Costobjects
Costobjects
Costobjects
StageStage 1 : Assigning all manufacturing overhead 1 : Assigning all manufacturing overhead
to production and service departments.to production and service departments.
Cost Basis of allocation
Property taxes, lighting and heating
Employee-related expenditure:
works management, works canteen, payroll office
Depreciation and insurance of plant and machinery
Area
Number of employees
Value of items of plant and
machinery
Common cost are allocated to all the departments. Some cost can be directly related such as salary of the engineer working in the service quality department, however other need to be allocated using an allocation base.
StageStage 2 :Reallocating the cost assigned to service 2 :Reallocating the cost assigned to service
cost centers to production cost centers. cost centers to production cost centers.
the next step is to reallocate the costs that have been assigned to service cost centres to production cost centres. Service departments or support department are those departments that exist to provide services of various kinds of other units within the organization. For example, the costs of the cafeteria can be reallocated to the production cost center by using number of workers in the factory as the allocation base.
There are three methods in reallocating the cost from service to production departments.
1.DIRECT METHOD2.STEP METHOD 3.ALGEBRIC METHOD
Y
X A
B
Y
X A
B
Y
X A
B
Producing departmentService department
Part 1Direct method
Part 2Step method
Part 3Algebraicmethod
Diagram of 3 diff, allocation methods
Stage 3: Assigning cost center overheads to Stage 3: Assigning cost center overheads to products or other chosen cost objects.products or other chosen cost objects.
In the final step is to allocated the overheads to products passing through the
production centers. Volume base allocation is used to assign the overhead
costs to the products. Example, number of units produced, number of
machine hours used.
(£) (£)
Indirect wages and supervision Machine cenres: X Y Assembly Materials procurement General factory supportIndirect materials Machine centres: X Y Assembly Materials procurement General factory supportLighting and heatingProperty taxesInsurance of machineryDepreciation of machineryInsurance of buildingsSalaries of works management
1 000 0001 000 0001 500 0001 100 0001 480 000 6 080 000
500 000805 000105 000 0 10 000 1 420 000
500 0001 000 000 150 0001 500 000 250 000 800 000 4 200 000
11 700 000
The annual costs for the Enterprise Company which has three production centres (two machine centres and one assembly centre) and two service centres (materials procurement and general factory
support) are as follows:
The following information is also available:
BookValue of
Machinery(£)
AreaOccupied
(sq. metres)
NumberOf
employees
DirectLabourhours
Machinehours
Machine shop: X YAssemblyStoresMaintenance
8 000 0005 000 0001 000 000 500 000 500 000
15 000 000
10 000 5 00015 00015 000 5 000
50 000
300200300100100
1000
1 000 0001 000 0002 000 000
2 000 0001 000 000
Details of total material issues to the production centres are as follows:
(£)
Machine shop XMachine shop YAssembly
4 000 0003 000 0001 000 0008 000 000
Item ofexpenditure
Indirect wage and supervisionIndirect materialsLighting and heatingProperty taxesInsurance of machinery
Depreciation of machinery
Insurance of buildingsSalaries of works management
Reallocation of service centre costs Materials procurement
General factory support
Machine hours and direct labour hoursMachine hour overhead rateDirect labour hour overhead rate
Direct
DirectArea
AreaBook value of machineryBook value of machineryArea
Number of employees (1)
Value of materials issuedDirect labour hours (2)
Total(£)
Basis ofallocation
Machinecentre Y
(£)
Assembly(£)
Materialsprocurement
(£)
Generalfactory support
(£)
Machinecentre X
(£)
6 080 000
1 420 000 500 000
1 000 000
150 000
1 500 000 250 000
800 00011 700 000
2 000 000
11 700 000
1 000 000
500 000 100 000
200 000
80 000
800 000 50 000
240 0002 970 000 2 690 000 2 480 000 1 760 000 1 800 000
880 000
450 000
660 000
450 000
220 000
900 000 4 300 000 3 800 000 3 600 000
1 800 000
1 760 000
1 000 000 2 000 000£2.15 £3.80
£1.80
OVERHEAD ANALYSIS SHEET Production centres Service centres
1 000 000
805 000 50 000
100 000
50 000
500 000 25 000
160 000
1 500 000
105 000 150 000
300 000
10 000
100 000 75 000
240 000
1 100 000
150 000
300 000
5 000
50 000 75 000
80 000
1 480 000
10 000 50 000
100 000
5 000
50 000 25 000
80 000
2 000 000
11 700 000
880 000
450 000
660 000
450 000
220 000
900 000 4 300 000 3 800 000 3 600 000
1 800 000
1 760 000
1 000 000 2 000 000£2.15 £3.80
£1.80
Reallocation ofService centre costs Materials procurement
General factory support
Machine hours and direct labour hoursMachine hour overhead rateDirect labour hour overhead rate
Value of materials issuedDirect labour hours (2)
cost centre overheads
cost centre direct labour hours or machine hours
Machine centre X =
Machine centre Y =
Assembly department =
£4 300 000
£3 800 000
£3 600 000
= £2.15 per machine hour
= £3.80 per machine hour
= £1.80 per direct labour hour
2 000 000 machine hours
1 000 000 machine hours
2 000 000 direct labour hours
Product A £
Direct costs (100 units x £100)Overhead allocations Machine center A (100 units x 5 machine hours x £2.15) Machine center B (100 units x 10 machine hours x £3.80) Assembly (100 units x 10 direct labour hours x £1.80)Total costCost per unit (£16 675/100 units) = £166.75
10 000
1 075 3 800 1 800
16 675
Product B £
Direct costs (200 units x £200)Overhead allocations Machine center A (200 units x 10 machine hours x £2.15) Machine center B (200 units x 20 machine hours x £3.80) Assembly (200 units x 20 direct labour hours x £1.80)Total costCost per unit (£66 700/200 units) = £333.50
40 000
4 30015 200 7 20066 700