Cost ascertainment Page 01

It is important that the management accountant can determine the variable and fixed costs and there are a
number of techniques to assist in separating the fixed and variable elements of semi-fixed or semi-variable
costs.

1.  Analysing costs by direct observation of the resources required to convert materials into a finished
product and applying costs to these activities. Direct materials, direct labour and machine time can be
established quite easily.

2. By inspecting the accounts the accountant can classify costs as being variable or fixed.

3.  High-low method. This method entails selecting the period of highest and lowest levels of activity and
comparing the changes in costs that result from the two levels.

Cost Ascertainment-Material Costing

Cost Ascertainment for materials is the process of identifying cost incurred or paid to acquire raw
materials needed for the production of a product. There are diverse logistics of handling raw
materials such as purchase, store, control and actual issuance of the materials from the stores for
actual production which require inventory valuation. The valuation methods are diverse as used by
different organisations.
Diagrammatic approach in ascertainment of material cost
Actual material cost used in production of a product is diagrammatically portrayed as follows;

Steps of cost ascertainment of materials

Step one; Determination of the cost of opening inventory of raw materials. This is anchored on the
inventory valuation methodology adopted, FIFO, LIFO., simple average and weighted average.
Step two; Add cost of raw materials purchased
Step three; Transfer raw materials to production Centre
Step Four; Determination of the cost of closing inventory of raw materials. This is anchored on the
inventory valuation methodology adopted, FIFO, LIFO., simple average and weighted average.
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Example
The following details were extracted from store ledger card of Honey Co. Ltd  for the month ended
of 30th/09/2020
Date                  
1st/09/2020 Opening inventory of raw materials       500 units  valued at $2,000
4th/09/2020 Received 300 units @ $5 each
11th/09/2020  Issued 500 units
20th/09/2020 Received 400 units @ $5
22nd/09/2020  Issued 400 units
25th/09/2020  Received 500 units @ $8
29th/09/2020 Issued   300 units
 
Required;
 i). Determine the cost of raw materials used in production of the final product. Assume that there
was no wastage of raw materials during production. (Hint-use FIFO method)

It should be noted that the cost of raw materials used in production is $5,500 (i.e
2,000+2,000+1,500) which is the total cost of all materials issued to the production section for
manufacturing purposes.
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Types of costing used for ascertaining cost

For ascertaining cost, following types of costing are usually used.

1. Uniform Costing
When a number of firms in an industry agree among themselves to follow the same system of
costing in detail, adopting common terminology for various items and processes they are said to
follow a system of uniform costing. In such a case, a comparison of the performance of each of the
firms can be made with that of another, or with the average performance in the industry. Under such
a system it is also possible to determine the cost of production of goods which is true for the
industry as a whole. It is found useful when tax-relief or protection is sought from the Government.

2. Marginal Costing:
It is defined as the ascertainment of marginal cost by differentiating between fixed and variable
costs. It is used to ascertain effect of changes in volume or type of output on profit.

3. Standard Costing and variance analysis

It is the name given to the technique whereby standard costs are pre-determined and subsequently
compared with the recorded actual costs. It is thus a technique of cost ascertainment and cost
control. This technique may be used in conjunction with any method of costing. However, it is
especially suitable where the manufacturing method involves production of standardized goods of
repetitive nature.

4. Historical Costing
It is the ascertainment of costs after they have been incurred. This type of costing has limited utility.

5. Direct Costing
It is the practice of charging all direct costs to operations, processes or products leaving all indirect
costs to be written off against profits in which they arise.

6. Absorption Costing
It is the practice of charging all costs, both variable and fixed to operations, processes or products.
This differs from marginal costing where fixed costs are excluded.