Understanding

the costing system of a company

2-1
 Costing systems
3 main requirements:

1- Understand the manufacturing structure

2- Understand the approach to the consuption reports (actual/standard

costing)

3- Understand the definition entitled to term of “cost”

2-2
 Costing systems
1- Understand the manufacturing structure

Job-costing Process-costing
system system

Distinct units Masses of identical

of a product or similar units of
or service a product or service

2-3
 Costing systems
2- Understand the approach to the consuption reports (actual/normal costing)

Actual costing Normal costing

Actual costing is a system that Normal costing is a method that

uses actual costs to determine Allocates indirect costs based on
the cost of individual jobs. the budgeted indirect-cost rate(s)
times the actual quantity of the
It allocates indirect costs based on the actual
cost allocation base(s).
indirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).

2-4
 Costing systems
3- Understand the definition entitled to term of “cost”

Prime Cost Complete Cost Variable Cost Normal Cost

-Direct Material -Direct Material -Direct Material -Direct Material

-Direct Labor -Direct Labor -Direct Labor -Direct Labor
- Indirect production - Indirect production - Indirect production
- variable - only variable - variable
- fixed - fixed**
**using the capacity usage rate
** idle capacity expenses

2-5
 Costing systems
Direct Material Cost: 2,000,000
Direct Labor Cost: 3,000,000
Indirect Production costs: 3,000,000
Fixed costs: 1,000,000
Variable costs: 2,000,000

Total production capacity: 10,000 units

Total production: 8,000 units

Prime cost – Complete cost - Variable Cost – Normal Cost

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FLASHING STAR is a well known journal in the media business. The costing details of the
company are provided below.

Considering the provded information please calculate

- The monthly production cost?

- Prime cost?
- Conversion cost?

During your calculations please consider:

1 month = 30 days = 240 hours = 14,400 min
1,400 drops of ink = 1 ink bottle
1 leaf of newsprint = 4 pages

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 Example :

Product: Journal

Requiered materials:
TOTAL CIRCULATION: 700.000/day
Ink: 5 drops/page (1,400 drops/bottle)
(1 month = 30 days = 240 hours = 14,400 min)
(total 28 pages/journal)
Costs:
Ink: 3 USD/bottle

Raw Material:
pages drop/each page drops total
Ink /1 newspaper 28 5 140

total NP/day total day total NP/month

Total newspaper 700,000 30 21,000,000
INK

Required Drop 1 month 2,940,000,000

Required Bottles (1 bottle = 1,400 drops) 2,100,000

1 Bottle = 3 USD 6,300,000

 Example :

Product: Journal

Requiered materials:
TOTAL CIRCULATION: 700.000/day
Page: 7 leaves of newsprint (total 28 pages/magazine)
(1 month = 30 days = 240 hours = 14,400 min)
Costs:
Page: 0.5 USD/leaf

L Leaf/each NP Total leaves/ 1 NP

Leaf /1 newspaper 1 7 7

total NP/day total day total NP/month

Page

Total newspaper 700,000 30 21,000,000

Required Leaves 1 month 147,000,000

Total Cost of the Pages (1L = 0.5 USD) 73,500,000

 Example :

Product: Journal

Required work force: TOTAL CIRCULATION: 700.000/day

1min/magazine (1 month = 30 days = 240 hours = 14,400 min)

Costs:
Salaries: 10 USD/hour

Work Hr NP Total Hr/ 1 NP

Leaf /1 newspaper 0.01667 1 0.01666667
Labor Cost

total NP/day total day total NP/month

Total newspaper 700,000 30 21,000,000

Required Time in 1 month 350,000

Total Cost of the Labor (1H = 10 USD) 3,500,000

 Example :

Product: Journal

Required work force:

TOTAL CIRCULATION: 700.000/day
1min/magazine
(1 month = 30 days = 240 hours = 14,400 min)
Other indirect costs:
1 USD/work hr.
Machinery depeciation: 100,000 USD/month

Work Hr NP Total Hr/ 1 NP

Leaf /1 newspaper 0.01667 1 0.01666667
Other indirect costs

total NP/day total day total NP/month

Total newspaper 700,000 30 21,000,000

Required Time in 1 month 350,000

Total Cost of the OIC (1H = 1 USD) 350,000

Depreciation 100,000
 Example :

Product: Journal

Question: monthly production cost?

Prime cost? Conversion cost?

TOTAL COST 83,750,000

Prime 83,300,000
Conversion 3,950,000
2 - 13
 Inventory Movement
Raw Finished Trade
Materials Goods Goods
Debit Raw materials (Assets) Credit

Opening (+) Disposals (-)

Additions (+) Sent to production
New purcases Returns from purchases
Return from disposals Scraps/Obsolosence
etc. etc.

Year end= Opening + Additions - Disposals

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 Valuing Closing Inventory

Specific Cost Average Methods: HIFO

FIFO Simple Average LOFO

Method
LIFO NIFO
Weighted Average
Perpetual LIFO Method Replacement Cost
(Market Value)
Moving Average
Method

2 - 15
 Specific Cost
Under this method specific cost of materials issued is charged to
production. When materials are purchased for a particular job, they
should be charged to that particular job at their actual cost.

This method is suitable for job order industries which carry out
individual jobs or contracts against specific orders. This method is
impracticable to use if purchases and issues are numerous and the
materials issued cannot be identified.

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 Example
Unit Total Amount (USD)
1-Jan Opening inventory 200 24,000
8-Jan Sent to production 130 ???
11-Jan Purchase 700 100,800
23-Jan Purchase 875 109,375
26-Jan Purchase 615 103,320
28-Jan Sent to production 1,880 ???

Find the total amount of Raw Material consumptions that should be

reflected to Direct Material Cost Accounts

2 - 17
 Example - FIFO
Date Explanation Additions Balance
Disposals

Unit Unit Cost Amount Unit Unit Cost Amount Unit Unit Cost Amount

1-Jan Opening 200 120 24,000 200 120 24,000

8-Jan Sent to production 130 120 15,600 70 120 8,400
11-Jan Purchase 700 144 100,800 70 120 8,400
700 144 100,800
23-Jan Purchase 875 125 109,375 70 120 8,400
700 144 100,800
875 125 109,375
26-Jan Purchase 615 168 103,320 70 120 8,400
700 144 100,800
875 125 109,375
615 168 103,320
28-Jan Sent to production 70 120 8,400 380 168 63,840
700 144 100,800
875 125 109,375
235 168 39,480
Total 2,390 337,495 273,655

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 Example – Perpetual LIFO
Date Explanation Additions Balance
Disposals

Unit Unit Cost Amount Unit Unit Cost Amount Unit Unit Cost Amount
1-Jan Opening 200 120 24,000 200 120 24,000
8-Jan Sent to production 130 120 15,600 70 120 8,400
11-Jan Purchase 700 144 100,800 70 120 8,400
700 144 100,800
23-Jan Purchase 875 125 109,375 70 120 8,400
700 144 100,800
875 125 109,375
26-Jan Purchase 615 168 103,320 70 120 8,400
700 144 100,800
875 125 109,375
615 168 103,320
28-Jan Sent to production 615 168 103,320 310 144 44,640
875 125 109,375 70 120 8,400
390 144 56,160
Total 2,390 337,495 284,455 380 53,040

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 Example – LIFO (Year –end)
Date Explanation Additions Balance
Disposals

Unit Unit Cost Amount Unit Unit Cost Amount Unit Unit Cost Amount
1-Jan Opening 200 120 24,000 200 120 24,000
8-Jan Sent to production 200 120 24,000
11-Jan Purchase 700 144 100,800 200 120 24,000
700 144 100,800
23-Jan Purchase 875 125 109,375 200 120 24,000
700 144 100,800
875 125 109,375
26-Jan Purchase 615 168 103,320 200 120 24,000
700 144 100,800
875 125 109,375
615 168 103,320
28-Jan Sent to production 615 168 103,320 180 144 25,920
875 125 109,375 200 120 24,000
520 144 74,880
Total 2,390 337,495 287,575 380 49,920

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 Example – Simple Average
Unit Unit Cost Amount
200 120 24,000
700 144 100,800
875 125 109,375
615 168 103,320
557

557/ 4 139

Total Disposal 2,010 279,892.50

Closing inventory 380 52,915
332,807.50

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Example – Weighted Average (Year-end)

200 X 120 = 24.000

700 X 144 = 100.800

875 X 125 = 109.375

615 X 168 = 103.320

2.390 337.495

337.495 / 2.390 = 141.21 = unit cost

Total disposal = 141.21 x 2.010 = 283.832

Closing inventory= 141.21 x 380 = 53.660

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 Example – Moving Average
Date Explanation Additions Balance
Disposals

Unit Unit Cost Amount Unit Unit Cost Amount Unit Unit Cost Amount
1-Jan Opening 200 120 24,000 200 120.0 24,000
8-Jan Sent to production 130 120 15,600 70 120.0 8,400
11-Jan Purchase 700 144 100,800 770 141.8 109,200

23-Jan Purchase 875 125 109,375 1,645 132.9 218,575

26-Jan Purchase 615 168 103,320 2,260 142.4 321,895

28-Jan Sent to production 1,880 142 267,771 380 142.4 54,124

Total 2,390 337,495 283,371 380 54,124

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 Example

Running shoes Basketball shoes

Raw material #1 consumption 40% 60%
Raw material #2 consumption 30% 70%
Raw material #3 consumption 70% 30%
Labor consumption 40% 60%

Machinery depreciation 300,000

Other fixed IPC 400,000
Variable IPC 200,000

2 - 24
 Example
Raw material 1 Date Explanation Unit (kg) Amount (total)
5-Jan Purchase 4,000.0 720,000
18-Jan Purchase 3,000.0 555,000
31-Jan Sent to production 2,000.0
6-Feb Purchase 9,000.0 1,530,000
14-Feb Sent to production 4,000.0
28-Feb Purchase 2,000.0 350,000
13-Mar Sent to production 7,000.0
31-Mar Sent to production 2,000.0

Raw material 2 Date Explanation Unit Amount (total)

1-Jan Balance cf 10,000.0 13,000
14-Feb Sent to production 2,500.0
24-Feb Purchase 4,000.0 5,600
13-Mar Sent to production 5,000.0
31-Mar Sent to production 1,500.0

Raw material 3 Date Explanation Unit Amount (total)

1-Jan Balance cf 500.0 2,500
14-Feb Sent to production 200.0
14-Feb Return to warehouse 50.0
25-Mar Purchase 400.0 2,200
26-Mar Return to supplier 100.0
31-Mar Sent to production 200.0

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 Example
Total number of emolyee Monthly Salary per level
Executives 3 75,000.00
Accounting & Finance dept 10 35,000.00
Marketing dept 12 50,400.00
Factory 25 45,000.00
Total 50 205,400.00

Machinery hour spent 2,400

Running shoes 40%
Basketball shoes 60%

Capacity usage ratio : 70%

Other IPC will be allocated to the products using the macihnery hour as the allocation key

Selling details Unit selling price

80% of the Running shoes were sold 120
50% of the Basketball shoes were sold 160
No openning finished goods.

Please calculate the profit of 1st quarter using the normal costing method.

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