Cost and Management Accounting

N6
 Module 1 – Job costing

INTRODUCTION
Cost systems provide management with useful information to help with
decision making. Managers are then able to more efficiently allocate
resources and measure and control operations. With good cost management
systems in place, a company can become more profitable.

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 Module 1 – Job costing (continued)

UNIT COST
Importance of unit cost:
• To calculate a selling price after mark up.
• To help management make decisions e.g. stop producing a certain line,
initiate new products, accept or reject special orders.
• To calculate the value of the unsold stock.

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 Module 1 – Job costing (continued)

COSTING SYSTEMS
A cost system is a specific method whereby costs for a product or a process
are collected, edited and disclosed. Companies use either:
• A process costing system;
• A product costing system which is also called job-order costing; or
• A combination of the two (called operation costing).

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 Module 1 – Job costing (continued)

RECORDING TRANSACTIONS
All costs related to a job must be recorded on a job cost sheet, which can be
on paper or in electronic form. On the job cost sheet the direct material,
labour costs and the overhead costs will be recorded. The job cost sheets
may differ from business to business, to suit their own requirements.

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 Module 1 – Job costing (continued)

JOB COSTING STATEMENT

A job costing statement is a summary of all the production costs of a job (it
can also show an amount for sales and marketing costs.) If the job is
completed it includes the selling price and the profit on the job.

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 Module 1 – Job costing (continued)

JOB ORDER COSTING IN SERVICE BUSINESSES

Job order costing can be used in both manufacturing and service businesses.
In service businesses where jobs differ from one another and there is a need
for cost information for separate jobs, several varieties of job order costing
are used. These could be in industries such as laundries, tailors, garden
services, repairs as well as professional services such as legal,
accounting, architectural and consulting services.

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 Module 1 – Job costing (continued)

COMPARING PRODUCT AND PROCESS COSTING – SIMILARITIES

• Both systems use the same ledger accounts for recording transactions
regarding manufacturing, material control, production control, finished
goods control and so forth.
• Costs flow through these accounts in the same way in both systems.
• The purpose of both systems is the same; to apply material, labour and
overhead costs to products and to calculate unit cost.

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 Module 1 – Job costing (continued)

COMPARING PRODUCT AND PROCESS COSTING - DIFFERENCES

Product costing/ Job order costing Process costing

1. Many different jobs are worked on during the 1. A single product is produced either on a
production period, each job with different continuous basis, or for long periods. All units
production requirements are identical. Often have joint and by products

2. Cost accumulated by individual job 2. Costs accumulated per department

3. The job cost card is the key document 3. The department production report is the key
controlling the accumulation of cost by a job document showing the cost per department.

4. Unit cost is calculated per job on the Job cost 4. Unit cost is calculated by department or by
card dividing total cost with total units produced

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 Module 2 – Contract costing

INTRODUCTION
Contract costing uses the same principles as job costing but it applies to
more substantial projects for example construction of dams, bridges, roads,
blocks of flats and so forth. It is a product orientated cost system. A separate
contract account is opened and the cost elements will be debited to the
applicable contract in order to calculate whether there was a profit.

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 Module 2 – Contract costing (continued)

CONTRACT COST
The term contract costing refers to the cost for a particular contract which has
accumulated over a period of time. Costs usually fall in three categories:
• Direct contract cost;
• Indirect contract cost; and
• General cost including selling and administration cost.

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 Module 2 – Contract costing (continued)

TYPES OF CONTRACTS
There are two basic methods are used for contract accounting:
• Fixed price contract which is where a contract price is agreed upon
beforehand between the contractor and the contractee; and
• Cost-plus contract which is where the contractor is paid for all his costs
plus a fixed extra amount.

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 Module 2 – Contract costing (continued)

CALCULATIONS OF PROFIT
At the end of the financial period some contracts will be unfinished. Profits or
losses on these unfinished contracts must be estimated. There are methods
which can work towards calculating uncompleted projects such as:
• Completed contract methods – the profit can only be calculated when the
contract is completed.
• Percentage of completion method – the profit is calculated according to
how much work has been completed.
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 Module 2 – Contract costing (continued)

PROVISIONS
There is still a possibility of only realising profit (such as in the case of non-
payment by a debtor or other unforeseen circumstances) and so a figure can
be further qualified by taking into account only the profit realised on the
money received. This amount is recorded as a provision in the contract
account.

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 Module 2 – Contract costing (continued)

CONCLUSION
Contractors estimating contract costs without a complete understanding of the
cost components, especially the indirect costs, are unnecessarily increasing
the risk and exposure to losses. An understanding of the relationship of
indirect costs to the particular contract is very important.

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 Module 3 – Standard costing

INTRODUCTION
A standard cost is the predetermined cost of manufacturing a single unit or a
specific quantity during a specific period under current or anticipated
operating conditions.

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 Module 3 – Standard costing (continued)

THE AIM OF STANDARD COSTING

The purpose of standard costing is to furnish relevant information to
management for them to make the right decisions. This goes through the
following procedure:
• Establish standards.
• Determine actual costs.
• Compare actual with standard costs and calculate the variance.
• Analyse the variance and introduce measures to correct them.
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 Module 3 – Standard costing (continued)

USE OF STANDARD COSTING

Standard cost systems help management with:
• Planning;
• Cost control;
• Establishing budgets;
• Establishing contract bids and for setting selling prices;
• Stock valuation; and
• The keeping of records.
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 Module 3 – Standard costing (continued)

ADVANTAGES OF STANDARD COSTING

• Actual costs can be measured against the standard costs.
• Analysing variances will indicate problem areas, which often leads to
improvement of operations.
• The firm becomes more cost conscious.
• Because it simplifies costing, it reduces clerical work.
• Workers know what is expected of them.
• It may stimulate further planning which will lead to greater efficiency.
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 Module 3 – Standard costing (continued)

SETTING OF STANDARDS
Under ideal conditions employees accept standards as personal production
goals. Once standards are set, a standard cost card should be prepared for
each product manufactured or service rendered. This will include:
• Standard quantities and standard prices of each raw material.
• Standard labour rate and standard hours.
• Standard manufacturing overheads.
• Total standard cost allowed to manufacture a completed product.
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 Module 3 – Standard costing (continued)

VARIANCES
The difference between the actual costs for material, labour and overheads
and the standard costs is called a variance. This figure can either be
favourable (when the actual cost is less than the standard cost) or
unfavourable (when the actual cost is more than the standard cost).

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 Module 4 – Cost control

INTRODUCTION
These are two different methods used to recover fixed manufacturing costs.
Management can decide to use the direct costing or the absorption costing
method. The two methods treat fixed manufacturing costs differently.

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 Module 4 – Cost control (continued)

DIRECT COSTING
With direct costing, the fixed overheads total are charged against income
when the cost is incurred and costs are recovered on the basis of the number
of units sold during a period.

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 Module 4 – Cost control (continued)

ABSORPTION COSTING
With absorption costing fixed costs are recovered on the basis of the number
of units manufactured during the period. A rate for recovery of fixed cost per
unit is calculated and written off per unit produced. Absorption costing
charges fixed overheads against income when the goods are sold.

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 Module 4 – Cost control (continued)

COMPARISON BETWEEN DIRECT AND ABSORPTION COSTING

SYSTEMS
Direct costing Absorption costing
Charges the total fixed overhead cost against Charges fixed overheads against income when the
income in the year it was paid. goods are sold.

Matching total fixed cost for a period with revenues Matching the fixed manufacturing costs with units
(income) of that period. produced and then only take those costs to the
income statement when those goods are sold.

Used for internal reporting and analysis. Required for external reporting.
Referred to as variable costing or marginal costing, Referred to as conventional costing.

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 Module 4 – Cost control (continued)

BREAK-EVEN ANALYSIS
The break-even quantity is the minimum amount of products that must be
sold to recover all the costs, without the company making profit or a loss.
The formula to calculate Break-even value is:

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 Module 5 – Budgets

INTRODUCTION
Budgeting shows the route to be taken to achieve goals, and budget control
is the comparison of the results achieved with results envisaged.

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 Module 5 – Budgets (continued)

BUDGET CONTROL
Budget control is monitoring performance and getting the staff to cooperate in
order to achieve those goals and even, if necessary, to take corrective steps
before it is too late.

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 Module 5 – Budgets (continued)

TYPES OF BUDGETS OF A MANUFACTURING CONCERN

Enterprise uses different budgets to manage the finances such as:
• Master budget/main budget which coordinates all the other budgets;
• The sales budget which is the starting point in preparing the master budget;
• The raw materials budget which plans the required quantity and costs of
the materials needed, according to the estimates of the production budget;
• The labour budget; and
• The marketing budget.
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 Module 5 – Budgets (continued)

BUDGETED INCOME STATEMENT

This statement summarises the budgeted sales, estimated income and
expenditure. It projects net income which is the goal towards which all efforts
are directed. Management can judge the accuracy of the different budgets.

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 Module 5 – Budgets (continued)

BUDGETED BALANCE SHEET

The balance sheet at the end of the budget period reflects all the changes in
assets, liabilities and shareholder’s interest, resulting from all the budgets
submitted by the various departments. It can be seen as control over the
accuracy of all the other budgets.

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