methods of costing ii
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COSTING METHODS
Treatment of fixed and semi
variable Overheads
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Prepare a cost sheet from fol low ing Detai ls :
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COSTING PROCESS INCLUDES
CALCULATION OF VARIABLEAND NON VARIAB LECOSTS OF LABOUR AND MATERIAL
Factory OverheadsNECESSARY TO OPERATE THE FIRM
GENERAL OPERATING EXPENSES
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METHODS OF COSTING
MarginalCOSTING
Absorp t ionCOSTING
ACTIVITY BASED COSTING (ABCCOSTING)
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Absorption COSTING OR (Full cost method)
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All costs including an appropriate share of all O/H are borne byall products.
Some costs are easily traced to a garment others arenot.
Problems-
Overheads have to be added in some way and thendivided amongst all the products
Fty O/H in some cases are accounted over longperiods of time.Have to be estimated in advance????
OH rate perproduct ion hr=Total OH/Estimated Production Hrs.
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Prepare an income statement from fol low ing
detai ls:
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Marginal Vs Absorption
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Absorption Costing
Considers all mfging costs ( variable & non variable)
Sometimes O/H is allocated with application rate which is a % ofdirect labor cost (maybe DM/DE or Prime cost).WHY?????
O/H applic at ion rate-Factory ov erhead/Total direct labor co st
RISKS-
DLC calculation might not be accurate
O/H application rate might not be accurate
As DLC reduces it shows reduction in O/H
UNDER Absorption & OVER Absorption
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Marginal OR (Direct Costing)
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Marginal Cost
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MARGINAL COSTING
VARIABLE COSTS ARE TAKEN AS PRODUCT COST
NON VARIABLE COSTS ARE TREATED AS TIME PERIOD COSTS
FEATURES
COST OF PRODUCTION AND CONTRIBUTION TOWARDS GOE CAN BECOMPARED FOR DIFFERENT PRODUCTS
INDIVIDUAL STYLES AND THEIR LEVEL OF CONTRIBUTION CAN BE
IDENTIFIED
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ABC COSTING
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ABC COSTING
OVERHEADS ARE ASSESSED TO ACTIVITY
CENTERS
COST ARE THAN ALLOCATED TO THESTYLES THAT CREAT THE DEMAND FORTHESE RESORSES
FEATURES
IT BUILDS ACCURATE DIRECT LABOUR AND MATERAILSCOST DATA BY DETERMINING THE DEMANDS MADE BYPARTICULAR STYLE
MAKES EACH ACTIVITY CENTER ACCOUNTABLE FOR TIMEAND PRODUCTIVITY
COST CAN BE CONTROLLED AS IT MAKES OVERHEADTRACEABLE
COMPANYCANDETERMINE THE PRODUCTS THAT
CONTRIBUTE HIGHER GROSS MARGINS
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Activity Based Costing(ABC)
A more realistic approach.
Build accurate direct labor & materials cost data.
All fty O/H,S&D costs.Admin costs are assessed toactivity centers and then allocated to styles whichdemanded these resources.
It is a diagnostic tool that allows focus on overhead costreduction as well as reductions in direct labor cost.
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Companies can determine the products &customers that contribute higher gross marginsand those that do not.
Provides realistic information about supportactivities and product costs.
Makes all costs traceable
Makes each activity center accountable for time &productivity
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Sales : P1 = $ 1000: $1000
Direct Material
p1 = $300: p2 = $500
Direct Labor;
p1 = $400: p2 = $200
Variable O/H;
p1 = $200: p2 = $100
Variable S&D Expenses;
p1 = 50: p2 = $30
Non V. O/H;
p1 = $100: p2 = $50
Non S&D Expenses = p1 = 50: p2 = $20
Calculate gross profit, Contribution and net profit for each product
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Treatment ofsemi variableOverheads
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