methods of costing ii

7/27/2019 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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methods of costing ii

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