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COSTING OF MANUFACTURING OPERATIONS

DEPARTMENTAL AND ABC TECHNIQUES

COST ACCOUNTING SYSTEM


It consists of techniques, personnel, forms and accounting records used to develop timely information regarding the cost of providing products or services
Divisions of Management Accounting: Cost Accounting , Managerial Planning

Why need for costing ?


1. For Pricing purpose

2. For Income measurement

DIRECT COSTS

INDIRECT COSTS

FULL COST OF THE UNIT

MANUFACTURING COSTS
DIRECT COSTS
1. 2.

INDIRECT COSTS Indirect material Indirect labor Equipment repair Depreciation

Direct material Direct labor

ACCOUNTING FOR MANUFACTURING OPERATIONS


Manufacturing Inputs Manufacturing process Manufacturing Outputs

Material Direct Indirect

Work in Progress PPU

Finished Goods Inventory

FLOW OF COSTS
Raw material a/c
Cost of Direct Materials Cost of indirect Materials Cost of direct material used Cost of indirect materials used

Wages Payable
Cost of Cost of direct Direct labor labor used Cost of Indirect Labor Cost of indirect labor used

WIP
Cost of direct Cost of materials used completed products Cost of direct labor used Applied factory overhead

Finished Goods
Cost of Completed products Cost of products sold

Cost Goods sold


cost of products sold

Factory Overhead
Cost of indirect Labor used Cost of indirect Materials used Utilities Depreciation Applied factory Overhead

Finished Goods

Cost of Goods sold

PPU

Balance Sheet
Assets Liabilities

Trading Account
Purchases

Sales

Matching Principle
Manufacturing costs should be reported on the income statement only and to the extent to which they match to the sales revenue.
Builder can not show any cost of houses built in his trading a/c unless they are sold

TYPES OF COSTING
Costing is the process of charging costs against each unit.

FULL COSTING (Absorption Costing)

MARGINAL COSTING

FULL COSTING
1.

Single Product ( Process costing )


Produce steady stream of identical products like Oil refineries, flour mills and breweries

1.

Multi-product ( Job costing )


Process of charging full cost when products differ from each other.

Types of Costing Systems Used to Determine Product Costs

Process Costing

Job-order Costing

Many units of a single, homogeneous product flow evenly through a continuous production process. One unit of product is indistinguishable from other Each unit of product is assigned the same average cost. unit of product.

Types of Costing Systems Used to Determine Product Costs


Process Process Costing Costing Job-order Job-order Costing Costing

Typical process cost applications:


Petrochemical refinery Pharmaceutical

manufacturer

Paint manufacturer Paper mill

Types of Costing Systems Used to Determine Product Costs


Process Costing Job-order Costing

Many different products are produced each period. Products are manufactured to order. Cost are traced or allocated to jobs. Cost records must be maintained for each distinct product or job.