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SECTION B003A
(to be completed by the tutor marking assignment)

Assessment Criteria: Weighting Mark

s Achieved

Discuss the type of costing system used in the Crystal division at 6 marks
Derby Ltd and outline the purpose of such a costing system

Explain the meaning of Prime Cost and calculate the prime cost for 10 marks
Job A1 and Job B1.

Based on the formula used as a basis for estimates, calculate the

selling price of Job A1 and Job B1 and advise on whether the 12 marks
proposed selling prices are reasonable
Identify what costing system is being used in the Clear division and
10 marks
when the chosen costing system is best applied in companies.

Discuss the meaning of normal loss and provide two examples of

10 marks
when this may occur

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Write up the process account and the normal loss account for
Product X (show all workings, including the cost per kg of the 30 marks
output)

An overview of the difference between an abnormal loss and an

12 marks
abnormal gain (providing examples)

Presentation 10 marks

Total 100 marks

Comments

Tutor's Name:

PROVISIONAL
MARK
Date Received:

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 Table of contents

Abstract
There are two methods normally employed by companies to determine the selling price of
their products: Job order system and process costing system. This report analyses how these
costing systems were applied by Derby Limited to determine the selling prices of products
produced in its two divisions.

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 Introduction
Usually it does not matter what product a company produces and sells, the selling
price of the company’ s product or services will always impact on the success of the
company. Therefore, the price of a product must always be determined with great care, and it
may be complex. There are a number of basic rules that need to be followed when deciding
price of a product. First, the price chosen should always cover production costs and profit.
Secondly, the best way to lower the price of a product is to lower its cost of production.
Thirdly, prices should constantly be reviewed in order to ensure that they conform to the
market dynamics such as competition, profit objectives, and market demand. Finally, the
determined price must always assure sales otherwise the company will be running at lose
(Dutta, 2004).
The price of a product is set it is always important that to accurately determine the
cost of running the company which may include: production cost, operation costs and so on.
If the price does not cover all these costs then the cumulative cash flow will be negative, and
the company will exhaust all the resources which may ultimately lead to its ultimate closure

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(Tulsian, 2002). The costs that must always be included when determining product price
include: utilities, loan repayments, inventories, equipment and property leases, salaries,
wages, commissions, financial costs, employee discounts, shortages, desired profits, cost of
production, damages, and so on (Mitra, 2000). It is usually very important to add profit when
calculating the price of a product, and the profit should always be treated as a fixed cost just
like loan repayment since every business has to make profit and not to break even.
There are two methods normally employed by companies to determine the selling
price of their products: Job order system and process costing system. This report gives
analyses these costing systems with regard to how they were applied by Derby Limited which
used the two systems to calculate the selling prices of products produced in its two divisions.

2.1. Discuss the type of costing system used in the Crystal division at Derby Ltd
and outline the purpose of such a costing system.

The system of costing the company is employing in Crystal Division is Job order costing. It is
also known as job costing system. It is a cost accounting system in which manufacturing
costs for each unit are determined separately (Accounting for management, 2016). That is,
the cost of each job is determined separately. For example, in Crystal Division in Derby
Limited has two jobs: Job A1 and JobB1, and each job is unique and hence has a unique cost.
Companies and industries that use job costing:
Job costing method is used in firms producing unique products (each product they
produce is different from each other) (Accounting for management, 2016). A good example
of an industry where job costing is heavily applied is construction industry. This is because in
building industry each building is usually very different from another. Those who
manufacture custom equipment also do job order costing, they may include: a niche furniture
manufacturer, event management organizations, building industry, those producing expensive
air surveillance system, and so on (Accounting for management, 2016). These companies
often need to track cost of producing each item or doing each job separately. And as seen in
the case of Derby Limited, its Crystal Division produces two unique products (Job A1 is
different from Job B1). Other companies that use job order costing method are listed below:
 Movie producers
 Book Publishers

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  Ship and airplane manufactures
 Architects
 Legal, accounting and consulting firms and so on.

The process involved in Job costing:

In this type of costing system (job costing), jobs-order cost sheet is normally used to
account for the jobs done. The process that is involved as stated in the following steps:
i. Job identification: Involves identifying job to be done
ii. Tracing the direct costs associated with the job
iii. Identification of the indirect cost such as manufacturing overheads, and
determining allocation base for each cost
iv. Using pre-determined rate of allocation to apply indirect cost
v. Determining the total cost by getting the summation of all cost
components
vi. Closing of the “under or over applied overhead costs to cost of goods sold
or income statement
vii. Calculating the total revenue and cost.
(SAS, 2011)

2.2. Explain the meaning of Prime Cost and calculate the prime cost for Job A1
and Job B1.

The word “prime cost” is mainly used in manufacturing to mean direct costs involved
in the manufacture of an item (Dutta, 2004). It is generally determined by adding cost of raw
materials to labour cost directly associated with the manufacturing of the item. The
determination of prime cost is extremely important part of manufacturing since it used to
determine the minimum price at which a manufactured item can be sold. If the selling price
of an item does not exceed the prime cost, the organization (the business entity or
manufacturer) loses money on each item they produce.

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There exist a number of expenses involved in the production of goods for sale. It is therefore
important that prime cost is determined accurately. In order to so, there must be a clear
distinction between the expenses that directly links to the production of each item and those
that are required for the general running of the business (overhead cost) (Accounting for
management, 2016). The formula generally used in the determination of prime cost is stated
below:

Prime cost = Cost of raw materials + Cost of direct labour

Example is given below (Derby Ltd Crystal division)

Calculating Prime cost for Job 1 and Job 2 for Crystal Limited:
Given the following:

Table 1: Estimates for Job A1 and B1 for Crystal division

Job A1 Job B1

Direct Material £200 £300

Direct labour £500 £600

The following formulas are used by Derby Limited to determine cost in Cristal division.

Total Cost = Prime Cost + 40% overhead

Selling Price = Total Cost + 25% profit

Prime cost for Job A1:

Given the following:

Direct Material = £200

Direct labour = £500

Prime cost for Job A1 = Cost of raw materials + Cost of direct labour
Prime cost for Job A1 = £200 + £500 = £700

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 Prime cost for Job B1:

Given the following:

Direct Material = £300

Direct labour = £600

Prime cost for Job B1 = Cost of raw materials + Cost of direct labour
Prime cost for Job B1 = £300 + £600 = £900

2.3. Based on the formula used as a basis for estimates, calculate the selling price of Job
A1 and Job B1 and advise on whether the proposed selling prices are reasonable when
compared to the total costs.

Selling Price for Job A1:

Prime Cost for Job 1A = £700
Overhead cost = 40% × Prime cost = (40 ÷ 100) × 700 = £280
Total Cost = Prime Cost + 40% overhead = £700 + £280 = £980
Selling Price = Total Cost + 25% profit
Profit = 25% × Total cost = (25 ÷ 100) × £980 = £245
Selling Price = Total Cost + 25% profit
Selling Price = £980+ £245 = £1225

Selling Price for Job B1:

Prime Cost for Job B1 = £900
Overhead cost = 40% × Prime cost = (40 ÷ 100) × 900 = £360
Total Cost = Prime Cost + 40% overhead = £900 + £360 =£1260 Selling
Price = Total Cost + 25% profit
Profit = 25% × Total cost = (25 ÷ 100) × £1260 = £315
Selling Price = Total Cost + 25% profit
Selling Price = £1260+ £315 = £1575

Comparison of selling price and total cost:

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 When selling prices for both Job 1A and Job B1 are compared to their total cost it
observed that in both jobs, the selling price is more than the total cost by 25% which means
the firm is making profit and therefore the selling price is reasonable.

See below:

Job A1

Selling price for Job A1 = £1225

Total cost Job A1 = £980
Percentage profit = [(£1225 - £980) ÷ £980] × 100 = 25%
Job B1
Selling price for Job B1 = £1575
Total cost Job B1 = £1260
Percentage profit = [(£1575 - £1260) ÷ £980] × 100 = 25%

2.4. Identify what costing system is being used in the Clear division and outline when
the chosen costing system is best applied in companies (provide examples).

The available data:

The following data is given for identifying the costing system used in the Clear
Division.
Table 2: Costs involved in the production of product X
Input 5,000 kg £20,000

Labour cost £8,000

Overhead £5,000

Normal loss is 10% of input and has a scrap value of £3 per kilo.
The type of costing system used in Clear Division is PROCESS COSTING SYSTEM.
From the above table it is observed the accumulated cost of input (material cost) for
manufacturing all the units is £20000, accumulated labour cost is £8000, and accumulated
overhead cost is £5000. Since these costs are accumulated costs of manufacturing a large of
number of product X, the costing system used here is process costing system. In this type of
costing system, costs of labour, overhead and materials are normally compiled (aggregated)
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for the entire production (manufacturing) process, after which each individual item is
allocated its cost (Mitra, 2000).

Application of Process costing system;

This costing system is often applied when producing a large number of identical
items. That is, it is mainly used in production processes where items are continuously mass
produced via a single or multiple stage (Dutta, 2004). It is, for example, used in the
manufacture of mobile phones, erasers, processed food, chemicals, and so on. In this type of
costing (unlike job costing where jobs involved are evaluated and costed separately) it is the
processes of production that is costed. Generally, the total cost of the production process is
divided by the number of units to obtain cost of producing a single item (Dutta, 2004). The
formula below is often applied.
Cost per unit = Cost of inputs ÷ the expected number of output units

2.5. Discuss the meaning of normal loss and provide two examples of when this may
occur.

In a manufacturing process normal loss is used to refer to the normal expected wastage as a
result of usually production process (usually operating condition in the manufacturing
process) (Accounting for management, 2016). This may occur as a result of the following
reasons:
 Some of the manufactured products may evaporate.
 Some of the products may be lost during testing (such as destructive testing).
 Some of the products may be rejected either due to malfunction or some of the
products did not meet the expected quality.

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Other than normal loss there are other types of losses, namely: abnormal loss, and abnormal
gain. Abnormal loss is loss that occurs over and above the normal loss. These types of losses
occur as a result of errors by workers or faulty machinery, and so on. Abnormal gain occurs
when actual loss in a manufacturing process is lower than the expected loss. It occurs mainly
due to improved or greater equipment efficiency especially when new equipment is acquired.
Other important terms may include: scrap value and work in progress. Scrap value occurs
when the outcome of a loss is sold at relatively small value. For example, during
manufacturing process some items may be rejected as being low quality (small in size, extra-
large, distorted, and so on); these items may be sold as scrap at relatively lower price. Work-
in-progress, on the other hand, are units (items) whose manufacturing process has not been
completed at the end of working period.

2.6. From the data provided for Product X write up the process account and the normal
loss account (show all workings, including the cost per kg of the output)

Given the data below, the process account and normal loss account were prepared as
indicated below.

Table 3: Information for preparing process account and normal loss account for product X

Input 5,000 kg £20,000

Labour cost £8,000

Overhead £5,000

Normal loss is 10% of input and has a scrap value of £3 per kilo
Normal loss = 10% of input = (10 ÷ 100) × 5000 = 500 kg

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 Scrap value = £3 per kilo of normal loss = £3 × 500 kg = £1500
Total weight of produced = £5000 – 500 = 4500 kg
Total cost processed = £20,000+£8,000+£5,000 = £33,000

Process account for product X as at December, 2017:

  Kg £   Kg £
Input 5000 £20,000 Normal Loss 500 £1,500
Labour £8,000 Processed 4500 £33,000

overhead £5,000
Scrap value £1,500

5000 £34,500 5000 £34,500

Cost per kg = Total cost ÷ Expected kg

Total cost = £33,000
Expected kg = 5000 – 500 = 4500 kg
Cost per kg = £33,000 ÷ 4500 = £7.33 per kilo

Normal loss account for product X as at December, 2017:

  Kg £   Kg £
Scrap value 500 £1,500 Normal Loss 500 £1,500
 
500 £1,500 500 £1,500

Workings:
Normal loss is 10% of input and has a scrap value of £3 per kilo
Normal loss = 10% of input = (10 ÷ 100) × 5000 = 500 kg

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 Scrap value = £3 per kilo of normal loss = £3 × 500 kg = £1500

2.7. Provide the management team with an overview of the difference between an
abnormal loss and an abnormal gain (providing examples of both terms).

Abnormal loss:
Abnormal loss is loss that occurs over and above the normal loss. (Accounting for
management, 2016) These types of losses occur as a result of errors by workers or faulty
machinery, and so on.

Abnormal gain:
Abnormal gain occurs when actual loss in a manufacturing process is lower than the expected
loss. It occurs mainly due to improved or greater equipment efficiency especially when new
equipment is acquired (Accounting for management, 2016).

Scrap value and Work in progress:

Other important terms may include: scrap value and work in progress. Scrap value occurs
when the outcome of a loss is sold at relatively small value. For example, during
manufacturing process some items may be rejected as being low quality (small in size, extra-
large, distorted, and so on); these items may be sold as scrap at relatively lower price. Work-
in-progress, on the other hand, are units (items) whose manufacturing process has not been
completed at the end of working period (Accounting for management, 2016).

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 3. Conclusion and Recommendation:
There are two methods normally employed by companies to determine the selling price of
their products: Job order system and process costing system. Job order costing is also known
as job costing system. It is a cost accounting system in which manufacturing costs for each
unit are determined separately. That is, the cost of each job is determined separately. A good
example of an industry where job costing is heavily applied is construction industry. This is
because in building industry each building is usually very different from another. In process
costing system, costs of labour, overhead and materials are normally compiled (aggregated)
for the entire production (manufacturing) process, after which each individual item is
allocated its cost. This costing system is often applied when producing a large number of
identical items. That is, it is mainly used in production processes where items are
continuously mass produced via single or multiple stages. It is, for example, used in the
manufacture of mobile phones, erasers, processed food, chemicals, and so on.

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 4.References
Accounting for management., 2016. What is job order costing. Retrieved 12 4, 2017, from
Accounting for management: https://www.accountingformanagement.org/what-is-job-
order-costing/
Dutta, 2004. Cost Accounting: Principles And Practice. Delhi: Pearson Education India.
Mitra, J. K., 2000. Advanced Cost Accounting. New York: New Age International. .
SAS., 2011. RELEVANT TO FOUNDATIONS IN ACCOUNTANCY PAPER FMA.
Technical, 1-8.
Tulsian, 2002. Cost Accounting. Delhi: Tata McGraw-Hill Education.

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