Bilingual Workshop

María Cristina Maldonado

Teacher

Camilo Mejia Esguerra – 5800778

Juanita Galindo – 5800831
Sebastián Anga – 5800524
Daniel Bernal – 5800943

Students

Costs and Budgets

Faculty of Engineering

Universidad Militar Nueva Granada

Campus – Sede Cajicá

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 INDEX

1. Introduction ……………………………………………………………………... 3
2. Sets and By-Products …......…………………………………….………......... 4
3. Activity Based Costing ………………………………………….…………….. 8
4. Example ………………………………………………………………………… 11
5. Throuput Accounting System …..…………………………………………... 12
6. Example ………………………………………………………………………… 13
7. Conclusions ……………………………………………………………………. 14
8. Bibliography ………………………………………………………………….... 14

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 INTRODUCTION

The following work will talk about the different cost systems as they are: Joint Product
Cost System-co-productions and by-products, activity-based cost system, Throuput
accounting-based cost system, their definition and examples of these cost systems,
as well as the different accounting methods for each of these systems, with
examples, and final conclusions about each of them in order to understand their pros
and cons in each of the its uses.

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 SETS AND BY-PRODUCTS

When more than one product is generated in a company or industry in the production
phase, those products take the name of joint products or by-products which are
classified according to a market-generated value (sales income).

In most industries a product generates quite a few by-products, as in the oil

industries generate, Diesel, gasoline, etc. All this based on the refining of oil which
is the main product.

JOINT PRODUCTS

These products are individual products, which have a significant sales value which
are made on the basis of the same raw material or process, which can be presented
more commonly in packaging industries, where oils are made, etc.

These products are characterized mainly because they have a physical relationship
as to the process that is carried out, that is, when making a series of joint products
are produced or give rise to the creation of other products derived from them. At a
certain point these products go on to make independent which can already be sold
or will undergo a new process as the case may be. But the main feature of these
sets is that their none of these will be significantly greater than the rest of the
products.

Byproducts

For the production of these products, it should be taken into account that these
products consist of direct labor, direct materials and indirect costs. Given this, a
problem arises or makes it difficult in terms of joint costs to be invisible, since these
costs are not easily associated with the products, although at other times these costs
are confused with the common costs, those common costs are those that are directly
associated with the processed products and can be effectively associated with each
of the processed products. These by-products as well as the joint products depend
directly on a common raw material and an equal production system. These by-
products are generally not posted immediately but are posted at the time they are
sold.
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The following are commonly used methods for allocation of total costs incurred upto
the separation point or split-off point among joint products:

1. PHYSICAL UNITS METHOD:

A physical base like raw materials weight or volume of the products like kgs., tonnes,
litres, gallons, bales, number of units etc. is taken as basis for apportioning the joint
costs to products under this method. The process is borne by the joint products in
the ratio of their output weight.
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Advantages:

(a) It is a simple and easy method for understanding and application.

(b) It is technically sound.

Disadvantages:

(a) It is equitable to allocate joint costs on the basis of physical weight without
consideration of its sale value.

(b) If the output cannot be expressed in physical quantities, this method cannot be
applied.

(c) Similar allocation will be made to all joint products irrespective of its quality.

(d) It is not logical to treat all products is equally important, desirable and valuable.

2. MARKET VALUE METHOD:

In this method, joint costs will be apportioned to the products in the ratio of selling
price of respective individual products. The rationale underlying this approach is that
product with higher sales value should be allocated with a larger proportion of joint
costs than the products with lower sales value.

This ability to absorb joint costs is measured either by sale value or selling price.
This method is advocated based on the argument that it is a convenient method for
apportionment of joint costs based on ability to absorb i.e., if one product sells more,
more costs should be allocated to it than the product with lower sale value.

Criticism is levelled against the above method based on the following reasons:

(a) Selling prices of some joint products are fairly stable while others fluctuate and it
makes allocation of joint costs difficult.

(b) Determination of relative selling prices of joint products itself a difficult and time-
consuming process.

The following variants are in practice in this method of allocation of joint costs:

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Market Value at Separation Point:

The market value of individual joint products at the point of separation i.e. at the split-
off point, is ascertained and the joint costs will be apportioned in the ratio of market
value ascertained as above.

Market Value at Finished Stage:

In this method, the common costs and joint costs are apportioned to the joint
products in the ratio of final selling price of individual products and costs incurred for
further processing will be added to the respective joint products for determination of
product costs.

Net Realizable Value:

The sale value of final product reduced by the estimated net profits, direct selling
and distribution expenses and the cost of processing after the separation point will
be taken as basis for apportionment of joint costs to determine the product costs.

3. CONTRIBUTION MARGIN METHOD:

Under this method the joint costs are divided into variable and fixed costs. The
variable costs are applied to joint products on the basis of units produced or other
physical quantities. In case the products are processed further after split-off point,
then all variable costs incurred be added to the variable costs ascertained earlier.

Then total variable costs will be applied to joint products on the basis mentioned
above and deduct it from respective sales values to ascertain the contribution of
each joint product. The fixed costs will be apportioned in the ratio of contribution
made by individual products.

4. AVERAGE UNIT COST METHOD:

Under this method total joint costs upto the point of separation are divided by the
total units produced to get average cost per unit of production. This method is
advocated where processes are common and inseparable for the joint products and
where the resultant products can be expressed in terms of common unit.

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5. SURVEY METHOD:

Under this method, technical survey of the production process and the costs involved
is made and point values will be assigned to the products according to their relative
importance and joint products are multiplied by their assigned points to arrive at the
weights for allocation of joint costs to individual joint products. This method is more
scientific as compared to other methods.

6. STANDARD COST METHOD:

Where the Standard Costing system is in vogue, the joint costs of the product will be
apportioned on the basis of standard costs set for the respective joint products.

This method is supported for the following reasons:

(a) It is a convenient method for determining the maximum price that can be paid for
raw materials in the manufacture of joint products.

(b) It provides basis for measuring efficiency of the process in producing joint
products.

(c) It provides for comparison of actual material and conversion costs with standards
set, which provides basis for fixing up purchase prices.

7. DIRECT ALLOCATION METHOD:

This method is applied where joint costs are identifiable or capable of being
technically estimated to be allocable to each of the joint products.

Activity-Based Costing System

What is Activity-Based Costing?

The activity-based costing system, better known as the ABC, can be defined as a
costing method that is based upon the designation of all those over the head or
indirect costs that are related to the products and services. It’s a type of accounting

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method dedicated to costing which helps to recognize the relationship between the
following:

1. Costs
2. Overhead activities
3. Manufactured products
4. Indirect costs

That last one, the indirect costs, can be understood as a product that costs
significantly less than other traditional methods.

How actually does Activity-Based Costing work?

The way this particular method works is within the manufacturing industry, as its
purpose is that of enhancing reliability of data costs. At the same time, it’s producing
very similar true costs and classifying them in a better way that eases the production
process.

The ABC is calculated as followed:

1. Identify all the activities required to create the product.

2. Divide the activities into cost divisions, including all individual costs which are
related to the specific activity, which normally is manufacturing. Then, for each
division a calculation is made regarding the total costs.
3. Assign to each cost division a cost driver regarding the hours or units.
4. Calculate said costs driver by dividing the total overhead in each cost division
by the total cost drivers.
5. Divide the total overhead of each cost driver by the total cost driver to obtain
the rate of driver cost.
6. Multiply the cost of title rate by the number of cost drivers.

EXAMPLE

In order to understand it a little better, take the next example into account:

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 - If Company ABC has a budget of $50,000 per year regarding electric bill, it is
known that the number of labor hours that the workers put into the company
has a direct impact towards the electricity bill. 2,500 labor hours were worked
on a particular year, this being the “Cost Driver”. Then, we can calculate the
cost driver rate as followed:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡 $50,000

= 𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟 𝑅𝑎𝑡𝑒 → = $20 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟
𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟 2,500

Important Items 

 ABC method is known as assigning overhead indirect costs such as salaries

and utilities towards products and services.
 The ABC system is completely based on activities, which can be considered
as any event, unit of work, or task which satisfies a particular goal.
 An activity is the same as a cost driver, for example a purchase order or
machine setups.
 The cost driver rate is used to calculate the amount of overhead or indirect
costs related to a particular idea.

What are the Activity-Based Costing requirements?

The ABC system is one purely based on activities. Said activities can be known as
any events or units of work that perform a specific goal like a set up of a machine,
product design, finished good distributions or operating machines inside a
production line.

An ABC system can also be considered as a transaction or event that classifies as

a “Cost Driver”. This cost driver is used to reference an allocation base, like
machine setups, maintenance requests, power consumption (like our electricity bill
example before), purchase orders, quality inspections or production orders.

The two categories of activity measures:

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 1. Transaction drivers: This involves the process of enumerating how many
times a particular activity occurs.
2. Duration Drivers: This, on the other hand, measures in time how long the
activity is happening.

What are the Benefits of an Activity-Based Cost system?

The number one benefit that this particular system has is that of organization. The
ABC helps keep track of how the money is being spent inside the company. A
detail understanding of how much money is spent depending on labor hours or
work time helps to know if money is being well spend or being wasted away.

The ABC system enhances cost process in 3 different ways.

1. It expands the number of cost divisions that are strictly related to overhead
costs.
2. It creates a new base for overhead costs different than that of volume
measures, dedicating itself towards time efficiency.
3. It helps to take into account those costs known as “indirect”, more traceable
to the accounting department. This helps to understand how does indirect
costs are actually affecting the production of the company.

EXAMPLE

A company decides to use the ABC system to find out the overhead rates for their
company. They have two different activities with a different budget for each.

1. Machine set up has a budget of $200,000 with a total number of machine

setups being 340.
2. Inspection has a budget of $140,000 with a total of 7,500 inspection hours.

To find the Machine setup cost we use the following formula:

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝑆𝑒𝑡𝑢𝑝 𝐵𝑢𝑑𝑔𝑒𝑡

= 𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟 𝑅𝑎𝑡𝑒 →
𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑀𝑎𝑐ℎ𝑖𝑛𝑒𝑠

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 $200,000
= $𝟓𝟖𝟖. 𝟐𝟒 𝒑𝒆𝒓 𝒎𝒂𝒄𝒉𝒊𝒏𝒆
340

To find the cost of inspection we use the following formula.

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡 𝐼𝑛𝑠𝑝𝑒𝑐𝑡𝑖𝑜𝑛 𝐵𝑢𝑑𝑔𝑒𝑡

= 𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟 𝑅𝑎𝑡𝑒 →
𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑠𝑝𝑒𝑐𝑡𝑖𝑜𝑛 𝐻𝑜𝑢𝑟𝑠

$140,000
= $𝟏𝟖. 𝟔𝟕 𝒑𝒆𝒓 𝒉𝒐𝒖𝒓
7,500

Throuput accounting cost

This cost system is the alternative offered by TOC to solve the problems created by
cost accounting, when used as a support for business decision making. It allows to
make calculations in a simple and fast way based on the costs that are considered
relevant in a decision-making process, it does not need voluminous data collection
and allows us that these decisions that we need to make, can be quickly and
effectively, generating the company to earn more money quickly

It is a managerial accounting method that provides managers with information to

support decisions aimed at improving the profitability of the company. It has an
approach that identifies the factors that limit an organization from achieving its goal,
and then focuses on simple measures that lead to unity in key areas to achieve
organizational goals. It is close to a cash flow of income and has a non-traditional
approach because it allocates almost no costs to the products and services sold or
provided by a company.

It aims to optimize the restrictions that are in the processes in order to obtain a
greater utility. It has three components; The goal: corresponds to all the money that
enters the system, inventories, which corresponds to both stocks and investment in
infrastructure, and whose objective is always to reduce it.

The operating expenses (GO) that correspond to the resources that are consumed
by the system. Net profit of a company, this system allows us to have knowledge
about:

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 - Product prices, its feasibility, market segmentation
- Investment in capital goods
- Workforce
- Direct manufacturing costs

Mathematical formula

𝑇 = 𝑃𝑉 − 𝐶𝑇𝑉

T = Throuput

PV = Selling Price

CVV = Totally variable cost

Example

A company has two PYQ products

P Q
Price (P) 90 100
CTV Four. Five 40
Quantity sold (q) 100 fifty

You (p-CTV) Four. Five 60

TTp (Tu xq) 4500 3000

∑TTp = 7500

The Throuput has two parts, income and totally variable cost.

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 Conclusions

1. The key point to remember about the cost allocations associated with joint
products and by-products is that the allocation is simply a formula – it has no
bearing on the value of the product to which it assigns a cost. The only reason
we use these allocations is to achieve valid cost of goods sold amounts and
inventory valuations under the requirements of the various accounting
standards.

2. The Activity-Based system, commonly referred as the ABC is a system that

aims to help maintain a huge organization regarding how the money is being
spent. It’s a key factor to help find out if a budget is being well spent, or if its
being wasted. By knowing the number of hours being spent in a particular
area, and knowing the exact amount of budget being invested, its easy to find
out the number of dollars per hour required to keep said activity going.

3. The Throuput accounting-based cost system allows us to make calculations

in a simple and faster way because it is based on the relevant cost
observation and does not need such a voluminous data collection, allowing
for quick and effective deduction-taking support to increase the profit and
usefulness of a company.

Bibliography

1. https://www.accountingnotes.net/cost-accounting/products/joint-products-
definition-and-accounting-cost-accounting/10516
2. https://www.accountingtools.com/articles/2017/5/14/by-product-costing-and-
joint-product-
costing#:~:text=A%20joint%20cost%20is%20a,and%20which%20has%20m
inor%20sales.&text=Besides%20the%20split%2Doff%20point,one%20or%2
0more%20by%2Dproducts.
3. http://accioneduca.org/admin/archivos/clases/material/costos-
conjuntos_1563976549.pdf

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4. https://www.investopedia.com/terms/a/abc.asp#:~:text=Activity%2Dbased%
20costing%20(ABC)%20is%20a%20costing%20method%20that,to%20relat
ed%20products%20and%20services.&text=However%2C%20some%20indi
rect%20costs%2C%20such,to%20assign%20to%20a%20product.
5. https://www.wallstreetmojo.com/activity-based-costing/
6. https://www.intercostos.org/documentos/congreso-07/Trabajo101.pdf

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