C O S T I N G

COSTING/COST
ACCOUNTING
Procedures help management in gathering the
data needed to determine product cost and
generate financial statements and other
reports.
Basis for determining product cost and aids
management in planning and controlling
operations.
 1 Determining the selling price of a product

IMPORTANCE
2 Meeting competition

OF UNIT COST
IN MARKETING 3 Bidding on contracts

DECISION
4 Analyzing profitability
TWO BASIC PRODUCT
COSTING-SYSTEM
Job Order Costing Process Costing

Product costing system used by companies Product costing system used by companies that
making one-of-a-kind or special-order products. make a large number of similar products or
maintain a continuous production flow.
Examples:
Companies/Industries that makes: Examples:
1. Ships Companies/Industries that produce:
2. Airplanes Paint
3. Large Machines Oil & Gas
Soft drinks
Service Industry Firms Bricks
1. Accounting Firms
2. Consulting & Architectural Firms
 CHARACTERISTICS OF JOB ORDER COSTING
1. It collects all manufacturing costs and assigns
them to specific job or batches of product.

2. It measures costs for each completed job, rather

than for set time periods.

3. It uses one Work in Process Inventory Control

account in the general ledger.

Back to Agenda
CHARACTERISTICS OF PROCESS COSTING

1. Manufacturing costs are grouped by department

or work center, with concern for specific job
orders.

2. It emphasizes a weekly or monthly time period

rather than the time taken to complete a specific
order.

3. It uses several Work in Process Inventory accounts -

one for each department or work center in
manufacturing process.
4. The cost of production report provides
the detail for the Work in Process account
for each department.
DIFFERENCES BETWEEN PROCESS & JOB
ORDER COSTING
Process Costing
1. Homogeneous unit pass through a
series of similar processes.
2. Cost are accumulated by processing
department.
3. Unit costs are computed by dividing the
individual departments' cost by equivalent
production.
4. The cost of production report provides
the detail for the Work in Process account
for each department.
Job Order Costing
1. Unique jobs are worked on during a
time period.
2. Cost are accumulated by individual job.
3. Unit costs are determined by dividing the
total costs on the job cost sheet by the
number of units on the job.
4. The job cost sheet provides the detail for
the work in process account.
ELEMENTS OF
PRODUCT COST
DIRECT MATERIALS
materials that are consumed during the manufacture of a product; basic direct
materials

Examples:
Iron Ore for Steel, Flour for bread, Fabric used to assemble Clothing

DIRECT LABOR
labor involved in the manufacture of a product; coversion cost are cost incurred for direct labor

Examples:
Machine Operators

FACTORY OVERHEAD
all other costs that are not directly involved in the manufacture of a product

Examples:
Indirect Materials: Cleaning Products, Protective Gear, Glue, Tape
Indirect Labor: Repairmen, drivers, janitors, inspectors
 Cost Per Unit of Output = Total Expenses / Total Number of Units Produced

1. Analyze the inventory: To determine the number of units that are complete and number of

PROCESS units that are incomplete

COSTING 2. Convert inventory costs: For example, if there are 100 units that are 50% complete, then these
units would be converted to 50 completed units

FORMULA
3. Calculate applicable cost: The third step is to calculate the total indirect and direct costs that
were applicable to the production of the product. (Direct Materials, Direct Labor & Factory
Overhead)

4. Calculate cost per unit: Divide the total expenses by the total number of units produced.

5. Designate costs for complete and incomplete products.

PROBLEM #1
ABC Wine Company crushes grapes to be used in winemaking. The company has asked you to determine its
product cost per gallon for each stage of manufacture. You've been given the following information:

Manufacturing Stages/Department
(a) Crushing
(b)Packaging

Expenses Other Information:

Grapes purchased: 100,000 Units Produced: 50,000 gallons
Grape press maintenance: 25,000
Packaging supplies: 75,000
Packager labor: 50,000

Calculate the ff:

1. Crushing Cost per Unit 2. Packaging Cost Per Unit
(a) Direct Materials per Gallon (a) Direct Materials Cost per Gallon
(b) Conversion Cost per Gallon (b) Conversion Cost per Gallon
(c) Total Crushing Cost Per Gallon (c) Total Packaging Cost Per Gallon

How much is the Total Cost Per Unit?

 SOLUTION:
Crushing Department
(A) ₱100,000 grapes purchased ÷ 50,000 gallons juice
= ₱2.00 of direct materials cost per gallon
(B) ₱25,000 grape press maintenance ÷ 50,000
gallons juice = ₱0.50 conversion cost per gallon
(C) ₱2.00 of direct materials cost + ₱0.50 conversion
cost = ₱2.50 total crushing cost per gallon
Total Cost per Unit ₱2.50 crushing cost per gallon + ₱2.50 packaging cost per gallon = ₱5.00 total cost per gallon
Packaging Department
(A) ₱75,000 packaging supplies ÷ 50,000 gallons
juice = ₱1.50 of direct materials cost per gallon
(B) ₱50,000 packager labor ÷ 50,000 gallons of juice
= ₱1.00 conversion cost per gallon
(C) ₱1.50 direct materials cost + ₱1.00 conversion cost
= ₱2.50 total packaging cost per gallon Total Cost
per Unit
 TOTAL JOB COST = DIRECT MATERIALS + DIRECT LABOR + APPLIED
OVERHEAD

JOB
ORDER
1. Calculate the predetermined overhead rate
Predetermined Overhead = Estimated Overhead / Estimated Activity

COSTING 2. Determine direct materials and direct labor costs. Identify how much it costs you per hr in
labor and multiply that rate by home many hours were worked.

FORMULA

Example: If a job takes 20 hrs for an employee paid Php 17 per hour to complete, then the direct
labor cost for that job is Php17 x 20 = Php 340

3. Find the applied overhead rate

Completed hrs x Predetermined Overhead

4. Calculate total costs and profit.

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead
PROBLEM #2
Jared owns his own woodworking business called Woodworks Inc., of which he is the sole employee. Marissa
contracts Jared to build a custom dining room table for her new home. Using the steps above, here's how
Jared calculates the job cost for Marissa's table:

It's Jared's first order of the year, so his first step is calculating the predetermined overhead rate for
Woodworks since he has not done this already. For the upcoming year, Jared has determined the estimated
overhead is ₱35,000, and the estimated activity is 2,100 hours, making Woodworks' predetermined overhead
rate ₱16.67 per hour of direct labor.

Next, Jared tracks his hours worked and the cost of the materials he uses to complete Marissa's order. He
uses ₱400 of wood, metal and other supplies, and the project takes him 22 hours to complete. Jared is paid
₱30 per hour, making the job's direct labor cost ₱660: 22 x 30 = 660.
Jared multiplies 22 x ₱16.67 to find the applied overhead rate for the project, which is ₱366.74.
SOLUTION:

Using the formula Total job cost = Direct materials + direct labor + applied overhead,
Jared adds ₱400 + ₱660 + ₱366.74 to arrive at a total job cost of ₱1,426.74

This is the amount that Marissa pays Jared for her dining room table.
TAKE NOTE:
After you determine the cost of your product, add the desire mark up to come up with the
price.
Formula of Mark-up:
Total cost X Desired Mark-up
Formula of Unit Price:
Total cost + Mark-up

Under Process Costing: Under Job Order Costing:

ABC Wine Company has ₱5.00 per gallon
added desire mark up of 50 percent.
Computation:
₱5.00 X 0.5 = 2.5 mark up
₱2.5 (mark up) + ₱5.00 (cost per gallon) =
₱7.5 unit price
Woodworks Inc has ₱1,426.74 total cost of
project added desire mark up of 50
percent.
Computation:
₱1,426.74 X 0.5 = ₱713.37 mark up
₱713.37 (mark up) + ₱1,426.74 (cost of
project) = ₱2,140.11 unit price