UC: Job order Costing and Process Costing

What is cost?
Is all disbursement of cash (the commitment to pay cash in the future for the purpose of
generating revenue )
What is the difference between cost and expense?

Cost

Asset expense
(Unused portion of cost) (Used portion of cost)

Benefits more than one period benefits only current period

Objectives of cost accounting

Have the following main objectives
1. Determination of Cost
2. Cost controlling and reduction
3. determine selling price
4. Calculation and determine of profit

The following are major term in cost accounting

Cost allocations: is the allocation of the whole items of costs to cost center

Cost apportionment: the allocation of proportion of item of cost to cost per unit

Cost center: the cost incurred will be based on

o Location
o Person
o Items of equipment
 Cost per units:
Measurements of Cost/unit
Automobile ------------------------------------------------ numbers
Biscuit-----------------------------------------------------------kilograms
Chemical --------------------------------------------------------- Liter
Hospital ----------------------------------------------------------Patient per day

Classification of costs
Can be classified and used in several ways depending on the purpose of the analysis
1. Manufacturing
Manufacturing: is the process of transferring raw materials into finished goods by using labor
and other factory facilities
 are all costs incurred in the manufacturing of products up to the point at which the
product is ready for sale
Manufacturing cost can be divided in two
A. Direct material cost
A direct cost: is a cost that can be directly traced to a cost object / production process such
as direct material and direct labor are examples of direct costs.
 for which managers need a separate breakdown of its component of costs
 the acquisition of costs of those materials that become an integral part of the finished
product and
 whose costs can be conveniently traced to the finished products
B. Direct labor cost : consists of compensations to workers who directly and physically
involved in the conversion process
 That can be easily traced to individual units of product.
 Is sometimes called touch labor because direct labor workers typically touch
the product while its being made.

C. Indirect costs/ manufacturing overhead cost(MOH)

  Are costs that cannot be traced directly to a cost object?
 indirect costs are required to make finished products but are not as easy / cost effective to
track to one specific finished product
 Various names are used for MOH such as indirect manufacturing cost, factory overhead
and factory burden. All of these are synonyms for manufacturing over head

JOB ORDER COSTING AND PROCESS COSTING

Companies frequently adopt one of the two costing systems to assign costs to
Products or services. These are:

1. Job order costing system:

 Is a type of cost system that provides for a separate record of the cost of each particular
quantity of product that passes through the factory
 is commonly used by companies with products that are unique and divisible
 Costs are assigned to distinct unit, batch or lot of product or service.
Examples of business that use job order costing includes
 Construction companies
 Furniture manufacturers
 Printing firms
 Repair shops
 Service giving organization
 Garages etc.
2. Process costing system:
 Is used for manufacturing processing which produce a single product or single mix of
products continuously for an extended period of time.
 In this system, the cost of a product or service is obtained by using broad averages to
assign costs to mass of
 Similar units produced for general sale and not for any specific customers.
Companies that use process costing system are:
 Cement factories  Flour companies
 Petroleum  Beer factories
 refineries  Textile factories
 Beverage companies

ACCOUNTING PROCEDURES FOR JOB ORDER COSTING

 In general, a firm’s cost accounting system parallels its flow of operation. of The steps
are summarized below in a concise manner.
1. Procurement – raw materials and supplies needed for manufacturing are ordered,
received, and stored.
 2. Production – raw materials are transferred from storeroom to factory. Labor, tools,
machines, power, and other costs are applied to transform the raw material into finished
product.
3. Warehousing – finished goods are moved from the factory to the ware house to be held
until they are sold.
4. Selling – customers are found. Merchandises are shipped from the warehouse, and
customer accounts are charged

Prime cost = Direct material + Direct labor

Conversion cost = Direct labor + Manufacturing overhead cost
Transaction-1: Acquisition of direct materials

Raw-material Inventory----------------------xxx
Accounts payable (Cash) ------------------------------xxx

Transaction-2: Use of direct material

Work-in-process inventory---------------xxx
Raw-material inventory--------------------------xxx

Transaction-3: Use of indirect material

Manufacturing overhead-------------------xxx
Raw-material inventory--------------------------xxx

Transaction-4: Use of direct labor

Work-in-process Inventory---------------xxx
Wages payable--------------------------------xxx

Transaction-5: Use of indirect labor

Manufacturing overhead--------------------xxx
Wages Payable--------------------------------------xxx

Transaction-6: Other manufacturing overhead costs

Manufacturing overhead------------------------xxx
Prepaid Rent-------------------------------------------------xxx
Accumulated depreciation-Equipment------------------xxx
Accounts Payable (utilities and property tax) ----------xxx
Prepaid Insurance--------------------------------------------xxx
Transaction-7: Allocation or applied overhead costs
Work-in-Process Inventory ----------------------xxx
Manufacturing overhead---------------------------------xxx
Transaction-8: Selling and administrative costs
Selling and Administrative Expenses---------------------xxx
Wages Payable------------------------------------------------------xxx
Accounts payable---------------------------------------------------xxx
Transaction-9: Completion of production job
Finished goods inventory--------------------xxx
Work-in- Process inventory----------------------xxx
Transaction-10: Sales of goods (when finished goods sold)
Two journal entries are required
1. To record sales
Cash (A/R) xx
Sale xx
2. To record cost of goods sold
CGS xx
FG xx

FINANCIAL STSTEMENT FOR MANUFACTURING COMPANY

 DM used : BDM+ Purchase -EDM
 Total manufacturing cost (TMC): = DM + DL + FOH
 Cost of goods manufactured (CGM)= BWIP + TMC - EWIP
 Cost of goods sold (CGS)= BFG +CGM- EFG
 GP= sales – CGS
 NIBT= GP- operating expense

Cost-volume-profit analysis
Cost-volume-profit analysis: examines the behavior of total revenues, total costs, and operating
profit as changes occur in the output level, selling price, variable costs per unit, or fixed costs.
 Cost Behavior Point of View
Variable costs: are costs that vary in total, in direct proportion to changes in the level of activity
or cost driver
 if activity increase by n%, total variable cost also increase by n%, but the per unit cost
remains constant
E.g. Direct material cost, direct labor cost,
 commission paid to sales personnel (at $30 per commodity sold),
 cost of natural gas
 to heat factory, wages paid to employees
 Who assemble the goods in the assembly department
Fixed costs: are costs that remain unchanged in total regardless of variation in the level of
activity (or cost driver), for a given relevant range. If activity increases or decreases by n%.
 within the given relevant range, total fixed cost remains the same
E.g. Salary of plant manager,
 Monthly rental cost of equipment and /or house,
 Depreciation of machines used to produce furniture’s at $10,000 per year and the

Total cost is sum of variable cost and fixed cost: (TC=TFC+TVC)

Average cost = Total cost
No. unit produced
Expressing CVP Relationships

There are three related methods to deal with the model CVP relationships:
1. The equation method
2. The contribution margin method
3. The graph method
Contribution margin
Contribution margin: indicates why operating income changes as the number of units
sold changes
Total contribution margin (TCM): shows the amount contributed to profit after
deducting total variable cost from sales
TCM= sales – TVC

Where: Sale= PQ and TVC = Vc/unit x Q

TCM= PQ –Vc/unit x Q
TCM= Q (P – Vc/unit) NB: CM/unit= P-V/unit
Contribution margin per unit (CM/unit): shows by how much TCM increase for every unit
sold
CM/unit = P – V/unit

Contribution margin ratio (CMR): shows by how much TCM increase for each birr sold
CMR = TCM/sale
Where TCM= CM/unit (Q) and Sales = PQ
CMR = CMQ/PQ
CMR = CM/unit
P

Break Even Point and Target Operating Income

Breakeven point (BEP) : is that quantity of output sold, at which total revenues equal total
costs, that is, the quantity of output sold that results in $0 of operating income.

Mathematically TR=TC

Coc project1
During the month of January the following transaction will occur to produce three products
1. Purchase of raw material on account
Sand 500
Steel 790
Chemical 4500
2. Direct Material issued(used) and labor used
Material direct labor
Job 1. 227.5 160
Job 2. 780 210
Job 3. 3,900 175
3. Factory overhead applied is 80% of direct labor cost
4. Sold finished goods for birr 7,800
Required
Task1.1.Record journal entries
Task 2.2 .calculate each job cost
Task 2.3 .calculate gross profit
COC Project 2
During the month of February the following transaction will occur to produce products.
1. Raw materials purchased birr --------br.25.000
2. Raw materials used birr --------------br.21.000
3. Direct labor cost birr----------------- br.35.000
4. Inventory
Beginning inventory finished goods units-------------br.16, 000
Beginning inventory raw materials units---------------br.13, 000
Ending inventory finished goods units-----------------br.18, 000
5. Factory overhead cost is 80% of direct labor cost.
6. Sales is birr 117.000

Required:
Task3.1. Calculate cost of goods manufactured
Task3.2. Calculate cost of goods sold
Task3.3. Calculate gross profit

COC Project 3

Addis chamber of commerce is planning to Easter trade exhibitions. That it’s

Assumption at one of two possible venues location.

A. Addis Ababa exhibition center which has fixed rental cost of birr 2000 plus a charge birr 80
per person for its own catering of meal service of drink and entertainments.
B. MILLENIUM hail which have fixed rental cost of birr 6000 that the chamber of commerce
can hire a career for meals ,waits and waitresses to serve drink and meal at birr 60person The
chamber of commerce budgets birr 3500 in cost for administration and marketing the band will
cost fixed amount of birr 2500. Tickets to this prestigious event will be 120 per person all the
drinks served and prizes given away at event will be donated /sponsored
Required
Task1.1. Compute breakeven point for each location in term of ticket sold.
Task1.2. Compute the operating income of the even if (a) 150 attend and (b)
300 attended and comment on the result
Task1.3.At what level of ticket sold wills the two venues location have the

COC Project 4
ABC manufacturing PLC is producing weather vans, for the month of January2012, ABC
produces10,000 weather vans with the following unit cost:
Direct material-------------------------------------birr20, 000
Direct labor-----------------------------------------birr35, 000
Overhead--------------------------------------------birr10, 000
Selling expense------------------------------------birr10, 000
Administrative expense-------------------------birr10, 000
During the year ABC Company sold 9800units of weather van at birr12each.Beginningbalanceof
Finished goods inventory consisted of 630 units with total cost of birr4095.There were no
beginning and ending inventory of working process.
Task3.1.calculate unit cost of the following:
A. Direct material cost
B. Direct labor cost
C. Overhead cost
D. Prime cost
E. Conversion cost
Task3.2.prepare schedule of cost of goods manufactured
Task3.3.prepare schedule of cost of goods sold
Task3.4.prepare income statement for ABC manufacturing company

COC Project 4
Aclothingmanufacturerhasthefollowingtransactionsinitsfirstmonthofoperation’s
Relating to its only job, job#101
A.Purchased500 yards of silk@br.8peryardforcash
B.Requisitioned300 yards of silk to producejob#101
C.Incurred50 hours of direct labor to producejob#101: the average labor rate is br9per hour
D.PaidvariousFactoryoverheadcostsbr.650
E. Applied Factory overhead at the rate of 150% of direct labor costs to job#101
F. Completed job#101
G.Soldjob#101, receiving cash of br.4400

Required
Task4.1.Enter the transaction in the T-Accounts .Assume the opening balance of cash is
br.9000
Task4.2.Determine the ending balance of each account
Task4.3.What was the gross profit earnedonJob#101
Task4.4.factory overhead applied or under applied, and by how much