Module – II (Session 6,7,8)

Product Costing

Chapters: 4 (Job costing),5 (Activity based costing) and 15

(Support department cost)
C l a s s i fi ca ti o n o f C o st :

• Fixed vs. Variable

• Direct vs. Indirect
• Nature – Material, Labor, Expense
Te a s e r # 1

Average cost (Total cost per unit) of producing a unit of Product-

X is Rs. 15.

Company has an excess capacity available, a proposal for

Product-X is under consideration, which offers a price of Rs. 13
per unit for Product-X.

I f y o u a r e p r o d u c t m a n a g e r f o r p r o d u c t- X , w i l l
you accept the proposal?
Teaser # 2

What cost items you will take into account for calculating the total cost for
the product “Crocin Advance”?
 COST has a PURPOSE
• Financial Reporting – COGS and value of closing
inventory
• Pricing Decisions – Regular market or special orders
• Strategic decision – Continue or discontinue
• Strategic decision – Manufacture or outsource

Please remember term ‘COST OBJECT’

W h a t g o e s i n t o t h e c o s t o f a p ro d u c t ?

i. Prime Cost
ii. Overheads
iii. Support Department Cost
iv. Fixed Cost / Period Cost
Activity Based Costing
 Caselet
• Total overhead cost = Rs. 50,000
• Overhead cost distributed on the basis of direct labor hours (DLH)
• Labor rate – Rs. 100 per hour
• DM – Direct Material

  A B C
Units 1000 1000 1000
DLH 250 300 450
DM 75000 90000 120000
  A B C

Units 1000 1000 1000

DM 75000 90000 120000

DL 25000 30000 45000

OH 12500 15000 22500

Total 112500 135000 187500

Cost per unit 112.5 135 187.5

  A B C Total Cost

Electricity 750 450 650 30000

Carriage out 30 20 45 20000

  A B C

Units 1000 1000 1000

DM 75000 90000 120000

DL 25000 30000 45000

Electricity 12162.16 7297.30 10540.54

Carriage out 6315.79 4210.53 9473.68

Total 112162.16 127297.30 175540.54
Cost per unit 112.16 127.30 175.54
  A B C

TC 112.5 135 187.5

ABC 112.16 127.30 175.54