Behavioral Classification

1. Fixed Cost
2. Variable Cost
3. Semi-variable or semi-fixed cost
 Behavioral Classification
• Fixed Cost:

(a) (b)

Total Unit

Fixed Fixed

Cost Cost

Activity Level Activity Level

Fixed Costs (a) total; (b) unit

 Behavioral Classification
• Variable Cost

(a) (b)

Total Unit
Variable Variable
Cost
cost

Activity level Activity level

Variable Costs (a) total; (b) unit

 Segregation of Variable & Fixed Costs
High Low Method Example

Month Hours worked Phone Bill

Rs.
Jan. 180 2290
Feb. 200 2600 We know that,
March 250 3030 Y = a + bx
April 225 2800
May 190 2430 Fixed Expense= 2290 - (10.57)(180)
June 240 2940
Fixed Expense= 387.4
Lowest Activity 180 2290
Highest Activity 250 3030
Difference 70 740

Variable Rate = 10.57

(3030 - 2290)/(250 - 180)
Classification according to cost units
• Direct Costs: Those costs that can be
specifically and exclusively identified with a
particular cost object.
• Indirect Costs: In contrast, those costs which
cannot be identified specifically and
exclusively with a given cost object.
 According to Controllability
• Controllable Costs: a ‘cost which can be
controlled, typically by a cost, profit or
investment centre manager’.

• Uncontrollable Costs: These are those costs

which cannot be influenced by the action of a
specified member of an enterprise.
 On the basis of Time
• Historical Costs: These are the costs which are
ascertained after these have been incurred.
Historical costs are thus nothing but actual costs.
These costs are not available until after the
completion of the manufacturing operations.
• Pre-determined Costs: These are future costs
which are ascertained in advance of production
on the basis of the specification of all the factors
affecting cost.
 Classification by Departments
1. Production Departments
2. Service Departments
 For Analytical Process
• Differential or Incremental Costs
• Imputed Costs
• Opportunity Cost
• Replacement Cost
• Sunk Costs
• Out-of-pocket Cost
• Future Costs
• Discretionary Costs
• Committed Cost
 Costing Methods

Job Order Process

Costing Costing

Operating
Costing
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 Job Order Costing
• Special Features of Job Order Costing:
1. Production is against customer’s orders and not for
stocks.
2. Each job has its own characteristics and requires
special attention.
3. The flow of production is not uniform from one
department to another. It is the nature of job which
determines the department through which it is to
be processed.

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 Process Costing
• Special features of process costing are:
1. Production of unit cannot be separately identified in process costing
whereas in job order or batch costing the production unit retain its
identity. Unit cost has to be based on the average cost of the process.
2. The completed unit (output) of one process becomes the input of the
next process unless it reaches to final process and then to finished goods.
3. In the course of processing, several different main products (joint
products) and by products may arise.
4. The physical quantity of output of a process may be less than the input of
quantity. This can be due to the nature of process evaporation or
reaction etc.
5. For cost purposes, each process constitutes a cost centre and the cost
per unit is arrived at by dividing total cost of the cost centre by the
number of units of output.
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 Job Order Costing Vs. Process Costing
Job Order Costing
• Products identified
separately
• Production as needed
• Specific Customer
• Design & Quality as per
requirement
• Job started, completed and
handed over to customer
• Losses hardly arise
Process Costing
• Products identical
• Production continuous for
stock
• Customer general public
• Standardized substitutes are
available
• Output of one process
becomes the input of other
• Normal loss/abnormal loss
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 Job Order Costing Vs. Process Costing
• Job Order Costing
• No by or joint products
• Easy to determine the value
of work-in-process
• Job Cost Sheet
• Profit for each job
• Operation usually site
based, work normally
remain stationary
• Process Costing
• Different products from the
same process
• Complicated procedure
• Cost of Production Report
• Profit for the Company
• Through various process,
product moves from one
dept. to another
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 Operating Costing
Used in Service oriented organizations like:
• Road transport companies
• Railways
• Airways
• Shipping Companies
• Electricity companies
• Steam service
• Hospitals
• Cinemas
• Canteens
• Hotels
• School & Colleges
• Local authority
• Personnel department in a factory

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 Job Cost Sheet
Customer………………………………. Job No.……………………………….
Specification of Job …………………………….
Date of Commencement………………………   Date completed …………………………….
  Material Cost Direct Labor Manufacturing Overhead
Date Requisition Quantity Unit Price Cost Time Hours Rate Cost Cost Quantity Application Cost
  No.       Card       Driver   Rate  
          No.              
                         
                         
                         
                         
                         
                         
                         
                         
                         
                         
                         
                         
                         
                         
                         
                         
                         
Total Total Total
Profit/Loss Cost Summary
        Rs. Cost Item   Rs.
           
  Price Quoted ……………………………..   Total direct material      
  Less Cost ……………………………..   Total direct labor      
      Total manufacturing overhead      
      Administration Overhead      
  Profit or Loss _________________   Selling overhead      
           
      Total Cost _____________________
                          16
 Job Order Costing Illustration
Illustration: Inter-Wood, Co., manufactures furniture to customers’ specifications
and uses a job order cost system. A predetermined overhead rate is used in
applying manufacturing overhead to individual jobs. In department One,
overhead is applied on the basis of machine-hours, and in Department Two, on
the basis of direct labor hours. At the beginning of the current year,
management made the following budget estimates to assist in determining the
overhead application rate:
Department Department
One Two
Direct labor cost …………………………………… Rs.30,000,000 Rs. 22,500,000
Direct labor hours ……………………….. ……... 20,000 15,000
Manufacturing overhead ……………………… Rs. 42,000,000 33,750,000
Machine hours ……………………………………… 12,000 7,500

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 Job Order Costing Illustration
Production of a batch of custom furniture ordered by City
Furniture (job no.58) was started early in the year and completed
three weeks later on January 31. The records for this job show the
following cost information:
Department Department
One Two
Job order for City Furniture (job no. 58):
Direct materials cost …………………………Rs.1,010,000 Rs.760,000
Direct labor cost ……………………………...Rs. 1,650,000 Rs. 1,110,000
Direct labor hours ……………………………1,100 740
Machine-hours …………………………………750 500

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 Job Order Costing Illustration
Selected additional information for January is given below:
Department Department
One Two
Direct labor hours-month of January ………1,600 1,200
Machine hours – month of January ….........1,100 600
Manufacturing overhead incurred in January (000)…Rs.3,901 Rs.2,654
a) Compute the predetermined overhead rate for each department.
b) What is the total cost of the furniture produced for City Furniture?
c) Prepare the entries required to record the sale (on account) of the
furniture to City Furniture. The sales price of the order was Rs.
14,700,000.
d) Determine the over-or under-applied overhead for each department
at the end of January.

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 Job Order Costing Illustration
(a). Predetermined overhead rate

Predetermined overhead rate = Estimated manufacturing overhead/Base hours

Department One - (machine hours)

Rs.
42,000,000 /
Predetermined overhead rate = 12,000
per machine
Predetermined overhead rate = 3,500.00 hour  

Department Two - (direct labor hours)

Rs.
33,750,000 /
Predetermined overhead rate = 15,000
per Direct
Predetermined overhead rate = 2,250.00 Labour hour   20
 Job Order Costing Illustration
(b). Department Department
One Two Total

Direct material cost (Rs.) 1,010,000 760,000 1,770,000

Direct labor cost (Rs.) 1,650,000 1,110,000 2,760,000

Prime Cost 2,660,000 1,870,000 4,530,000

Manufacturing overhead (Rs.) 2,625,000 1,665,000 4,290,000

Total cost of production 5,285,000 3,535,000 8,820,000

Working
Manufacturing overhead:
Manufacturing overhead = Predetermined overhead rate * Base hours for job. 58
Department Department
One Two

Applied Rate * Actual hours 2,625,000 1,665,000

(750 * 3,500) (740 * 2,250) 21
 Job Order Costing Illustration
(c). Journal Entries:

Accounts Receivable 14,700,000

Sales 14,700,000

Cost of goods sold 8,820,000

Finished goods inventory 8,820,000

(d). Over or underapplied overhead:

Department Department
One Two Total
     

Actual overhead incurred 3,901,000 2,654,000 6,555,000

Applied overhead 3,850,000 2,700,000 6,550,000

(Actual hours * Predetermined rate)

(Dept. 1: 1100 * 3500) 51,000 -46,000 5,000

(Dept. 1: 1200 * 2250) (U) (O) (U) 22