Session 9 Product Costing Methods 403 Part 1

ACCT 403
COST & MANAGEMENT ACCOUNTING I
Session 9 – Product Costing Methods-Specific Order

Costing
Lecturer: Dr. William Coffie, UGBS

Contact Information: wcoffie@ug.edu.gh
College of Education
School of Continuing and Distance Education
2016/2017 – 2017/2018
Session Overview
Learning objectives
By the end of this session you should be able to:
• Explain product costing methods, the need for an appropriate
product costing system and the various product costing methods.
• Explain the nature of various specific order costing methods - job
order costing, batch costing and contract costing.
• Explain how costs are recorded on jobs, batches and contracts
and pass journal entries for cost flow in jobs, batches and
contracts
• Determine the profits made on jobs, batches and contracts via the
costing system available to each method
Dr. William Coffie Slide 2

Reading List
• S. Andoh Kwofie, Cost and Management Accounting. Gpak
Publishing House, Accra. Chapter 5 (pages 95-107)
• W. Coffie, Cost & Management Accounting Question Bank,
AndrewPerb Publishing Accra
• D. Hansen & M. Mowen, Management Accounting,(8th
Edition), South-Western College Publishing, USA

INTRODUCTION
Regardless of the type of company involved, costs are

associated with the products and services produced and sold.
How to determine the cost of a product (service) depends on

the organization’s production process
Product (and service) costing is important

• Externally – to value inventory (for products) and to determine the
gross profit on sales.
• Internally - making pricing decisions and budgeting for expected cash
flows.
COSTING METHODS DEFINED
The procedures used to accumulate, track and

assign cost to a final product or service.
The process of assigning costs to the product or

services provided by an organization.
The method of costing which is designed to suit the

way goods are processed or manufactured or the
way that services are provided.
CATEGORIES OF COSTING METHODS
Different products are provided differently hence different

methods of accumulating and allocating cost of resources used
when products are being manufactured.
Every organization will have a product costing method with

unique features depending on the firm’s production process.
Whatever costing method is employed, the basic costing

principles relating analysis, allocation and apportionment will
be used.
Specific Order Costing Methods and Continuous Operation

Method

SPECIFIC ORDER COSTING METHOD
The basic cost accounting method applicable where work

consists of separately identifiable contracts, jobs or batches
Its used where products are produced in distinct batches and

with each batch significantly different from the other batches
The process is such that cost can be identified and allocated to

specific job.
This method is usually used in the construction industry,

specific order printing, ship building etc.
The main variations are job costing, batch costing and contract
costing.
CONTINUOUS OPERATION METHOD
The method used where standardized and homogeneous products are

produced from a sequence of repetitive and continuous operations
Costs are averaged over the units produced during the period, being
initially charged to the operations or process.
It is used in the chemical industry, oil refinery, breweries etc.
The main variations are process costing (including joint and by

products) and service costing

CATEGORIES OF COSTING METHODS
Costing
Methods
Specific Order Continuous

Costing Operations Method
Operating
Job Batch Contract Process
(Service
Costing Costing Costing Costing
Costing)
By- Joint
Products Products

JOB ORDER COSTING METHOD
A type of specific order costing in which costs are
attributable to individual job
Work is done to customers requirement and

specification
Cost is accumulated by job and cost is determined

for each job completed
Each order is termed a job and it is given an

identification to differentiate it from others
PROCEDURE FOR JOB ORDER COSTING
Receiving an enquiry
Estimation of the cost
Receiving the order
Prepare production/Job order
Recording of cost
Determination of profit or loss on the job

JOB ORDER COSTING METHOD CONT’D …
Preparation of estimated job cost or quotation price
• Prime cost + Production Overheads + Non production overheads + Profits

• Used to respond to customers/clients enquiry for tender
• Used to compare with actual cost of job when completed

Job Order Costing Method cont’d …
Accumulating/ gathering of actual cost to be assigned to completed jobs
• Capturing all information from source documents information is required on all cost
elements that go into production
• Making entries via
• journalizing and
• postings entries into the ledgers (subsidiary and main)

POSTING OF ENTRIES INTO THE LEDGERS ...
Subsidiary ledger
• Contains detailed entries of cost elements relating to the job

• It records all details for materials used, labour hours spent and overhead applied or
incurred
• Document used is called Job Card or Job Cost Sheet
• The aggregate sum of all job cards will be transferred to the control accounts in the
main ledger

OK Ltd Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05

Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead

Req. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

POSTING OF ENTRIES INTO THE LEDGERS CONT’D ...
Main ledger
• Contains control accounts which record in total, the detailed individual entries made
in the subsidiary ledger
• Journalize the entries from the flow of production
• Main control accounts are: Material/ stores control account, wages control account,
Production overhead control account, Work –in –progress control account, Finished
goods control account, Cost of sales control account, Non- production overhead
control account
JOURNAL ENTRIES IN JOB COSTING
Purchase of raw material
• Dr Materials/ stores control account

• Cr cash / Trade payables
Materials issued to production
• Dr Work –in –progress (direct material issued

• Dr Production overhead control account (indirect material)
• Cr Material /store control account
JOURNAL ENTRIES IN JOB COSTING CONT’D ...
Labour utilized for production
• Dr Work –in –progress a/c (with direct labour)

• Dr Production overhead control a/c (with indirect labour)
• Cr Cash/ wages payable a/c
Expenses incurred during production
• Dr Work –in –progress a/c (with direct expenses incurred)

• Dr Production overhead control a/c (with indirect expenses)
• Cr Cash/ Payables a/c
Production overheads absorbed
• Dr Work –in –progress a/c

• Cr Production overhead control a/c
• Close off production overhead control account to over/under absorbed overhead control account
Finished goods transferred
• Dr Finished goods control a/c

• Cr Work –in –progress a/c

Cost of goods sold
• Dr cost of sales a/c

• Cr Finished goods a/c
Non- production overhead

• Incurred
• Dr Non- production overhead a/c
• Cr Cash/ Payables a/c
• Absorbed
• Dr Cost of sales a/c
• Cr Non- production overhead a/c
• Close off non-production overheadSlide
Dr. William Coffie
control
22
account to over/under absorbed
overhead account
Sales
• Dr Cash/ Trade receivables account

• Cr Sales account
Determination of profit or loss
• Close off the sales a/c, the cost of sales a/c and the over/under absorbed overhead a/c
to the income statement.

BATCH COSTING
Its similar to job costing in that each batch of a similar articles is
separately identifiable
Batch is a group of similar articles which maintains its identity

throughout one or more stages of production and treated as a cost
unit
It is applied where quantity of identical articles or items are

produced and items are produced in batches.
Procedures for costing batch are similar to job costing as batch are
treated as a job during production

BATCH COSTING CONT’D …
Cost per unit of batch costing is determined as follows by dividing the total cost of the
batch by the number of units produced in the batch
This costing method is common in the footwear, clothing and printing industries.
Job costing is distinguished from batch costing in that the production for the former is
to meet customers specification, where as that of the latter, usually are produced into
inventory for future sales to customers.

CONTRACT COSTING
It involves the application of job costing principles to work or cost units with the
following characteristics:
• Site based (constructed away from the enterprise)

• Undertaken to customers requirement
• Takes a relatively long period to complete
• Mostly of a constructional nature e.g. building ship, aircraft etc.

CHARACTERISTICS OF CONTRACT COSTING
High proportion of direct cost
• Most materials are ordered and purchased specifically for the job. Any materials
drawn from store are direct.
• Nearly all labour cost are direct even though it is a type of labour generally considered
as indirect e.g. night workers site clerk.
• Most expenses are direct because of the self contained nature of most site operations.

CONT’D …
Nearly all overheads are head office cost e.g. directors salary
• If plant is leased for the job, the leasing charges directly to the contract.
• If plant is purchased
• A depreciation charge is made using the rate of depreciation periodically
• The cost of the plant is first charged to the job
• The plant is valued at the end of accounting or contract period and is credited to the job. The difference is what is charged to the job
Contract plants and equipment

CONT’D …
Intermediate/Periodic Valuation
• Architect Certificate - certificate issued by an architect after inspecting the work. It

details the work satisfactorily completed and shows its value at contract price.
• Retention monies - monies withheld for any future constructional defects. They are
only paid after all defects have been rectified or the warranty period is expired.

CONT’D …
Profit taken on contract
• Prudence concept
• Not all profit earned on the contract to the period end date are taken to the income
statement of the period if contract is uncompleted
• A portion is reserved for unforeseen circumstances

CONTRACT COSTING ACCOUNTS
Contract account
• The account that will determine the cost of the contract and the profit made on the
contract to date.
• Consists of the cost section, the profit section and the future section
Contractee account
• The personal account of the client/customer

CONTRACT ACCOUNT
Current (Cost) section
• Records and accumulates all costs relating to the job/contract.

• Determines the cost of work to date that should be included in the costs of sales for
the purpose of calculating profit taken up for the period.
• It is made up of cost of work certified and cost of uncertified.
• Cost of work certified = cost of goods sold
• Cost of work certified = work -in -progress

CONTRACT ACCOUNT CONT’D …
Profit section
• Determination of profit show the profit/loss on each completed contract.
Future Section
• Contains items carried down from the previous section of the contract accounts.
• Contains unexpired costs, unexpired revenue and written down balances such as cost
of work not certified, accruals and prepayments etc.

DETERMINATION OF PROFIT ON CONTRACT
Determine the overall result of contract
• Contract price – Contract cost

• Where contract cost = cost of work to date + Estimated cost of work to complete
• If it’s a contract loss, the whole amount is written off to the income statement of the period
immediately.
• If it is a contract profit, determine the profit on contract to date for the period end
• Where Surplus = Value of work certified to date – cost of work to date
• A portion of the profit is taken to the income statement based on the degree of work completed.

DETERMINATION OF PROFIT ON CONTRACT
CONT’D ...
Degree of Work Completed
• This is determined as follows:

Cost of work to date
x 100
Contract Cost
• Where the degree of completion is:

• less than 35%, no profit should be recognized
• Between235% and 85%, profit to be recognized
Proportion of cash Received
x Surplus x
3 Value of Work certified
• The rest of the profit is called profit in suspense

• Greater
Dr. William Coffie than 85%, all profitsSlideshould
35 be recognized
Contact Account
Materials xxx Material returned xxx
Wages xx Material c/d xxx
Accrued wages xx xxx *Prepaid expense xx
Expenses xx **Plant c/d xxx
*Prepaid expense (xx) xxx Cost of work to date
**Depreciation xxx Cost of work certified xxx
**Plant xxx Cost of work not certified xxx
xxx xxx
Cost of work certified xxx Value of work certified xxx
Surplus taken xxx
Surplus in suspense xxx
xxx xxx
Prepaid expense xx Accrued wages/expense xx
Material c/d xx Surplus in suspense xxx
Plant c/d xxx
CONTRACTEE ACCOUNT
The personal account of the client customer who awarded the
contract.
It is debited with the value of work certified and credited with the
progress payments (cash received)
Progress payments are used in the determination of work in

process
Retentions money are not considered debt at this stage and

therefore do not appear as a receivable (debtor) on the SOFP
However, the extent of retention monies held by the client could be

disclosed as a note
Statement of Financial Position (SOFP) of
Outstanding Items
All carried down entries in the current sections brought down to the future sections
appears in the SOFP
A work in process account is also presented in the SOFP
All carried down items used in the determination of work in process will not appear in
the SOFP

WIP in Contract Costing
• Method 1
Cost of work to date
Cost of work certified xx
Cost of work not certified xx xxx
Add: Profit taken xxx
xxx
Less: Cash received (progress
(xxx)
payments)
Work-in-progress xxx
WIP in Contract Costing cont’d ...
• Method 2
Cost of work not certified xxx
Add: Balance of contractee account xxx
xxx
Less: Surplus in suspense (xxx)
Work-in-progress xxx

SUMMARY
In this Session, you have learned:

• The various product costing methods.
• The various specific order costing methods and how to
apply them.
• How costs are recorded on jobs, batches and contracts and
pass journal entries for cost flow in jobs, batches and
contracts
• The profits made on jobs, batches and contracts via the
costing system available to each method

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ACCT 403

COST & MANAGEMENT ACCOUNTING I

Session 9 – Product Costing Methods-Specific Order

Lecturer: Dr. William Coffie, UGBS

Dr. William Coffie Slide 2

Dr. William Coffie Slide 3

Regardless of the type of company involved, costs are

How to determine the cost of a product (service) depends on

Product (and service) costing is important

The procedures used to accumulate, track and

The process of assigning costs to the product or

The method of costing which is designed to suit the

Different products are provided differently hence different

Every organization will have a product costing method with

Whatever costing method is employed, the basic costing

Specific Order Costing Methods and Continuous Operation

Dr. William Coffie Slide 6

The basic cost accounting method applicable where work

Its used where products are produced in distinct batches and

The process is such that cost can be identified and allocated to

This method is usually used in the construction industry,

The method used where standardized and homogeneous products are

It is used in the chemical industry, oil refinery, breweries etc.

The main variations are process costing (including joint and by

Dr. William Coffie Slide 8

Specific Order Continuous

Dr. William Coffie Slide 9

Work is done to customers requirement and

Cost is accumulated by job and cost is determined

Each order is termed a job and it is given an

Estimation of the cost

Receiving the order

Prepare production/Job order

Determination of profit or loss on the job

Preparation of estimated job cost or quotation price

• Prime cost + Production Overheads + Non production overheads + Profits

Dr. William Coffie Slide 14

Accumulating/ gathering of actual cost to be assigned to completed jobs

Dr. William Coffie Slide 15

• Contains detailed entries of cost elements relating to the job

Dr. William Coffie Slide 16

Job Number A - 143 Date Initiated 3-4-05

Direct Materials Direct Labor Manufacturing Overhead

Cost Summary Units Shipped

Dr. William Coffie Slide 17

Purchase of raw material

• Dr Materials/ stores control account

Materials issued to production

• Dr Work –in –progress (direct material issued

Labour utilized for production

• Dr Work –in –progress a/c (with direct labour)

Expenses incurred during production

• Dr Work –in –progress a/c (with direct expenses incurred)

Production overheads absorbed

• Dr Work –in –progress a/c

Finished goods transferred

• Dr Finished goods control a/c

Dr. William Coffie Slide 21

Cost of goods sold

• Dr cost of sales a/c

Non- production overhead

• Dr Cash/ Trade receivables account