Cost accounting Session 8

Learning objectives Know what is meant by a Cost Accounting Method/System Understand the two major categories of Cost Accounting Methods Specific order costing, and Continuous operation/process costing Know the characteristics of, and define, job costing, contract costing, batch costing and process costing

Know what is meant by a Cost Accounting Method/System Learning objective 1 Know what is meant by a Cost Accounting Method/System

Cost Accounting Method a system designed to suit: The way goods are processed or manufactured, or The way that services are provided. The methods relate to cost accumulation. Cost accumulation refers to the manner in which costs are collected and identified with specific customers, jobs, batches, orders, departments and processes. The company’s cost accumulation method, or methods are influenced by the type of production operation and the extent to which detailed cost accounting information is needed by management.

Principles Whatever method is used, it will employ basic cost accounting principles on - classification, - analysis, - allocation, and - apportionment.

Costing Operation Costing All costs - labour, materials & overheads are allocated or apportioned to a cost centre and then shared out over cost units produced. Specific Order Costing Materials & labour are directly charged to a cost unit Overheads are allocated or apportioned to a cost centre and then shared out over cost units.

Techniques Whatever cost accounting method is used, it can be combined with any of the following cost accounting techniques. Total Absorption Costing, Marginal Costing, Standard Costing, or Activity Based Costing.

Understand the two major categories of Cost Accounting Methods Learning objective 2 Understand the two major categories of Cost Accounting Methods

Cost Accounting Method Two broad categories Specific order costing The basic cost accounting method applicable where work consists of separately identifiable contracts, jobs or batches. Usually, the cost unit is the job or contract. Continuous operation/process costing Applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period, initially charged to the operation or process.

Specific Order Costing Sub-divisions are Job costing Contract costing Batch costing

Operation Costing Main sub-divisions are Process costing Including Joint product costing, and By-product costing Service/function costing

Learning objective 3 Know the characteristics of, and define, job costing, contract costing, batch costing and process costing

Job Costing Main purpose: establish profit or loss on each job, and A form of specific order costing in which costs are attributed to individual jobs. Main purpose: establish profit or loss on each job, and provide a valuation of WIP. Costs are accumulated by jobs, orders, contracts, or lots. The key is that the work is done to the customer's specifications. As a result, each job tends to be different.

Contract Costing Similar to job costing and is applied to work which is Undertaken to customer’s special requirements Relatively long duration. Site based, sometimes overseas. Frequently of a constructional nature. Characteristics Higher proportion of direct costs Low indirect costs Difficulties of cost control Surplus material

Contract Costing Contract Plant When plant is leased: Leasing charges are charged directly to the contract When plant is purchased. Two methods: Charge new plant at cost to the contract for which it was purchased. Where plant is moved from contract to contract or contract is relatively short, each contract is charged a daily or weekly rental. NOTE: ordinary running costs are charged direct to the contract.

Contract Costing Progress payments Client makes progress payment based on an architect’s certificate of work completed. Certificate shows value of work done at selling price. Certificate accompanies the invoice sent to the customer. Amount paid is normally the certified value less a % retention released when contract is fully completed and accepted by the customer. Accounting entries when payment is received are: DR Bank A/C CR Client A/C

Batch Costing Form of costing which applies where a quantity of identical articles are manufactured as a batch. The batch is treated as a job during manufacture On completion, cost per unit can be calculated. Total batch cost No. of good units produced

Process Costing Is a form of operation costing used to allocate the total costs of production to homogenous units produced via a continuous process that usually involves multiple steps or departments.

Cost Accounting Methods End of session 8