1. 1 Costing Systems Design  Traditional systems of calculating costs-based on the production size –A process costing system (pl: kalkulacja procesowa) (ch.4) –A job order costing system (pl: kalkulacja zleceniowa) (ch.3)

2. 2 Calculation of product costs  The task of calculating product costs: –Valuing the goods produced or services rendered according to manufacturing costs  Calculating a unit cost in order to: –Allow for correct valuation of asset components e.g. inventory –To control the costs incurred –To determine profitability of individual products  Object of calculation : –Defining and presenting a product in a number from –Usually the manufacturing cost is assigned to appropriately chosen unit of a psychical good (e.g. a piece, ton, kilogram, m3)

3. 3 Calculation and organization of the manufacturing process  Manufacturing types: –Mass production  Homogenous goods are produced continuously –Series production  Homogenous goods are produced in batches –Unit production  Production of heterogeneous goods; manufacturing process can be repeated

4. 4 Traditional systems of calculating costs  A job-order costing –Used in enterprises producing heterogeneous products –Production in units or series –Production process and use of resources are defined separately for each good or series  A process costing –Used in manufacturing of homogenous products –Mass production  There is one type of goods produced  Different products are produced from the same raw materials using the same machines and technology

5. 5 Assumptions of job-order processing  Separately calculate the costs of each cost object (final product, e.g. single product, series)  For each cost object, a job cost sheet is opened, to gather costs  Direct costs are directly related to cost object and registered based on accounting documents  Indirect costs are allocated through an allocation process using a cost driver (pl: klucz rozliczeniowy) –Traditional methods of assigning costs assume that level of indirect (overhead) costs changes with changes in manufacturing quantity –Easiest way: allocate all indirect (overhead) costs using the same method –Another way: assign in direct costs to different departments

6. 6 Transfer of costs in job-order costing Direct raw materials Direct labor Energy Overhead costs Overhead labor Amortization Other department costs COST OBJECT department COST OBJECT department COST OBJECT product, order COST OBJECT product, order Relating costs directly Assigning overhead costs

7. 7 Calculating costs under job-order costing  Calculating direct raw materials –Documented e.g. in the computer system or materials requisition from, in which a type and quantity of materials drawn from a storeroom is specified along with an order (job) number –(e.g. see p. 72)  Calculating use of direct labor –Based on manual or computerized employee time ticket on which a value (an amount) of direct labor is recorded and charged to specific order (job) –(e.g. see p. 73)  Calculating indirect manufacturing costs –Costs of raw materials used with separate costs by type are assigned –Total of departmental costs over a given period is transferred to (using a cost driver) job cost sheet

8. 8 Cost drivers of indirect costs  Most common cost drivers: –Quantity or weight of produced goods –Direct labor hours (DHL) –Machine-hours (MH) –Quantity of hours (time) used by machines or equipment  Ratio for computing pre-determined overhead cost Ratio of indirect (overhead) costs (Estimated) total manufacturing indirect (overhead) costs (Estimated) total units in the base (cost driver) =  Indirect (overhead) costs assigned to a cost object Ratio of indirect costs = Indirect costs assigned to a cost object Quantity of cost driver used x

9. 9 Example of completed job cost sheet - See p.77

10. 10 Assumptions of process costing  The characteristic of process costing is a continuity of manufacturing process  The manufacturing process may go through one or more departments (parallel processing)  The cost is calculated per "manufactured unit" over a period of time  When assigning unit costs we consider: –Direct raw materials –Direct labor –Indirect manufacturing costs (overhead costs)

11. 11 Transfer of costs in process costing Direct materials Indirect labor Overhead costs COST OBJECT Finished goods COST OBJECT Finished goods Work-in-process Department A Work-in-process Department A Work-in-process Department B Work-in-process Department B

12. 12 A simple process costing  A simple process costing –Depends on dividing the costs over a given period by a quantity of equivalent units Unit manufacturing cost Manufacturing costs incurred in a given month Number of equivalent units = –It is used in an enterprises with mass production of homogenous products that equally uses raw materials of the enterprise  A process costing with ratios –It is used with heterogeneous production, when manufactured goods unevenly use raw materials –Requires use of ratios, which express a difference in costs among goods

13. 13 Example: A simple process costing - no inventory Production Report – DEPARTMENT AProduction of 100 units CalculationPeriod costsManufacturing Costs per unit Direct materials Direct labor Overhead manufacturing costs 2 000 700 1 100 20 7 11 3 80038 Costs transferred to Department B3 80038 Production Report – DEPARTMENT BProduction of 100 units CalculationPeriod costsManufacturing Costs per unit Direct materials Direct labor Overhead manufacturing costs 500 300 400 534534 Costs transferred from Department A3 80038 Wyroby gotowe przekazane do magazynuFinnished goods transferred to storeroom 5 00050

14. 14 Example: a simple process costing - parallel  Question: what quantity of incurred costs pertains to finished goods and what quantity to goods in process –One should calculate percentage progress of manufacturing process –Calculate quantity of goods in process in terms of finished goods –We get information about the quantity manufactured in a given period e.g. an equivalent amount of finished goods  Equivalent units –it's an equivalent amount of units, which could be manufactured in 100% with appropriate engagement of materials and capacity  Equivalent manufactured amount –It's an amount manufactured over a given period resulting from a work-in-process and finished goods

15. 15 Rules of preparing process costing with ratio  Determine the ratio for every good  Determine the number of "ratio units" as a multiple of physical units and applicable ratios  Determine the costs of manufacturing a ratio unit, which is calculated by dividing manufacturing costs by ratio units  Calculate unit manufacturing cost which is determined by multiplying unit ratio cost by its ratio

16. 16 Example: Process costing with ratio  Enterprise manufactures chocolate blocks (tables) of 100 g. and 150g. Average monthly manufacture amounts to 50000 tables of 100 g. and 20000 tables of 150 g.  Monthly manufacturing costs amount to 48000 zl and are as follows: –Raw materials30 000 zł –Manufacturing (work-in-process)18 000 zł  What is the cost of making chocolate? Cost object Physical units Ratio Number of unit ratios Cost of unit ratio Cost of the object Manufacturig costs 100 g50 0001,0 150 g20 0001,5 Total48 000

17. 17 Example: Process costing with ratios (1) - different ratios for calculating costs  Enterprise manufactures products A and B. Products differ in weigh and hours needed to produce them –One should determine ratios for direct materials and manufacturing costs  Assume that ratios and costs in a given period are as follows: direct raw materials manufacturing cost –Product A13 –Product B24 –Cost incurred in a given period 40 000 8 000  Calculation of equivalent units : –Product A:200 units @ 100% = 200 –Product B: 60 units @ 100% = 60 100 units @ 40% = 40

18. 18 Example: Process costing with ratios (2) - different ratios for calculating costs Cost object Equivalent units Ratio Number of unit ratios (col. 2 x 3) Cost of unit ratio* Unit cost (col. 3 x 5) Cost of equivalent unit (col. 2 x 6) 1234567 Direct materials Product A2001,0 200100 20 000 Product B1002,0 20010020020 000 Total-- 400100-40 000 Manufacturing costs Product A2003,0 6008244 800 Product B1004,0 4008323 200 Total--1 0008-8 000 *manufacturing costs/number of unit ratios

19. 19 Example: Process costing with ratios (3) - different ratios for calculating costs Product A: 200 units at 100%: 200 szt. x (100+24) = 24 800 Product B: 60 units at 100%: 60 szt. x (200+32) = 13 920 100 units at 40%: 40 szt. x (200+32) = 9 280 Total period costs: 48 000