Job costing and batch costing are both methods of costing. Both are used in specific order costing. But occupation bing determines the cost of one unit of production but in batch costing, we will be unable to cipher the cost of one unit. For illustration you see 12 biscuits in one battalion of biscuits. But this battalion is the batch of 12. We will cipher the cost of one battalion alternatively of one biscuit.
Using occupation bing
In a occupation bing system, costs may be accumulated either by occupation or by batch. For a typical occupation, direct stuff, labour, subcontract costs, equipment, and other direct costs are tracked at their existent values. These are accrued until the occupation or batch is completed. Overhead or “ burden ” may be applied either by utilizing a rate based on direct labour hours or by utilizing some other Activity Based Costing ( ABC ) cost driver. In either instance, one time overhead/burden is added, the entire cost for the occupation can be determined. If the comptroller is utilizing a general leger accounting system, which lacks true occupation bing functionality, the costs must be manually transferred out of Work in Process to Finished Goods ( Cost of Goods Sold for service industries ) . Of class, in the yearss of computerized occupation bing package, journaling costs manually is an disused procedure. Such hand-journaling is compulsory for companies that continue to utilize general accounting package to make occupation bing. Enlightened comptrollers are traveling frontward and utilizing occupation bing package, thereby bettering cost control, cut downing hazard, and increasing the opportunity of profitableness.
Using cost codifications in budgeting
In a true occupation cost accounting system, a Budget is set up in progress of the occupation. As existent costs are accrued, they are compared to budgeted costs, to find discrepancies for each stage of each occupation. Cost Codes are used for each stage, leting “ mini-budgets ” to be generated and tracked. In the building industry, the Construction Specifications Institute ( CSI ) has established an industry criterion Cost Coding system. Job bing system consists of assorted cost driver that drives occupation cost, moreover it
An advertisement run for Pepsi is likely to be really specific to that single client. Job bing enables all the specific facets of each occupation to be identified. In contrast, the processing of look intoing history backdowns is similar for many clients. Here, procedure costing can be used to calculate the cost of each look intoing history backdown.
The seven stairss in occupation costing are:
1. ) Identify the occupation that is the chosen cost object,
2. ) Identify the direct costs of the occupation,
3. ) Select the costallocation bases to utilize for apportioning indirect costs to the occupation,
4. ) Identify the indirect costs associated with each costallocation base,
5. ) Compute the rate per unit of each costallocation base used to apportion indirect costs to the occupation,
6. ) Compute the indirect costs allocated to the occupation, and
7. ) Compute the entire cost of the occupation by adding all direct and indirect costs assigned to the occupation.
Example
These illustrations will presume that operating expense is allocated on the footing of Direct Labor Hours. Direct Material is abbreviated DM, Direct Labor as DL, and Overhead as OH.
XYZ corporation industries aeroplanes. 1 order was completed ( 110 ) , 2 received farther work ( 111, 112 ) , and 1 new order was received ( 113 ) . Overhead is allocated at a rate of $ 100/DL Hour. All employees earn $ 20/hour. Get downing Work In Process Balances are as follows: 110, $ 25,000 ; 111, $ 10,000 ; 112, $ 12,000 ; 113 $ 0 ( New Order ) . Below are the sums of DM and DL used.
110 $ 2,000 DM, 25 DL hours. Therefore, $ 5,000 in new cost is added ( $ 2,000 DM, $ 500 DL, $ 2,500 OH ) . The occupation had a entire cost of $ 30,000. this sum is transferred out of Work in Process to Finished Goods or Cost of Goods Sold.
111 $ 3,000 DM, 30 DL hours. Therefore, $ 6,600 in new cost is added ( $ 3,000 DM, $ 600 DL, $ 3,000 OH ) . The occupation has a new entire cost of $ 16,600. This sum remains in Work in Process until completion.
112 $ 5,000 DM, 100 DL hours. Therefore, $ 17,000 in new cost is added ( $ 5,000 DM, $ 2,000 DL, $ 10,000 OH ) . The occupation has a new entire cost of $ 29,000. This sum remains in Work in Process until completion.
113 $ 1,000 DM, 10 DL hours. Therefore, $ 2,200 in new cost is added ( $ 1,000 DM, $ 200 DL, $ 1000 OH ) . The occupation has a new entire cost of $ 2,200. This sum remains in Work in Process until completion.
Caution: Remember, operating expense is allocated on the footing of DL hours. While in this instance, apportioning operating expense on the footing of DL cost ( $ 5 of operating expense for every $ 1 DL cost ) would bring forth the same consequence, this may non ever be the instance. Since rates are developed based on a budget, if employees are really paid a different rate from the budgeted rate, apportioning at a $ 5 to $ 1 ratio would bring forth a different cost from the stated $ 100/DL hr allotment. Companies use somewhat different overhead allotment methods.
Procedure Costing:
Procedure costing is an accounting methodological analysis that hints and accumulates direct costs, and allocates indirect costs of a fabrication procedure. Costss are assigned to merchandises, normally in a big batch, which might include an full month ‘s production. Finally, costs have to be allocated to single units of merchandise. It assigns mean costs to each unit, and is the opposite extreme of Job bing which attempts to mensurate single costs of production of each unit. Procedure costing is normally a important chapter.
The importance of procedure costing
Costing is an of import procedure that many companies engage in to maintain path of where their money is being spent in the production and distribution procedures. Understanding these costs is the first measure in being able to command them. It is really of import that a company chooses the appropriate type of bing system for their merchandise type and industry. One type of bing system that is used in certain industries is process bing that varies from other types of bing ( such as occupation bing ) in some ways. In Process bing unit costs are more like norms, the process-costing system requires less bookkeeping than does a job-order costing system. So, a batch of companies prefer to utilize process-costing system.
Reasons for usage
Companies need to apportion entire merchandise costs to units of merchandise for the undermentioned grounds:
A company may fabricate 1000s or 1000000s of units of merchandise in a given period of clip.
Merchandises are manufactured in big measures, but merchandises may be sold in little measures, sometimes one at a clip ( cars, loaves of staff of life ) , a twelve or two at a clip ( eggs, cookies ) , etc.
Merchandise costs must be transferred from Finished Goods to Cost of Goods Sold as gross revenues are made. This requires a right and accurate accounting of merchandise costs per unit, to hold a proper matching of merchandise costs against related gross revenues gross.
Directors need to keep cost control over the fabrication procedure. Procedure bing provides directors with feedback that can be used to compare similar merchandise costs from one month to the following, maintaining costs in line with jutting fabricating budgets.
A fraction-of-a-cent cost alteration can stand for a big dollar alteration in overall profitableness, when selling 1000000s of units of merchandise a month. Directors must carefully watch per unit costs on a day-to-day footing through the production procedure, while at the same clip covering with stuffs and end product in immense measures.
Materials portion manner through a procedure ( e.g. chemicals ) might necessitate to be given a value, procedure costing allows for this. By finding what cost the portion processed stuff has incurred such as labour or overhead an “ tantamount unit ” relation to the value of a finished procedure can be calculated.
Procedure cost processs
There are four basic stairss in accounting for Process cost:
Sum up the flow of physical units of end product.
Compute end product in footings of tantamount units.
Summarize entire costs to account for and Compute tantamount unit costs.
Assign entire costs to units completed and to units in stoping work in process stock list.
Job bing vs. procedure bing
Job costing ( known by some as occupation order bing ) is cardinal to managerial accounting. It differs from Process bing in that the flow of costs is tracked by occupation or batch alternatively of by procedure.
The differentiation between occupation bing and procedure costing flexible joints on the nature of the merchandise and, hence, on the type of production procedure:
Procedure costing is used when the merchandises are more homogenous in nature. Conversely, occupation bing systems assign costs to distinct production occupations that are significantly different. An mean cost per unit of merchandise is so calculated for each occupation.
Procedure bing systems assign costs to one or more production procedures. Because all units are indistinguishable or really similar, mean costs for each unit of merchandise are calculated by spliting the procedure costs by the figure of units produced.
Many concerns produce merchandises with some alone characteristics and some common procedures. These concerns use bing systems that have both occupation and procedure costing characteristics
A Detailed Worked Example
The undermentioned illustration illustrates how to near a Process Costing inquiry, paying peculiar attending to presentation and computation. Campaigners should ever endeavor to show their solutions as neatly and methodically as possible, non merely to assist the marker follow the computations, but besides to let themselves to look into that they have non missed out a critical measure. The information for the inquiry is shown in Figure 1.
Figure 1
Jammy Ltd is a fabricating administration with two procedures. Information for the period ended 31 July 1999 is as follows:
Particulars
PROCESS1
PROCESS2
Opeing work in advancement
Costss of periods:
Material 1000kg costing
labor
operating expenses
ransferred to treat bing 2
transferred to finished goods
shuting work in advancement
Nothing
?25650
?12750
?5950
700kg
— — –
200kg
200 kilogram
nothing
?6950
?3475
— — –
800kg
150kg
Normal losingss are expected to be 5 % of input for each procedure. Losses in Process 1 have no bit value, whilst losingss in Process 2 can be sold for ?10 per kilogram. Losingss are deemed to originate at the terminal of the procedure.
Opening WIP is 60 % complete with respect to Labour and Overheads. Closing WIP in Process 1 is 100 % complete with respect to Material and 50 % complete for Labour and Overheads. Closing WIP in Process 2 is 50 % complete with respect to Labour and Overheads.Prepare the Process Accounts for each procedure.
Solution: Measure 1
The best manner to near this inquiry is to concentrate on Process 1 foremost, as Process 2 can non be completed until we know the value of the points transferred into this procedure from Process 1. The first measure is to pull up a procedure history in typical ‘T ‘ history manner. Each side of the history should hold a column for ‘Units ‘ and a column for ‘? ‘ . You should so come in all the information given in the inquiry. This will do it clear as to which points have to be calculated – these points are numbered in this illustration for exemplifying intents.
Procedure 1 History
Particulars
Unit of measurements
?
Particulars
Unit of measurements
?
CURRENT Cost
Material
Labor
Operating expense
1000
— — — –
— — — –
1000
25650
12750
5950
44350
TRANSFFERD TO PROCESS 2
NORMAL LOSS
Shutting WIP
ABNORMAL LOSS
700
50
200
50
1000
( 1 )
Nothing
( 2 )
( 3 )
( 4 )
The Normal Loss figure is 5 % of the 1000kg input. No cost is assigned to Normal Loss as the cost is absorbed into the “ good ” units. Abnormal Loss is the difference between the entire units on the debit side and the entire units on the recognition side.
Measure 2
The following measure is to pull up an Equivalent Unit of measurements Statement to find the cost per unit of the tantamount “ whole ” units produced.
Equivalent Unit of measurements Statement
Particulars
Material
Labor
Operating expense
Unit of measurements TRANSFERRED TO PROCESS 2
ABNORMAL LOSS
Shutting WIP
Time periods cost ( B )
Cost per unit ( B ) / ( a )
700
50
200
950
?25650
?27
700
50
100
850
?12750
?15
700
50
100
850
?5950
?7
Closing WIP is 50 % complete for Labour and Overheads, which is tantamount to 200 tens 50 % = 100 “ complete ” units.
Measure 3
The information calculated in the Equivalent Units Statement is so used to build a Cost Allocation Statement. The layout of this statement is precisely the same as the Equivalent Units Statement.
Particular
Material
Labor
Operating expense
Sum
Unit of measurements TRANSFERRED TO PROCESS 2
ABNORMAL LOSS
Shutting WIP
18900
1350
5400
25650
10500
750
1500
12750
4900
750
700
5950
34300 ( 1 )
2450 ( 3 )
7600 ( 2 )
44350
Each entry in the above statement is calculated utilizing the cost per unit calculated in the Equivalent Units Statement and the relevant tantamount units. For illustration, the Material Cost of Units transferred to Process 2 ( ?18,900 ) is calculated by multiplying the Material Unit Cost ( ?27 ) by the tantamount units transferred to Process 2 in regard of Material ( 700 ) . This gives us ?18,900. The Labour Cost of Abnormal Loss is calculated by multiplying the Labour Unit Cost ( ?15 ) by the tantamount units of Abnormal Loss in regard of Labour ( 50 ) . This gives us ?750, and so on.
You will detect that the sum of each column ( Material, Labour and Overhead ) is the same as the figures looking in the Process Account for each of these costs.
Measure 4
The concluding measure is to finish the Process Account by utilizing the figures calculated in the ‘Total ‘ column of the Cost Allocation Statement. Those figures labelled ( 1 ) – ( 3 ) are the figures to be slotted into the infinites likewise numbered in the Process Account in Step 1. Your concluding Procedure Account should now look therefore:
Procedure 1 History
Particulars
Unit of measurements
?
Particulars
Unit of measurements
?
CURRENT Cost
Material
Labor
Operating expense
1000
— — — –
— — — –
1000
25650
12750
5950
44350
TRANSFFERD TO PROCESS 2
NORMAL LOSS
Shutting WIP
ABNORMAL LOSS
700
50
200
50
1000
34300
Nothing
7600
2450
44350
Measure 5
We are now in the place to travel through the whole “ procedure ” once more for Process 2. The chief differences between the two procedures are the being of Opening WIP and scrap value of losingss in Process 2. Explanations for the figures in Process 2 are merely given where the constructs have non been explained already in Process 1.
Construct Process Account:
Procedure 2 History
Particulars
Unit of measurements
?
Particulars
Unit of measurements
?
Opening WIP
Transferred From Process 1
Labor
Operating expense
300
700
— — — –
— — — –
1000
13000
34300
6950
3475
57725
Transferred To Finished Goods
NORMAL LOSS
Shutting WIP
800
50
150
1000
( 4 )
500
( 5 )
( 6 )
Losingss can be sold at ?10 per kilogram, hence Normal Loss is assigned a pecuniary value of 50 ten ?10 = ?500.
Measure 6
Construct Equivalent Units Statement:
Equivalent Unit of measurements Statement
Particulars
Transferred Cost From Process 1
Labor
Operating expense
Opening WIP
UNITS STARTED & A ; COMPLETED
Shutting WIP
Entire EQUIVALENT UNIT
Time periods cost ( B )
Cost per unit ( B ) / ( a )
Nothing
500
150
650
?33800
?50
120
500
75
695
?6950
?10
120
500
75
695
?3475
?5
Opening WIP is already 60 % complete with respect to Labour and Overheads, hence merely 40 % remains to be completed in this period. Equivalent units completed in this period are hence 300 ten 40 % = 120kg.
Opening WIP in regard of “ Transferred Costs from Process 1 ” are ever NIL as they were transferred in a old period and hence do non organize portion of the cost of the units transferred from Process 1 in this period.
Unit of measurements started and completed during the period is the difference between the units transferred to finished goods ( shown in the Process Account as 800 ) and the units already started at the beginning of the period ( Opening WIP of 300 ) .
The period cost given for “ Transferred Costs from Process 1 ” has been calculated by subtracting the bit value of Normal Loss ( ?500 ) from the sum transferred cost ( ?34,300 ) .
Measure 7
Concept Cost Allocation Statement:
Cost Allocation Statement
Particular
Transferrd Cost From Process 1
Labor
Operating expense
Sum
Opening WIP
UNIT STARTED & A ; COMPLETED
Shutting WIP
Nothing
26000
7800
33800
1200
5000
750
6950
600
2500
375
3475
1800 ( * )
33500 ( * )
8925 ( 5 )
44225
( * ) The computation of the cost of units transferred to Finished Goods is somewhat different when there is Opening WIP. The cost of units transferred includes 3 elements: the cost of Opening WIP brought frontward from the old period ( ?13,000 ) , the cost to finish the Opening WIP in this period ( ?1,800 ) and the cost of the units started and completed in this period ( ?33,500 ) . This gives us a sum of ?48300 to be slotted into the Process Account.
Measure 8
Complete the Procedure History:
Procedure 2 History
Particulars
Unit of measurements
?
Particulars
Unit of measurements
?
Opening WIP
Transferred From Process 1
Labor
Operating expense
300
700
— — — –
— — — –
1000
13000
34300
6950
3475
57725
Transferred To Finished Goods
NORMAL LOSS
Shutting WIP
800
50
150
1000
48300
500
8925
57725
