Job, Process & Standard
Costs-5
Various types of costing methods
Are used in determining unit costs
Copyright H.M. Van Bemmelen
2005
Accrual vs Cash
• In a cash based system income
statements are also the cash flow
statements
• In an accrual system the cash flow differs
from the income statement by the delays
of balance sheet transactions
– Receivables vs Sales and Payables vs
Purchases
– Inventory builds
Copyright H.M. Van Bemmelen
2005
Inventory Transactions
• Goods and materials ordered or partially manufactured but not sold
are posted to several categories of inventory
• Cost of materials arrivals (when recognized) are posted (debited) to
‘raw materials’ inventory
• Once conversion processes are started, some of the materials are
required and relieved (credited) but reposted (debited) to ‘work in
progress’ inventory
• The completed the units are transferred (debited) to a ‘cost of
manufactured goods’ inventory. The equivalent amount of the work
in progress is credited
• The cost of manufactured goods is added debited to the already
present finished goods
• As finished good are sold, the cost of goods sold account is
updated at the time as the sales account. The difference between
cost of goods sold and sales are the other expense items such as
marketing and the profit or net income after taxes.
Copyright H.M. Van Bemmelen
2005
Actual costs vs Equivalent unit
costs
• In actual costs the cost build up is determined
from actual cost measurements
– Frequently used where each job is somewhat unique
• In many situations where there are multiple
similar units the costs are based on equivalent
units
– Averaged units
– FIFO (First in First out) units
– Standard Costs
– Hybrid systems
Copyright H.M. Van Bemmelen
2005
Job Costing
• In job costing the costs are accumulated
by specific jobs
• These may be accumulated by stage of
production as different operations or
departments become involved.
• Both direct and indirect costs are assigned
to the product on a job by job basis
• Used most frequently where each job is
likely to be unique
Copyright H.M. Van Bemmelen
2005
Variable & Absorption Costs
• In variable type costing all variable costs are
included in inventoriable costs. Fixed costs are
excluded.
– Fixed costs are treated as an expense
• In absorption type costing (used in standard cost
systems) both variable and fixed costs are
included
– Fixed costs are treated as inventoriable costs
– The differences between the actual incurred costs
and the inventoriable (standard) is treated as a period
expense (other manufacturing costs)
Copyright H.M. Van Bemmelen
2005
Standard Costs
• Each equivalent unit is assigned a standard labor,
material & overhead cost
• It is a widely used costing system which allows for very
good analyses methods
• During the accounting period variances between actual
and standard can be measured
– Material variances
– Cost price variances
– Labor efficiency variances
• Periodically management must review/change the
standards
• The standard costs are including fixed overhead
inventoriable. The rest is usually expensed as a period
cost.
Copyright H.M. Van Bemmelen
2005
Variable costs
• In variable costs, fixed overhead is not
considered to be inventoriable to work in
progress or cost of goods sold
• This results in a different cost assignment
picture than in standard costs
• Most companies use standard costs
Copyright H.M. Van Bemmelen
2005
FIFO & LIFO
• FIFO (First in ,First out) means earlier cost
units come out first
– Hence if the earlier units had higher material
costs, the result would be that the first units to
be sold had a higher cost
– This can have tax advantages
• LIFO (Last in, First out) Has the opposite
effect
– The government is reluctant to let you change
from one to another.
Copyright H.M. Van Bemmelen
2005
Variable cost example
• Revenues $10 X 600 units $6000
• Variable costs
– Start inventory $1000
– Variable costs $20 X 80 units $1600
– Cost of goods for sale $1600
– End inventory $20 X 20 units ($400) $ 600
– Variable cost of goods sold $1200
– Marketing Costs $19X 60 units $(1140)
– Total Variable costs $2340
• Fixed Costs
– Fixed mfg costs $1200
– Fixed marketing Costs $1080
– Total Fixed costs $2280
• Operating Income $1380
Copyright H.M. Van Bemmelen
2005
Absorption Cost example
• Revenues $10 X 600 $6000
• Cost of goods Sold
– Start Inventory $1000
– Variable costs $20 X 80 units $1600
– Fixed mfg Costs $15 X 80 units $1200
– Cost of Goods $2800
– End inventory ($20+$15)X20 units ($700) $ 300
– Cost of goods sold $2100
– Gross margin $3900
• Operating Costs
– Variable marketing costs $1140
– Fixed marketing costs $1080
– Total operating costs $ 2220
• Operating Income $1680
Copyright H.M. Van Bemmelen
2005
Absorption
• The standard cost applied during an
accounting period is the absorbed cost
• The difference between actual cost and
the applied cost is identified as either
under absorbed or over absorbed.
• It is also possible to budget for planned
under or over absorption and then identify
the actual variances
Copyright H.M. Van Bemmelen
2005
Indirect & Overhead costs
• In addition to material and labor, the organization
experiences other costs
– Variable with quantities
– Non variable for a time period
• These costs can be associated with Cost drivers (single
base or multiple base)
– From service departments
– From equipment required, etc
– Even joint costs
• There are various ways to identify these through
analyses methods including occasional regression
analyses techniques
• Once allocated , they can assist in measuring
effectiveness of various operations
Copyright H.M. Van Bemmelen
2005
Process Costing
• This is used in situations where identical
units (equivalent units of production) are
made during the accounting period
– Chemical manufacturing
– Aspects of the semi conductor industry
• Costs are accumulated by production
processes instead of by jobs
• Standard cost methods are often used
here as well.
Copyright H.M. Van Bemmelen
2005
Just in Time
• This is a methodology to order from
suppliers at the time supply runs low
rather than by larger (and lower cost )
batches
• The advantage is that the lower inventory
costs often more than off set the unit price
differential
Copyright H.M. Van Bemmelen
2005
Other management issues
• Inventory problems are often rampant
– Purchasing contracts for large quantities for
items which have not yet been received often
do not show up in the financials
– Management can play games with quantities
of sales units reported which do not reflect
actual inventories
• In mergers and acquisitions inventory due
diligence is a must.
Copyright H.M. Van Bemmelen
2005