WHAT IS COST ACCOUNTING

Transcription

1 COST ACCOUNTING

2 WHAT IS COST ACCOUNTING This is to look at the way that a business will put it's job costings together. A cost object can be defined as anything in a business that generates costs

3 DIRECT VS INDIRECT COSTS A direct cost can be linked to a particular product or cost object. An example of this would be the materials used to make a particular product. An indirect cost generally has a more wide scope across a business and can't be easily linked to one product. An example of this would be a factory supervisor who oversees the production of a number of products.

4 PRODUCT VS PERIOD COSTS Product costs deal with the manufacture or purchase of a particular product while period costs can't be allocated to a single product, similar to direct vs indirect costs. Product costs can be broken up into 3 different categories which are direct material, direct labour and factory overheads

5 DIRECT MATERIALS Examples of direct material costs could be as follows: Wood Metal Materials such as cloth for fashion or bricks for bricklaying

6 DIRECT LABOUR This is the cost of the wages of the employees who either manufacture the product or provide the service to customers

7 FACTORY OVERHEADS Factory overhead is all other factory costs and can include some of the following: Rent Electricity Depreciation Repairs

8 RELEVANT COSTS These are future costs linked to a particular project

9 Sunk costs are those which have occurred in the past and will not be changed in the future regardless of whether the project goes ahead or not. SUNK COSTS

10 JOB COSTING Job costings are done by businesses that manufacture small identical types of products. It can also be used by businesses that provide services as well

11 EXAMPLE 1 Albany Bibs and Bobs have decided to make clothes for young babies. They have signed a new contract with a major retailer for their clothes and need to calculate the cost price of the clothes. The direct material to make the clothes is $7.50 The direct labour paid to make the clothes is $ The business has estimated that its factory overheads for the next 12 months will be $15,000. The business believes that it will have 6,000 direct labour hours over the time period and aims to have a profit margin of 30%.

12 EXAMPLE 1 SOLUTION Calculating Overheads Cost Driver Figures

13 EXAMPLE 1 SOLUTION Calculating Overheads 15,000 6,000 $2.50 Cost Driver Figures Direct Materials $7.50 Direct Labour $16 Factory Overheads $2.50 Cost $26.00 Profit Margin $7.80 Final Cost $33.80

14 PRACTICE QUESTION 1 Albany Bibs and Bobs have decided to make hats for young teenagers. They have signed a new contract with a major retailer for their hats and need to calculate the cost price of the clothes. The direct material to make the clothes is $12.00 The direct labour paid to make the clothes is $9.00. The business has estimated that its factory overheads for the next 12 months will be $12,000. The business believes that it will have 4,000 direct labour hours over the time period and aims to have a profit margin of 30%.

15 PRACTICE QUESTION 1 SOLUTION Calculating Overheads 12,000 4,000 $3.00 Cost Driver Figures Direct Materials $12.00 Direct Labour $9.00 Factory Overheads $3.00 Cost $24.00 Profit Margin $7.20 Final Cost $31.20

16 DEPARTMENTAL OVERHEADS There are times when a job has to be allocated to a number of departments depending on the type of job that needs to be completed. If this is the case, then the overheads will be allocated to each department separately to ensure that the costs are allocated accurately and the business doesn t lose money. They can be allocated via labour hours or machine hours.

17 DEPT. OVERHEAD EXAMPLE Mt Barker Surfboards make custom surfboards for clients all over the world. Each client can custom make their board using their own design. The materials required to make a standard board cost $80 and the labour costs to make the standard board amounts to 5 hours of shaping at $60 per hour per board. Mt Barker Surfboards has given the following information to calculate its overheads for a standard board: Item Design Shaping Estimated Overheads for each area 36,000 52,000 Estimated Direct Labour Hours 1,440 2,600 Estimated Direct Machine Hours 2,000 1,625 The boards require 3 hours of design work using labour hours and the boards are calculated using 5 machine hours

18 DEPT. OVERHEAD SOLUTION Design Overheads 36,000 $25 x 3 hours = $75 1,440 52,000 1,625 Shaping Overheads $32 x 5 hours = $160 Overall Cost Direct Labour $300 Direct Materials $80 Design Overheads $75 Shaping Overheads $160 Total Cost $615

19 PRACTICE EXAMPLE 2 Geraldton Surfboards make custom skateboards for clients all over the world. Each client can custom make their board using their own design. The materials required to make a standard board cost $50 and the labour costs to make the standard board amounts to 2 hours of shaping at $80 per hour per board. Geraldton Surfboards has given the following information to calculate its overheads for a standard board: Item Design Shaping Estimated Overheads for each area 17,920 18,000 Estimated Direct Labour Hours Estimated Direct Machine Hours 2,000 1,625 The boards require 3 hours of design work using labour hours and the boards shaping are calculated using 4 machine hours

20 PRACTICE EXAMPLE 2 SOLUTION 17, ,000 1,600 Design Overheads $32 Shaping Overheads $11.08 Overall Cost Direct Labour $50 Direct Materials $80 x 2 = $160 Design Overheads $32 x 3 = $96 Shaping Overheads $11.08 x 4 = $44.32 Total Cost $350.32

21 SERVICE BUSINESS EXAMPLE Not every type of service business will use direct materials such as accountants but others will such as painters. Walpole Bookkeeping Services has just opened and has been asked to prepare a quote to maintain a businesses books for them over the next 6 months. It is estimated that it will take 8 hours each month to maintain the books. The business is looking to charge its clients $40 per hour, along with 20% profit and has the following overhead costs: Secretary Wages 40,000 Rent 12,000 Insurance 1,200 Advertising 2,400 Telephone 820 The business expects to have 1,820 direct labour hours this year. What is the monthly charge?

22 SERVICE BUSINESS SOLUTION Calculating Overheads Cost Driver Direct Labour Factory Overheads Cost Profit Margin Final Cost Figures

23 SERVICE BUSINESS SOLUTION Calculating Overheads 56,420 1,820 $31 Cost Driver Figures Direct Labour $320 Factory Overheads $248 Cost $568 Profit Margin $ Final Cost $681.60

24 PRACTICE EXAMPLE 3 Walpole Timber Supplies have started to polish timber floors to expand their business with a 20% profit margin and take 8 hours to finish the job. The business will have the following expenses directly related to the job: Glue and Oil $120 Direct Labour $300 Secretary Wages 20,000 Van Expenses 6,000 Insurance 500 Advertising 1,200 Telephone 1,500 The business expects to have 1,600 direct labour hours this year. What is the cost per job?

25 PRACTICE EXAMPLE 3 SOLUTION Calculating Overheads Cost Driver Direct Labour Direct Materials Factory Overheads Cost Profit Margin Final Cost Figures

26 PRACTICE EXAMPLE 3 SOLUTION Calculating Overheads 29,200 1,600 $18.25 Cost Driver Figures Direct Labour $300 Direct Materials $120 Factory Overheads $146 Cost $566 Profit Margin $ Final Cost $679.20

27 Example 4: Calculating a Job Cost COST ITEM Direct Materials: Spare Part A Spare Part B Spare Part C COST $50 $25 $10 Direct Labour - per hour $20 Overheads - per hour $12

28 Mr Maile brings in his motor vehicle for a repair and the following is recorded on his job card. Item Spare Part A 1 Spare Part B 2 Direct Labour Quantity 3 hours COST ITEM Direct Materials: Spare Part A Spare Part B Spare Part C COS T $50 $25 $10 Direct Labour - per hour $20 Overheads - per hour $12 Calculate the cost of the job if the markup on the total cost is 20%.

29 Item Quantity Spare Part A 1 Spare Part B 2 Direct Labour 3 hours COST ITEM Direct Materials: Spare Part A Spare Part B Spare Part C COST $50 $25 $10 Direct Labour - per hour $20 Overheads - per hour $12 ITEM CALCULATION TOTAL COST Spare Part A Spare Part B Direct Labour Overheads Total Cost

30 SO WHAT IS THE SELLING PRICE? ITEM CALCULATION TOTAL COST Spare Part A Spare Part B Direct Labour Overheads Cost Profit Margin Total Cost

31 Item Quantity Spare Part A 1 Spare Part B 2 Direct Labour 3 hours COST ITEM Direct Materials: Spare Part A Spare Part B Spare Part C COS T $50 $25 $10 Direct Labour - per hour $20 Overheads - per hour $12 ITEM CALCULATION TOTAL COST Spare Part A $50 50 Spare Part B $25 50 Direct Labour $20 60 Overheads $12 36 Total Cost $196

32 SO WHAT IS THE SELLING PRICE? ITEM CALCULATION TOTAL COST Spare Part A $50 50 Spare Part B $ Direct Labour $20 60 Overheads $12 36 Cost 196 Profit Margin Total Cost $235.20