The Costing Systems

This article will not include pictures of cats and dogs. Perhaps in the near future, depending on the mood, I might include one. But right now, I’m fighting that urge which is I think more difficult than reviewing the prerequisites of this material and introducing you to the two kinds of costing systems.

Grab a coffee and read on.

Cost Accounting is an area in accounting concerned in cost determination, analysis, and control for the purpose of financial reporting and decision making. This area of accounting supplements financial accounting by providing details of cost figures found in generic financial statements (statements that are prepared by using general standards, i.e. GAAP). It also enables management accounting is processing (cost) data which will be used in analysis and decision making. In short, we need cost accounting for financial reporting and decision making.

Cost system- also known as the perpetual approach, accounts for the flow of costs in detail with the intention of providing unit costs and inventory cost for periodic reporting. Costs are accumulated by products and batches, or by processes and departments.

(Review periodic vs perpetual)

Know the following: (these are easy checklist of topics for you to read. It would improve your understanding in the succeeding topics if you have an idea beforehand. I would create a different entry for these but in the meantime, please read them on your own.

1.      Chart of accounts used by manufacturing firms

2.       Controlling accounts vs subsidiary accounts

3.       Stores accounts and store ledger cards

4.       Work in process account and the job cost sheet (for job order costing) and cost of production report (for process costing)

5.       Finished goods and the finished goods ledger card

6.       Other controlling accounts such as Factory overhead control, Selling Expense control, General and Administrative expense control, etc.. ( these are supported by subsidiary ledgers and may be used for both periodic and perpetual inventory systems because they do not affect value of your inventories.

7.       How (actual/applied) factory overhead is charged to production.

8.       How to dispose over/underapplied factory overhead

9.       The factory ledger and the general ledger ( main office/ factory reciprocal accounts.)

10.   Transfer voucher (inter-office dr/cr memo)

11.   Review your cheat sheets from the Non-cost System

Job Order Costing and Process Costing

Cost accumulation and reporting may be done by products or batches ( using the job order costing), or by departments (using the process costing system). Let’s have a quick comparison of these two costing system.

	Job Order costing	Process costing
As to the nature of products	Products or batches can be easily identified and differentiated from each other (heterogeneous). Each product has its own unique features due to different processes involved.	Products or batches are not distinguishable from each other. (homogeneous) Products go through the same continuous process resulting to similar characteristics.
Examples:	Customized shoes, made to order boats, houses, fabricated factory machines,	Beverages, cosmetic products, canned goods, refined sweeteners.
Cost accumulation and reporting	By Job orders	By departments or processes
When is unit cost computed	Upon completion	At the end of the accounting/cost period (usually at the end of the month)
Computation of unit cost	Production cost per job Number of units	Departmental cost Equivalent units of production
Subsidiary record for work in process	Job order cost sheet	Cost of production report
PRIMARY OBJECTIVE?	Compute the cost per job	Compute the costs charged to each production process

Below is a summary of the Job order cost flow, please take note of the key entries. Understanding the cost flows together with these primary entries would facilitate future discussion. Study them, memorize them, visualize them, put them in your index cards, have them tattooed at the back of your hands, put them at the cover of your economics and psychology notebooks… I know you get the point.

And below is the Process costing cost flow

In addition, below is an example of a job order cost sheet… this will be used in job order costing.

And below is just a sample portion of Cost of Production Report, feel free to google a better example and insert it here…  coz right now I am fighting the urge to insert a picture of my cat playing with my kids toys… (I will update this post as soon as I can)

I hope this short cheat sheet helps. Leave a comment and let me know what do you want me to add in the discussion.

Happy reading!

  

Introduction to Basic Cost Flows: The Non Cost System

The Non Cost System

Its past 12 am. Still hungry. My coffee is cold, and outside... is colder. Salamat kay Fiji at mainit ang mga paa ko (Fiji is the Alpha cat in our house). I'm half awake and would like to sleep asap but I'm afraid i might snore myself to death.

AND just to point out that this is not a serious page, here is my kid hugging a tree...

  

Im not really sure why its called a Non cost system when all the necessary costs are there, but...spare me, here we go.

Normally, when the management of a manufacturing firm wants to simplify the preparation of the year end financial statements, they may only be interested in the total production cost, the total cost of goods manufactured and the total cost of goods sold. At these times, the management may want to adopt the non-cost system. (Mejorada,2000)

Under this system, the flow of costs are not accounted for in detail and paperwork is minimal. The periodic inventory system is used to arrive at the ending balances of the inventories (raw materials, work in process, finished goods) so that the cost of goods manufactured and sold can be computed. Unit costs are usually computed by dividing the total cost of goods manufactured by the number of units produced.

In this system, there is poor control over costs and inventories. Pilferage and wastage may go undetected and will be absorbed by the cost of goods sold.

Before we begin, you should know the following:

1.       Types of inventories: Raw materials, Work in process, Finished goods

2.       Manufacturing costs: Direct materials, Direct labor, Factory overhead

3.       Items affecting raw materials inventory: Purchases, Freight-in, Purchase returns, allowances, and discounts, materials used/issued (direct materials)

4.       Items affecting work in process inventory: Direct materials, Direct labor, Factory overhead, cost of goods manufactured.

5.       Items in our finished goods: Cost of goods manufactured, cost of goods sold.

6.       What are net purchases, total materials available for use, total cost placed in process, total goods available for sale, prime cost, conversion cost, total manufacturing cost.

7.       Addendum: producing department, servicing department, payroll account, Factory overhead control account

IT STARTS IN THE STORE ROOM OF RAW MATERIALS

Normally, our operations would start from the purchase of raw materials which will go to our store room. The value of such will be increased by the amount of freight incurred and will be reduced by our purchase returns, allowances, and discounts. The net purchase will be computed as follows:

Purchases		P xxx
Add: Freight-in		Xxx
Gross Purchase		P xxx
Less: Purchase returns	P xxx
Purchase allowances	Xxx
Purchase discounts	Xxx	Xxx
Net Purchases		P xxx

               

The net purchase is the net increase in our inventory for the period.

Under the periodic inventory system, you can get the value of the beginning raw materials inventory in the ledger (or last year’s trial balance/Balance sheet) and the ending raw materials inventory during our inventory count. Now you can compute your direct materials (Raw Materials Used) as follows:

Net Purchases ( from above)	P  xxx
Add: Beginning Raw Materials Inventory	Xxx
Total Materials available for use	P  xxx
Less: Ending Raw Materials Inventory	xxx
Direct materials (Raw materials used)	P  xxx

 The Direct Material is the value of materials used in production. This amount represents how much materials were transferred from the storeroom going to our factory or production facility. (Others would prefer to use Direct Materials Used, but that would be redundant,would be redundantly redundant and redundant...20 jumping jacks naman dyan para magising ka!)

FROM STOREROOM TO FACTORY

To be transformed to its saleable state, the direct materials should be converted in the factory. In the process, we will be incurring Conversion cost (Direct labor and Factory Overhead). These costs when incurred and put together will give us the total manufacturing cost for the current period.

Direct Materials	P xxx
Direct Labor	Xxx
Factory Overhead	Xxx
Total Manufacturing cost	P  xxx

Now add this to your work in process beginning inventory ( that’s the amount of inventories you did not finish last period) and you will get the Total Cost Placed In Process. This is how much you can finish for the current period. From that amount, if you deduct your work in process ending inventory (from your inventory count though most of the time its just estimated, we”ll get back on that soon), you will arrive at the Cost of Goods Manufactured. This is the value of your completed goods for the current period, and now ready for sale.

Total Manufacturing cost	P xxx
Add: Beginning WIP Inventory	Xxx
Total cost placed in process	P Xxx
Less: Ending WIP Inventory	Xxx
Cost of Goods Manufactured	P  xxx

(as of this point, i would like to emphasize na ang hirap namang mag ingles, sana tinagalog ko nlang mula sa umpisa)

FROM FACTORY TO SALES ROOM

Once these goods are completed, they are now transferred to the sales room or to another room where finished goods are stored. In the same manner, they have to be reclassified from work in process to finished goods inventory. These inventories will be expensed at the time they are sold accounted under the Cost of Goods Sold, computed as follows:

Cost of Goods Manufactured	P xxx
Add: Beginning FG Inventory	Xxx
Total Goods Available for Sale	P Xxx
Less: Ending FG Inventory	Xxx
Cost of Goods Sold	P  xxx

  

Tadaaa! Congratulations! You’ve just finished the basic cost flow of manufacturing cost… But wait, there’s more! If that’s too long for you, I will provide below not 1, not 2…but 3 T-accounts which may serve as your cheat sheet….

(zoom in zoom in nlang pag masyadong maliit)P.S. pardon my grammar and spelling, they are everywhere,dont care..
P.S.S. Please leave your comments below so I could update/revise based on  my mood. Thanks.
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 (tho, a free cup of coffee would be great!)