Chapter 8 Costs Management

8.
1 Introduction
P3 – CHAPTER 8 1. The essential elements in control system:

1. The detailed operation planning;
PRODUCTION COSTS 2. The actual results in operation;
CONTROL & MANAGEMENT 3. The comparison between the actual results and planning;
4. The official rules for changing the operations if

neccessary.
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8.1 Introduction 8.1 Introduction

1. The essential elements in control system: 1. The essential elements in control system:
1. The detailed operation planning; 1. The detailed operation planning;
a. The policies and rules: b. The long-term planning (over 5 years):
+ The official documents should be published for guidance; + Cover all functions such as: marketing and sales;
+ The internal manual/instruction for quality and production, personnel, and finance;
operational issues; + Developed based on top managers’ decisions and

companies’ policies;
1. The detailed operation planning; 2. The realistic performance;
c. The mid & short-term planning (within 1 year): + The realistic performance should be updated & compared
+ Developed in certain periods for operations, based on with operation planning in the same parameters;
middle managers’ decisions (production manager);

3. The comparison and evaluation; 4. The adjustment: revise or update the remain plan
+ Comparing the updated performance with operation + Updating the remaining plan to meet original targets and
planning, evaluating the feasibility of remaining plan; budget of operation planning;
+ Based on the trend of updated performance, preparing for + Revising the remaining plan to meet the targets;
the adjustment of the remaining plan;
1. The essential elements in control system: 2. The production and labor control:
+ The requirements of control process: a. The advantages and necessaries of control process;
- Simplicity, effectiveness; flexibility; b. The implementation of control process in the system;
- Correct and updated information/data; c. The staffs training for operations;
- Should be focused on specific factors/parameters; d. The results evaluation with relevant compensation, and
- Should be planned and adjusted; payment

2. The production and labor control: 2. The production and labour control:
a. The advantages and necessaries of control process; b. The implementation of control process in the system;
- Confirming that control process is necessary! - Co-operating all staff is the key to have a suceessful
- Reminding and determining the human responsibility in control process.
control process,
- Difficult to convince the leaders for changing/updating

control process if the system still gets benefit.
2. The production and labour control: 2. The production and labor control:
c. The staff trainning for operations; d. The results evaluation with relevant compensation, and
- Trainning programs are very important to implement payment
control process. - The evaluating results and compensation for control staff
- Trainning programs should be maintained. should be repeated (in short to long-terms);
8.1 Introduction 8.2 Operational cost computing

2. The production and labour control: Operation unit cost determination
d. The unsuccessful causes in control process a. Materials and direct labour: based on bill of materials
- The operators: disqualified, mistakes in operations, (BOM) and involved workers.
- Operations data: input data (costs, standard time,

auditing data,…) are not correct.
8.2 Operation cost computing 8.2 Operational cost computing
b. Overhead costs for each item: overhead costs are based Example: A certain factory produces 2 types of item, the
on all kinds of item, then being allocated to each kind of allocation overhead cost is based on involved working hours.
item. The consideration factors for Overhead costs This month, the overhead cost is $ 20,000, the required
allocation are presented as follows: working hours for product A is 400 hours, and product B is
600 hours, determine the allocated overhead cost for each
- Number of involved staffs,
kind of item:
- Involved labour cost,
Product A: (400/1,000) x $20,000 = $8,000
- Involved working hours,
Product B: (600/1,000) x $20,000 = $12,000
- Raw materials for each item,
- Number of machine hours....
8.3 The simple method computing unit cost 8.3 The simple method computing unit cost
1. The weighted method: 1. The weighted method
Example: A certain factory produces 4 kinds of item: A, B,
This method is useful for items in the same group, that are C, and D. The total costs (materials, labour,…) are used for
compared amomg them to determine the weight for each all items. At the end of period, the report of total costs is
item, based on experiences or benefit contribution. 28,980,000 VNĐ. And total output volume as follows:
- item A: 2,000 units
- item B: 1,500 units
- item C: 1,000 units
- item D: 2,000 units
1. The weighted method 1. The weighted method
The confirmed weighted such as: (equivalent exchange): Solution: consider item A (weighted is 1.0) as a standard
item A = 1.0; item for equivalent exchange of all items B, C and D to
item B = 1.2; standard items.
item C = 1.5; - item A: 2,000 x 1.0 = 2,000 units
item D = 0.8; - item B: 1,500 x 1.2 = 1,800 units
- item C: 1,000 x 1.5 = 1,500 units
Calculate the selling price for all items?
- item D: 2,000 x 0.8 = 1,600 units
Total 6,900 units
1. The weighted method 1. The weighted method
Selling price for unit of standard item (item A): Total selling price as follow:
28,980,000 / 6,900 = 4,200 VNĐ. - item A: 4,200 x 2,000 = 8,400,000 VNĐ.
item B: 4,200 x 1,2 = 5,040 VNĐ. - item B: 5,040 x 1,500 = 7,560,000 VNĐ.
item C: 4,200 x 1,5 = 6,300 VNĐ. - item C: 6,300 x 1,000 = 6,300,000 VNĐ.
item D: 4,200 x 0,8 = 3,360 VNĐ. - item D: 3,360 x 2,000 = 6,720,000 VNĐ.
Total: 28,980,000 VNĐ.
2. The ratio method 2. The ratio method
- Necessary for items without the same group (cannot Example: A certain factory produces 3 kinds of item A, B,
determine weight), and C, planning selling price for each item as follow:
- Based on the planning costs and the actual costs, to - item A: 2,250 VNĐ/unit
determine the ratio to compute actual selling price for each
item. - item B: 4,500 VNĐ/unit
- item C: 1,500 VNĐ/unit
In this certain period the total actual costs to produce all Solution: Total planning prices:
items is 8,640,000 VNĐ and the total output as follow: Item A: 2,250 x 1,200 = 2,700,000 VNĐ.
- item A: 1,200 units Item B: 4,500 x 900 = 4,050,000 VNĐ.
- item B: 900 units Item C: 1,500 x 1,500 = 2,250,000 VNĐ.
- item C: 1,500 units Total: 9,000,000 VNĐ.
Computing the actual selling price for each item. The ratio is determined such as: (actual vs planning)
8,640,000 / 9,000,000 x 100% = 96%
The actual selling price for each unit: Total selling price for each kind of item
item A: 2,250 x 96% = 2,160 VNĐ. Item A: 2,160 x 1,200 = 2,592,000 VNĐ.
item B: 4,500 x 96% = 4,320 VNĐ. Item B: 4,320 x 900 = 3,888,000 VNĐ.
item C: 1,500 x 96% = 1,440 VNĐ. Item C: 1,440 x 1,500 = 2,160,000 VNĐ.
Total: 8,640,000 VNĐ.
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8.4 Work-in-process cost computing 8.4 Work-in-process cost computing

Total operation costs include WIP costs and item costs, then 1. Materials cost consideration
it should be appropriately allocated.
Based on materials used for making this WIP.
If the costs for WIP is reduced, then the selling prices for
items is increased, the benefit is low. All other costs (labour cost, overhead cost) are allocated to
items.
If the costs for WIP is increased, then the selling prices for
items is decreased, the benefit is high.
Example: in a certain period, the total costs to produce item Solution
A is 7,400,000 VNĐ, includes:
Material cost: 5,000,000 VNĐ Materials cost for each unit (item + WIP)
Labour cost: 1,600,000 VNĐ
5, 000, 000
Overhead cost: 800,000 VNĐ = 2,500 VND
(1, 600 + 400)
The end of this period, the operational report is that the
factory produced 1,600 items and 400 WIP. Total value of WIP: 2,500x400=1,000,000 VNĐ
Computing the value of WIP and value of items Total value of items:
7,400,000 – 1,000,000 = 6,400,000 VNĐ

Solution: 2. Percentage of completion consideration:
Selling price of item: The end of opertional period, determine total WIP and
confirm the percentage of completion (compare with final
6, 400, 000 items);
= 4, 000 VND
1, 600  Tranfer WIP to final items for allocating overhead and
labor costs (but Materials is fullly allcated, 100% for WIP)
Example 1: In 1/2015, a certain factory produced the items Solution:
A, and actual operation cost 10,600,000 VNĐ includes: Materials cost for each unit (item + WIP)
Materials cost: 6,400,000 VNĐ
6, 400, 000
Labour cost: 2,800,000 VNĐ = 4, 000 VND
(1, 200 + 400)
Overhead cost: 1,400,000 VNĐ
Tranfer 400 WIP (completion rate 50%) to final items:
The end of period, the total output 1,200 items and 400 WIP
400 units x 50% = 200 units
with percentage of comletion is 50%. Computing value of
WIP and the value of items
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Solution: Solution:
Labour cost for each unit:
The actual selling price for each item:
2,800, 000
= 2, 000 VND 4,000 VNĐ + 2,000 VNĐ + 1,000 VNĐ = 7,000 VNĐ.
(1, 200 + 200)
Total value of items:
Overhead cost for each item:
7,000 VNĐ x 1,200 units= 8,400,000 VNĐ.
1, 400, 000 Total value of WIP:
= 1, 000 VND
(1, 200 + 200)
10,600,000 VNĐ – 8,400,000 VNĐ = 2,200,000 VNĐ.
Solution Example 2: Suppose that in 2/2015, this factory have the
actual operational cost 11,245,000 VNĐ, includes:
Or computing based on WIP:
Materials cost: 7,000,000 VNĐ
Materials cost: 4,000 VNĐ.
Labour cost: 2,915,000 VNĐ
Labour cost: 2,000 x 50% = 1,000 VNĐ.
Overhead cost: 1,330,000 VNĐ
Overhead cost: 1,000 x 50% = 500 VNĐ.
The end of 2/2015 the output report includes 1,500 items
Total: 5,500 VNĐ. and 500 WIP with completion rate 40%. Computing the
value of WIP and selling price for 2/2015. Comparing the
Total value of WIP: 5,500 VNĐx400units = 2,200,000 VNĐ
selling price between 1 and 2/2015.

Solution: Solution:
Total begining value of WIP at 2/2015 is 2,200,000 VNĐ Materials cost uses in 2/2015 for each unit (item + WIP)
(from 1/2015)
Includes: 1, 600, 000 + 7, 000, 000
= 4,300 VND
(1,500 + 500)
Materials cost: 4,000 VNĐ x 400 = 1,600,000 VNĐ
Labour cost: 1,000 VNĐ x 400 = 400,000 VNĐ
Tranfer 500 WIP (C. rate 40%) to items
Overhead cost: 500 VNĐ x 400 = 200,000 VNĐ
500 units x 40% = 200 units
Solution: Solution:
Labour cost for each item: The actual price for each item:
400, 000 + 2,915, 000 4,300 VNĐ + 1,950 VNĐ + 900 VNĐ = 7,150 VNĐ.
= 1,950 VND
(1,500 + 200)
Total value of item:
Overhead cost for each item :
7,150 VNĐ x 1,500 units = 10,725,000 VNĐ.
200, 000 + 1,330, 000 Total value of WIP:
= 900 VND
(1,500 + 200) (2,200 + 11,245 – 10,725) x 103 = 2,720,000 VNĐ

Solution: Solution:
Or computing based on WIP: Selling price comparing 1, 2/2015
Materials cost: 4,300 VNĐ. Costs 1/2015 2/2015 difference
Overhead cost: 1,950 x 40% = 780 VNĐ.
Materials 4,000 4,300 + 300
Overhead cost: 900 x 40% = 360 VNĐ.
Labour 2,000 1,950 - 50
5,440 VNĐ.
Overhead 1,000 900 - 100
Total WIP: 5,440 VNĐ x 500 units = 2,720,000 VNĐ.
Total 7,000 7,150 + 150
3. Actual processes consideration to compute WIP Example:
Based on the actual cost for certain stage in production A certain factory produces item A which includes 3 stages
process, we compute the value of WIP for each stage, and process. And the estimated cost for each stage for each unit
the total costs of final items is the differnce between total as follow:
actual cost and total value of WIP. Stage 1:
Materials cost 3,750 VNĐ
Other costs 750 VNĐ
Total cost for stage 1 4,500 VNĐ

Stage 2: In this operation period, the total actual costs (materials,
labour and Overhead) is 7,935,000 VNĐ, and the
Tranfer cost from stage 1 4,500 VNĐ
operational report as follow:
Others cost in stage 2 900 VNĐ
900 items, and:
Total costs for stage 2 5,400 VNĐ
100 WIP in stage 1
Stage 3:
150 WIP in stage 2
Tranfer cost from stage 2 5,400 VNĐ
200 WIP in stage 3
Others cost in stage 3 900 VNĐ
Computing the total value of WIP and items
Total costs for stage 3 6,300 VNĐ
100 WIP in stage 1 includes materials cost only Total value of WIP:
3,750 VNĐ x 100 units = 375,000 VNĐ. 375,000VNĐ+675,000VNĐ+1,080,000VNĐ = 2,130,000 VNĐ
150 WIP in stage 2 includes transfer total cost from stage 1: Total value of items:
4,500 VNĐ x 150 units = 675,000 VNĐ 7,935,000 VNĐ– 2,130,000 VNĐ= 5,805,000 VNĐ.
200 WIP in stage 3 includes transfer total cost from stage 2: The actual selling price for each item:
5,400 VNĐ x 200 units = 1,080,000 VNĐ.
5,805,000 VNĐ : 900 units = 6,450 VNĐ.

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8.

P3 – CHAPTER 8 1. The essential elements in control system:

4. The official rules for changing the operations if

8.1 Introduction 8.1 Introduction

a. The policies and rules: b. The long-term planning (over 5 years):

operational issues; + Developed based on top managers’ decisions and

middle managers’ decisions (production manager);

8.1 Introduction 8.1 Introduction

- Simplicity, effectiveness; flexibility; b. The implementation of control process in the system;

- Correct and updated information/data; c. The staffs training for operations;

- Should be planned and adjusted; payment

8.1 Introduction 8.1 Introduction

- Reminding and determining the human responsibility in control process.

- Difficult to convince the leaders for changing/updating

- Trainning programs are very important to implement payment

- Trainning programs should be maintained. should be repeated (in short to long-terms);

8.1 Introduction 8.2 Operational cost computing

- Operations data: input data (costs, standard time,

8.4 Work-in-process cost computing 8.4 Work-in-process cost computing

8.4 Work-in-process cost computing 8.4 Work-in-process cost computing

8.4 Work-in-process cost computing 8.4 Work-in-process cost computing

8.4 Work-in-process cost computing 8.4 Work-in-process cost computing

8.4 Work-in-process cost computing 8.4 Work-in-process cost computing

8.4 Work-in-process cost computing 8.4 Work-in-process cost computing

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