Chapter 5

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COSTING FOR

TRANSPORTATION
Year of offering: 2021
Lecturer: Miss M.P Jeza
Chapter 5: Costing jobs, processes & services
How do we cost an order?
• Job costing is a form of specific order costing, it
applies when work is undertaken to a customer’s
special requirements and each order is a short
duration compared with orders to which contract
costing applies
• The work is usually carried out in a factory or
workshop , and the product moves through
processes and operations as identifiable unit

Characteristics of job costing


• In job costing, each job is given a unique number
(the job number is then quoted on all documents
relating to the particular job
• A job cost card is a document with all the
information about a particular job
• All direct costs are charged to the job, and
manufacturing overheads are absorbed using the
best appropriate absorption rate
• If more labour is used in the production process,
either the labour hourly rate or the direct labour
cost rate (total cost of wages per unit of
production) is used
• The machine hourly rate is used if the production
process uses extensive machinery
• The job is delivered to the customer when it is
finished, and the quoted selling and distribution
costs are charged to the job

Worked example on page 107-108


• Labour hours are collected from the timecards of
the workers who do the work on the job
• A timecard is a device that records the time when
a worker begins and ends a work session
• Each worker clocks or records the time he or she
arrives at work and leaves from work
• At the end of the job, the total hours spent on the
job are added up
• The total number of labourers is multiplied by the
rate per hour

REFER TO PAGE 109 – 111 for worked examples


Costing a product that passes through a number of
processes

• Sometimes the goods that a manufacturer makes


have to pass through a series of processes during
production
• The method used for costing the job is called
process costing
• Costs are charged to the process before being
averaged (the units produced are all identical, and
it’s not possible to distinguish one from the other
e.g. bread, soap bar)
• Process costing is used mostly in industries such a
oli refining, chemical processing, food processing.
In these industries production is a continuous
process so the production passes from one cost
centre to another
• The finished product of one cost centre becomes
the input of the next process
• SEE PAGE 113 FOR A DIAGRAM

• The total costs of each process and the units


processed or produced are then transferred to the
next process until they become finished goods and
at that point they are transferred to the finished
goods stock
• Cost per unit is determined as followed:
• In process costing, losses often happen during
production and have to be accounted for
• Each industry has its own level of losses that are
accepted as normal losses
• These losses occur no matter how good the
operating system is so normal losses are
unavoidable losses and they are uncontrollable
• Normal losses are caused by a variety of factors
such as vaporisation, wastage due to spillage
evaporation and shrinkage
• The normal loss is included in the cost of the good
units produced
• Any value from the sale of the normal loss goes to
reduce the total cost of production
The conditions under which process costing can
occur (resulting in both losses and gains)

• Without normal losses during processes


• With normal losses during processing with no
saleable value
• With abnormal losses during processing with no
saleable value
• With normal losses during processing with saleable
value
• With abnormal losses during processing with
saleable value
• With abnormal gains during processing with no
saleable value
• With abnormal gains during processing with
saleable value
Process costing without losses

• Costs are accumulated as work-in-progress moves


from one cost centre to another
• The process account is debited with the total costs
of the process (these costs are material, labour, and
overhead costs) and raw materials input
• When the process is complete the total cost of the
process is transferred to the next cost unit by
crediting the process account

REFER TO PAGE 115 FOR A WORKED EXAMPLE

Abnormal loss no saleable value


• A loss that is over and above the normal loss that
happens during the production process is called an
abnormal value
• Such a loss is not expected to occur, and it could
have been avoided and so could been controlled
• It usually occurs as a result of inefficiency
• It is not absorbed by the output of good products,
and it is reported separately from the process
account
• The abnormal loss is valued at the cost of
production , which is credited to the process loss
account
• Accounting for this separately allows management
to monitor the problems that occur in production
• REFER TO PAGES 116 – 117 FOR A WORKED
EXAMPLE
Process costing with losses, with saleable value

• Sometimes, the normal loss has a saleable value


• Also known as the scrap value
• When this occurs , the loss to reduce the cost of
processing the output
• REFER TO PAGE 117 – 118 FOR A WORKED EXAMPLE

Abnormal gains with no saleable value

• Abnormal gains can also arise when the actual


output from the process exceeds the normal
output expected
• Normal output is defined as the input less normal
loss
• REFER TO PAGE 119 FOR A WORKED EXAMPLE
Abnormal gains where losses have a saleable value

• Where there is a saleable value for losses, the


abnormal gain value in the process account would
be unaffected
• The abnormal gain would be valued in the same
way
• In the abnormal gain account, the saleable value
would be debited and the normal loss account
credited
• Any balance remaining would be transferred to
income statement account
• REFER TO PAGE 120 FOR A WORKED ACCOUNT
Valuation of work-in-progress

• Work-in-progress is the value of the partly


completed goods at the end of the accounting
period
• This WIP consists of direct materials, direct labour
and the production overhead
• The partly completed goods must be converted
into what are known as equivalent completed units
• An equivalent unit is a notional quantity of
completed units
• It is substituted for an actual quantity of
incomplete physical units in progress (in other
words, it is an incomplete unit expressed as a
complete unit)
• An equivalent unit is calculated as follows:

A WORKED EXAMPLE IS ON PAGE 123

• The 5 stages to the process of working on the


equivalent units:
1) Determine the quantity schedule . This is the
physical flow of units
2) Calculate the equivalent units
3) Determine the total cost of the process
4) Calculate the cost per equivalent unit
5) Determine the cost of production

A WORKED EXAMPLE TO HELP YOU UNDERSTAND IS ON


PAGES 124 - 126
Joint products and by-products

• Some products can be separately identified from


the beginning of their process of manufacture, but
others come from a joint process, as in the meat
and timber industry (different grades of meat or
timber come from the raw material
• In the course of processing inputs into finished
products, more than one unique product comes out
of the production line at the same time
• These unique products are called the joint
products, and they all have relative a sales value
• The point at which the separate products become
identifiable is called the split-off point
• The cost of crude oil, the cost of labour and the
production overheads incurred in production before
the split-off point are known as the joint cost
• The joint cost is shared among the various joint
products

REFER TO WORKED EXAMPLE ON PAGE 129

Sharing of joint costs


• The following are 3 ways of sharing the joint costs:
1) The physical measured method
2) The sales value at split-off point method
3) The net realisable value method

The physical measurers method


• This method depends on the unit of physical
measurement (weight, units, metres, litres) of the
product
• The joint costs are shared among the quantity of
the unique products produced after the split-off
point
• WORKED EXAMPLE ON PAGE 129

Sales value at split-off point method


• Here the joint costs are shared at the sales value of
the product at the split-off point
• The quantity of each product is multiplied by the
selling price, and the value form the basis of
sharing the joint cost
• WORKED EXAMPLE ON PAGE 131

Net realisable value method


• The net realisable value method assumes that
further processing costs would be incurred either
to enhance the value of the products or to subject
those products to further processing
• The further processing cost is then deducted from
the sales value and the net realisable value of
each product is the basis on which the joint costs
are shared

By-products
• These are products that are produced incidentally
and not by intention, from the material used in the
production of the main products
• E.g. by-products in the meat industry are wool,
bones, skin, etc.
• By-products have relatively low saleable value as
compared with the main products
• Since these products are incidentally produced,
they do not bear any portion of the joint costs
• Example on page 133 135
Service costing
• This is a form of operation costing that is used
where the same type of services are provided either
by an organisation or by a service cost centre within
an organisation
• Service costing might be applied to a service such
as car maintenance, hotel or catering

Units of service
• A unit of service is the indicator of how much must
be charged for the service rendered

REFER TO PAGES 136 – 140 FOR WORKED EXAMPLES

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