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1 Week 09 Accounting for overheads and product costs.

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Presentation on theme: "1 Week 09 Accounting for overheads and product costs."— Presentation transcript:

1 1 Week 09 Accounting for overheads and product costs

2 2 Objectives To introduce - The process for dealing with overhead costs - Marginal costing - Absorption costing - Activity based costing To compare the three costing systems

3 3 Key concept 16.1 – Direct and indirect costs

4 4 Key concept 16.2 – Full costing

5 5 Figure 16.1 – components of cost of goods sold

6 6 Key concepts – Stages in the apportionment process

7 7 Key concept 16.3 – Activity based costing

8 8 Key concept 16.4 – Marginal costing

9 9 Absorption costing Absorption costing – uses predetermined overhead rates Budgeted costs / output Actual costs / output Difference between budget and actual = under or over absorption of overhead costs

10 10 Costing systems Job costing Process costing

11 11 Inventory valuations Marginal costing of inventory excludes production overheads Full costing of inventory includes production overheads

12 12 Absorption Costing Example Stroud Ltd is a small manufacturing company which operates from rented premises on a trading estate. The following is available regarding its overheads. The company is split into 5 cost centres Cutting, Painting and Assembling, which are production departments, and two production-related service departments, maintenance and canteen.

13 13 Overhead information Allocated overheads £ Cutting20,000 Painting15,000 Assembling30,000 Maintenance 10,000 Canteen 8,000 Other overheads £ Rent & Rates50,000 Insurance70,000 Depreciation25,000

14 14 Other production data Floor areaNumber ofValue of Maintenance (sq mtrs) employees machines (£) Services (%) Cutting2, , Painting1, , Assembling2, , Maintenance 1, ,000 Canteen1,500 20, , , NOTEThe maintenance department provides services to all production departments and to the canteen, but not to itself. The canteen provides services to all production departments and to the maintenance department, but not to itself. Required: Allocate and apportion overheads to production departments using appropriate apportionment bases.

15 15 Solution – charging overheads to departments CuttingPainting AssemblingMtceCanteen Allocate20,00015,000 30,000 10,000 8,000 Rent & Rates (floor area)14,7068,824 11,765 5,882 8,823 Insurance (floor area)20,58812,353 16,4718,23512,353 Depreciation (mach value)10,0005,000 7,0001,000 2,000 65,29441,177 65,23625,11731,176 Re-apportion6,5638,204 11,4864,923-31,176 12,0166,008 7, ,040 4, ,186 1, , ,13756,749 86,114

16 16 Apportionment bases The company has provided data on one of its lines, "The Moreton" as shown below: The company expects to manufacture 5,000 units of this product Details per unit are: Direct materials4 Kg of £1.50 per Kg Direct labour Cutting Dept2 £6.00 per hour Painting Dept3 £4.00 per hour Assembling Dept5 £5.50 per hour Machine use in the Cutting Dept is expected to be 10,000 hours (ie 2 hours per unit) Required: Calculate the overhead absorption rates for each production department using the most appropriate apportionment base.

17 17 Solution – appropriate apportionment bases Cutting Dept85,137/10,000= £8.51 per machine hour Painting Dept56,749/15,000= £3.78 per labour hour Assembling Dept86,114/25,000= £3.44 per labour hour Then: On the basis of the information you have been given and have calculated Calculate the full cost of ONE unit of this product.

18 18 £ £ Direct Materials4 £1.50 per Kg6.00 Direct Labour Cutting2 £ Painting3 £ Assembling5 £ Overheads Cutting2 mach. £ Painting3 labour £ Assembling5 labour £ Total unit cost Solution – Full (absorbed) cost of one unit of product

19 19 Details for 1 month's activity on Production Line "A" is listed below: Labour Maintenance HoursTotalStoresHoursSpareBatch ProductVolumeper unitHoursRequisitionsAttendedPartsSet-ups W5, , X , Y2, , Z ,

20 20 Overhead Costs for Production Line "A" for the month were: £ Stores costs7,590 Maintenance costs3,003 Spares administration3,456 Set-up costs4,176 18,225 Required: Calculate the overhead absorption rate PER UNIT for each product on a Labour Hours Basis on an Activity Basis

21 21 Labour hours basis Overhead Product OverheadUnitsper unit £ £ W(3,750/6,950) X 18,225 =9,834 5, X(1,200/6,950) X 18,225 =3, Y(1,250/6,950) X 18,225 =3,278 2, Z(750/6,950) X 18,225 =1, ,225

22 22 By Activity Stores Maint SparesSet-up Overhead Costs CostsAdmin.CostsTotalUnitsper unit £ W4, ,4905, X1,150 1,0531,9441,3925, Y690 1, ,7404,0322, Z1, , ,590 3,0033,4564,17618,2259,050 Summary of differences: WXYZ Labour Activity (0.67)

23 23 ABC and Absorption comparison (another example) Product Product Product X Y ZTotal Labour Hours20,000 25,000 30,00075,000 Set ups Stores Requisitions ,000 Maintenance man hours 5,000 5,000 10,00020,000 Overheads £ Set up costs100,000 Stores costs200,000 Maintenance costs 50,000 Total350,000

24 24 Results Apportion costs ProductProductProduct X Y ZTotal On labour hours basis93,333116,667140,000350,000 Using ABC - by cost driver Set up costs50,00033,33316,667100,000 Stores costs100,00050,00050,000200,000 Maintenance costs12,50012,50025,00050, ,50095,83391,667350,000 Difference (over/under costed)-69,16720,83448,333


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