1. Cost Accounting

2. The Cost Object
TimCo manufactures Chairs, each chair consists of Materials (Wood), Labor (A Carpenter) and Overhead (Rent, Utilities and Managers Wages). The Chairs are sold onto a furniture shop. TimCo’s Strategy is to make a profit on its operations

3. Planning
The manager asks how many chairs can the company make in a week?
The Manager asks you how much the chair needs to sell for to make a profit?

4. Costs Material costs per chair are $10 of wood and nails/glue
It takes a carpenter one hour to make a chair Carpenters are paid $300 per week and there are 40 working hours in each week, the company employs 2 carpenters
Manufacturing Overheads are $1000 per week, this includes rent, heat light and managerial wages

5. How Many Chairs can be made?
One chair per hour, per carpenter, two carpenters
40 hours in a week
= 40 x 2
= 80

6. What are the cost of constructing a chair?
Direct Materials $10
Direct Labour $7.5 ($300/40 hours)
Overhead $12.5 (£1000/80 Chairs constructed in one week)
= $30 per chair

7. What should the company sell the chair for?
Your manager suggests that the company needs to make a Margin of 30%
= $30 x 0.30
= $9
The selling price of the chair is therefore
= $39

8. Review Question
ABC Plc manufactures Beds the following information is available
Direct Materials $10
Direct Labour $5
Overheads $5
Units produced in one week 100
Sales Margin of 25%
What is the Total cost of production?
What is the selling price of one bed?
How much profit will the company make in one week?

9. Answer Total Cost of production is $20 (10+5+5)
Selling Price is $25 (20 x 0.25)
Profit for one week is $500 (5 x 100)

10. Fixed and Variable Costs
Fixed costs are usually the direct costs of producing a Cost Object
Variable Costs are all other associated costs which are assigned to the production of a Cost Object
Fixed and variable costs behave in different ways

11. Fixed Costs Fixed costs do not change with the volume of production
Usually fixed costs include all of the running costs of the business apart from the direct materials and labour involved in the physical aspects of the Cost Object

12. Variable Costs Variable costs increase as production increases
Variable costs are usually the direct materials and labour of producing the Cost Object

13. Allocation of Fixed Costs
It is unusual for a company to make only one product, but often many products will be made in the same environment, sharing some portion of Fixed Costs
Often managers will want more information about the difference between Cost Objects and the cost of production
We can do this by allocating overheads in some way

14. Example A company makes two products A and B $ A B Direct Materials 37
Direct Labour 5 9

15. Further Information Fixed Costs $ Utilities and Rent 400 Machine Costs
200
Managerial Wages
600

16. How can we allocate the fixed costs to the Products?
We need more information, assume the following
Product A utilises 30% of the Factory, Product B utilises 70%
Product A utilises 4 Machine Hours per unit, Product B utilises 3 Machine Hours per unit, there are a total of 400 machine hours used per week

17. Allocation of Fixed Costs
We need to make a choice on how we allocate these costs, given the information available we can assume the following
Allocate the utilities according to the % of space used
Allocate the Machine Costs according to the % total machine time each product uses
Allocate managerial costs using either of these methods

18. Rent and Utilities Total Fixed cost $400
Product A utilises 30%, Product B utilises 70%
Total Fixed Cost allocated to Product A $120 (400 x 0.3)
Total Fixed Cost allocated to product B $280 (400 x 0.7)
Fixed cost per Unit
Product A $2.4 (120/50)
Product B $5.6 (280/50)

19. Machine Costs Find Total Machine Hours per Product
Product A Machine Hours Per Unit = 4, Total Units Produced = 50, total machine hours used producing Product A = 200 (4 x 50)
Product B Machine Hours per Unit 3, total units produced 50, Total Machine Hours used producing Product B = 150 (3 x 50)

20. Machine Costs (ctd) Find % of cost to allocate to each product
Total Machine Hours= 350
Product A Machine Hours = 200
Product A Percentage = 57% (200/350 x 100)
Product B Percentage = 43% (150/350 x 100)
Product A = $114 ($200 x 0.57)
Product B = $86 ($200 x 0.43)
Product A Per Unit = $2.28 (114/50)
Product B Per Unit = $1.72 (86/50)

21. Managerial Costs
Managerial costs are less clear, we could use either method because there is not enough information, but it is likely that more managerial oversight is required for a bigger area of the factory, so you should use the same methodology as the Rent and Utilities

22. Managerial Cost Ctd Total Managerial Costs = $600
Product A = $180 (600 x 0.3)
Product B = $420 (600 x 0.7)
Per Unit, Product A $3.6 (180/50)
Per Unit, Product B $8.4 (420/50)

23. Allocated Costing Cost Product A Product B Direct Materials 3 7
Direct Labour 5 9
Utilities and Rent
2.4
5.6
Machine Costs
2.28
1.72
Managerial Overheads
3.6
8.4
Total Costs
16.28
31.72