Cost accounting 11.26

Overview of Job Costing and Process Costing

  • Two main costing systems: Job Costing and Process Costing.

  • Job Costing focuses on indirect costs for each job.

  • Process Costing emphasizes how many units have been produced.

Understanding Indirect Costs

  • Important to understand the pressures of indirect costs in production.

  • Indirect costs need to be accounted for correctly to determine the full cost of production.

Last In, First Out (LIFO) Method

  • LIFO method means finishing products from previous periods before starting new products.

  • Five critical steps to solve calculations systematically:

    1. Determine Total Cost: Identify the total cost for the period.

    2. Calculate Equivalence Units: Equivalence units = Number of units × Percentage of completion.

    3. Calculate Cost per Unit: Cost per unit = Total Cost / Equivalence Units.

    4. Calculate Cost of Finished Goods: Total costs for finished products.

    5. Calculate Cost of Work in Progress: Calculate the cost of unfinished units based on their percentage of completion.

Steps in Detail

  1. Total Cost

    • For example, if total costs are €1,000,000 for 10,000 units, and we know how many are completed and at what rates.

  2. Calculating Equivalence Units

    • If 6,000 units are 100% complete and 4,000 units are 50% complete:

      • Equivalence Units = (6,000 × 100%) + (4,000 × 50%) = 8,000.

  3. Cost per Unit

    • Cost per unit = Total Cost (€1,000,000) / Equivalence Units (8,000) = €125.

  4. Cost of Finished Goods

    • Multiply the number of finished goods by the cost per unit.

    • If 6,000 units are finished: Cost = 6,000 × €125 = €750,000.

  5. Cost of Work in Progress

    • Calculate costs for unfinished goods: Unfinished Units × % Completion × Cost per Unit.

Example Calculation for Year 2

  • The second year includes unfinished goods from Year 1 and newly produced goods.

  • Take into account that unfinished goods from the previous year are prioritized for completion in the current year.

  • Example costs for Year 2: total cost of €990,000, with calculations for work in progress and completed units carried from Year 1.

Method Overview: FIFO and Weighted Average

  • FIFO (First In, First Out): Assumes materials from the beginning inventory are finished first before moving to new goods.

  • Weighted Average: Combines costs from both the previous and current years to calculate average costs for units produced.

Importance of Consistency in Costing Methods

  • Changing methods (e.g., from FIFO to weighted average) requires full transparency and justification in financial statements.

  • Consistency is crucial to providing accurate financial information for decision-making.

Accounting Information System Integration

  • Understanding how costing integrates into financial systems is essential. All costs associated with materials and labor should be recorded accurately.

  • The four major accounting categories to consider when recording costs are:

    1. Assets

    2. Liabilities

    3. Equity

    4. Revenues

  • Using a double-entry system will ensure that debits and credits are balanced when recording costs and revenues.

Summary

  • Job costing and process costing have distinct approaches but ensure accurate reporting of costs.

  • Follow the five steps in LIFO to solve costing problems systematically.

  • FIFO and weighted average methods affect how costs are recorded; clarity and justification are critical when changing methods.