Job Costing
Job costing is a precise way of monitoring all expenses and income related to a specific project. Job costing is a costing method that assigns costs to manufacturing batches or work orders. Job costing is a costing approach used to determine the costs of single work orders, which are classified as small contracts. Job costing is often referred to as lot costing or job lot costing. Job costing concerns to the product cost, product cost is a cost essential to make a product, whereas period costs are non-manufacturing expenditures that are expensed during an accounting period. Product costs are recorded as inventory (an asset) on the balance sheet and do not appear as costs of goods sold on the income statement until the product is sold.
Standard Cost
Standard costing allocates "standard" costs to its cost of goods sold (COGS) and inventory rather than actual expenses. The standard costs are the budgeted amount and are based on the effective utilisation of labour and resources for producing the good or service under standard operating circumstances. Although standard costs are given to the items, the corporation must the fact that standard costs are given to the items, the corporation must nevertheless pay actual expenses. Variance analysis determines the process of determining the difference between the standard (efficient) cost and the actual cost spent.
Marginal costing
Marginal costing is a technique in which the variable costs are regarded as the product cost and the fixed expenses are considered as period costs. As fixed costs remain fixed regardless of production volume, increased production results in a lower fixed cost per unit because the total expenditure is distributed across a larger number of units. Variable costs vary according to production levels, therefore production of larger quantities will result in higher variable costs.
Absorption costing
Absorption costing is a method of calculating product costs that take into account both fixed and variable expenses. This method of costing is crucial, especially for reporting purposes. Financial reporting and tax reporting are both examples of reporting objectives. Absorption costing includes indirect as well as direct costs in the cost of a product. This indicates that the cost of each unit of a product includes not just the direct expenses associated with producing that unit, but also a fraction of the indirect costs incurred during the process of production, such as with the absorption overhead rate (AOR).
Example:
XYZ Ltd
Sales 24,000 units
Production 26,000 unit
selling price per unit £90
Variable costs per unit: £
Direct materials 20
Direct labour 10
Direct expenses 6
Selling overhead 4
Fixed costs for the year: £
Production overhead – incurred 324,000
Production overhead – estimated 300,000
Selling overhead 110,000
Administration overhead 80,000
The company absorbs fixed production overhead on the basis of the annual budgeted volume of cost units, which were 25,000 for the year just ended.
(i) Prepare a cost of the product
(ii) Prepare profit and loss statement and reconcile marginal with absorption costing method.
Marginal cost
(Cost per unit)
Direct Materials 20
Direct Labour 10
Direct expenses 6
Cost per unit 36
Absorption cost
(Cost per unit)
Direct Materials 20
Direct Labour 10
Direct expenses 6
Overhead absorption 12
Cost per unit 48
Overhead Absorption rate (OAR)
= Fixed production overhead ÷ Volume of activity
= 300,000 ÷25000= 12 per unit
Profit & loss – Marginal costing
Sales (24,000x90) 2,160,000
Less Cost of sales:
Opening stock 0
Variable production cost (26000x£36) 936,000
Less closing stock (2000 x£36) (72,000)
Variable cost of sales 864,000
Variable selling overhead 96,000
Total Variable cost 960,000
Total Contribution 1,200,000
Less
Fixed production Overheads (324,000)
Fixed selling and distribution (110,000)
Administration overhead (80,000) Total fixed cost (514,000)
Net Profit 686,000
Profit & loss – Absorption costing
Sales (24,000x90) 2,160,000
Less Cost of sales:
Opening stock 0
Variable production cost (26000x£48) 12,48,000
Less closing stock (2000 x£48) (96,000) Variable cost of sales (COGS) 11,52,000 Add. Under absorbed production cost ( 324000-312000) 12000
Total Variable cost 11,64,000
Total Contribution 9,96,000
Less
Selling Overheads (24000x4) (96,000)
Fixed selling and distribution (110,000)
Administration overhead (80,000) Total Fixed Cost (286,000)
Net Profit 710,000
Reconciliation of Marginal and Absorption costing
Net Profit – Marginal costing 686,000
Net Profit – Absorption costing 710,000
Differences 24,000
Closing Inventory {(2000 x (£48-36)} = 24000