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Costing Systems Design. Traditional systems of calculating costs-based on the production size A process costing system (pl: kalkulacja procesowa) (ch.4) A job order costing system (pl: kalkulacja zleceniowa) (ch.3). Calculation of product costs. The task of calculating product costs :

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Costing Systems Design

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Costing Systems Design

  • Traditional systems of calculating costs-based on the production size

    • A process costing system (pl: kalkulacja procesowa) (ch.4)

    • A job order costing system (pl: kalkulacja zleceniowa) (ch.3)

Calculation of product costs

  • The task of calculating product costs:

    • Valuing the goods produced or services rendered according to manufacturing costs

  • Calculating a unit cost in order to:

    • Allow for correct valuation of asset components e.g. inventory

    • To control the costs incurred

    • To determine profitability of individual products

  • Object of calculation :

    • Defining and presenting a product in a number from

    • Usually the manufacturing cost is assigned to appropriately chosen unit of a psychical good (e.g. a piece, ton, kilogram, m3)

Calculation and organization of the manufacturing process

  • Manufacturing types:

    • Mass production

      • Homogenous goods are produced continuously

    • Series production

      • Homogenous goods are produced in batches

    • Unit production

      • Production of heterogeneous goods; manufacturing process can be repeated

Traditional systems of calculating costs

  • A job-order costing

    • Used in enterprises producing heterogeneous products

    • Production in units or series

    • Production process and use of resources are defined separately for each good or series

  • A process costing

    • Used in manufacturing of homogenous products

    • Mass production

      • There is one type of goods produced

      • Different products are produced from the same raw materials using the same machines and technology

Assumptions of job-order processing

  • Separately calculate the costs of each cost object (final product, e.g. single product, series)

  • For each cost object, a job cost sheet is opened, to gather costs

  • Direct costs are directly related to cost object and registered based on accounting documents

  • Indirect costs are allocated through an allocation process using a cost driver (pl: klucz rozliczeniowy)

    • Traditional methods of assigning costs assume that level of indirect (overhead) costs changes with changes in manufacturing quantity

    • Easiest way: allocate all indirect (overhead) costs using the same method

    • Another way: assign in direct costs to different departments

Relating costs directly

Direct raw materials





Relating costs directly

Direct labor

Overhead costs




Overhead labor

Assigning overhead costs



Other department costs

Transfer of costs in job-order costing

Calculating costs under job-order costing

  • Calculating direct raw materials

    • Documented e.g. in the computer system or materials requisition from, in which a type and quantity of materials drawn from a storeroom is specified along with an order (job) number

    • (e.g. see p. 72)

  • Calculating use of direct labor

    • Based on manual or computerized employee time ticket on which a value (an amount) of direct labor is recorded and charged to specific order (job)

    • (e.g. see p. 73)

  • Calculating indirect manufacturing costs

    • Costs of raw materials used with separate costs by type are assigned

    • Total of departmental costs over a given period is transferred to (using a cost driver) job cost sheet

Ratio of indirect (overhead)


(Estimated) total manufacturing indirect (overhead) costs


(Estimated) total units in the base (cost driver)

Indirect costs assigned to a cost object

Ratio of indirect


Quantity of cost driver




Cost drivers of indirect costs

  • Most common cost drivers:

    • Quantity or weight of produced goods

    • Direct labor hours (DHL)

    • Machine-hours (MH)

    • Quantity of hours (time) used by machines or equipment

  • Ratio for computing pre-determined overhead cost

  • Indirect (overhead) costs assigned to a cost object

Example of completed job cost sheet - See p.77

Assumptions of process costing

  • The characteristic of process costing is a continuity of manufacturing process

  • The manufacturing process may go through one or more departments (parallel processing)

  • The cost is calculated per "manufactured unit" over a period of time

  • When assigning unit costs we consider:

    • Direct raw materials

    • Direct labor

    • Indirect manufacturing costs (overhead costs)

Direct materials

Indirect labor

Overhead costs


Department A


Department B




Transfer of costs in process costing

Manufacturing costs incurred in a given month

Unit manufacturing cost


Number of equivalent units

A simple process costing

  • A simple process costing

    • Depends on dividing the costs over a given period by a quantity of equivalent units

  • It is used in an enterprises with mass production of homogenous products that equally uses raw materials of the enterprise

  • A process costing with ratios

    • It is used with heterogeneous production, when manufactured goods unevenly use raw materials

    • Requires use of ratios, which express a difference in costs among goods

  • Example: A simple process costing- no inventory

    Example: a simple process costing - parallel

    • Question: what quantity of incurred costs pertains to finished goods and what quantity to goods in process

      • One should calculate percentage progress of manufacturing process

      • Calculate quantity of goods in process in terms of finished goods

      • We get information about the quantity manufactured in a given period e.g. an equivalent amount of finished goods

    • Equivalent units

      • it's an equivalent amount of units, which could be manufactured in 100% with appropriate engagement of materials and capacity

    • Equivalent manufactured amount

      • It's an amount manufactured over a given period resulting from a work-in-process and finished goods

    Rules of preparing process costing with ratio

    • Determine the ratio for every good

    • Determine the number of "ratio units" as a multiple of physical units and applicable ratios

    • Determine the costs of manufacturing a ratio unit, which is calculated by dividing manufacturing costs by ratio units

    • Calculate unit manufacturing cost which is determined by multiplying unit ratio cost by its ratio

    Example: Process costing with ratio

    • Enterprise manufactures chocolate blocks (tables) of 100 g. and 150g. Average monthly manufacture amounts to 50000 tables of 100 g. and 20000 tables of 150 g.

    • Monthly manufacturing costs amount to 48000 zl and are as follows:

      • Raw materials30 000 zł

      • Manufacturing (work-in-process)18 000 zł

    • What is the cost of making chocolate?

    Example: Process costing with ratios (1) - different ratios for calculating costs

    • Enterprise manufactures products A and B. Products differ in weigh and hours needed to produce them

      • One should determine ratios for direct materials and manufacturing costs

    • Assume that ratios and costs in a given period are as follows:

      direct raw materialsmanufacturing cost

      • Product A13

      • Product B24

      • Cost incurred in a

        given period 40 000 8 000

    • Calculation of equivalent units :

      • Product A:200 units @ 100% = 200

      • Product B: 60 units @ 100% = 60

        100 units @ 40% = 40

    Example: Process costing with ratios (2) - different ratios for calculating costs

    *manufacturing costs/number of unit ratios

    Example: Process costing with ratios (3) - different ratios for calculating costs

    Product A:

    200 units at 100%: 200 szt. x (100+24) = 24 800

    Product B:

    60 units at 100%: 60 szt. x (200+32) = 13 920

    100 units at 40%: 40 szt. x (200+32) = 9 280

    Total period costs: 48 000

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