costing process

Target/backward costing

Target/backward costing

Direct/marginal costing

• direct or variable costing is an inventory valuation method where only the variable manufacturing costs are charged to the inventory

• fixed overhead costs,ie rent,property taxes,insurance,depreciation etc are charged to expense in the current period as period costs

• it tends to be easier to calculate than full absorption costing

Direct/marginal costing

• Contribution=Sales – marginal costs

• Refer the basic cost sheet excel sheet

Absorption costing

• Variable and non variable costs• Recovers overheads by assigning a

percentage to some elements of direct labour

• Refer the excel sheet-basic cost sheet

Under-absorption and over-absorption of overheads

• Under-absorption of overheadscosts allocated is less than actual• Over-absorption of overheadscosts allocated is more than actual

Direct costing vs. absorption costing

ABC costing

• Prepare a cost sheet from the following data to find out1. Profit and 2.Cost per unit.• a.Raw Materials consumed Rs.1, 60,000• b. Direct wages Rs.80, 000• c. Factory overheads Rs.16, 000• d. Selling overheads Rs.1, 20,000• e. Units produced 4000• f. Units sold 3,600• g. Office overheads- 10% of factory cost• h. Selling price – Rs.100 per unit.

• ABC Fashions is a small scale exporter of garments. Despite intense competition, it has managed to win several orders from Germany and Middle East. It has established a reputation for quality and feels that it can gain a foothold elsewhere in Europe if it can lower its costs. Shirts are its specialty and currently the figures given below explain the cost structure. It feels that a bigger market share can be gained if its shirts could be sold for 9.50USD FOB. (Given the conversion rate 1USD=INR 50).

• Suggest to Fast Fashion. Where and by how much can cost control be exercised to sell at thedesired price?What innovative measures can it take to be more competitive?Cost structure of the shirt:

• Materials cost-• Fabric-2 m. @ 75/m• Trims- Rs.5• Labor Cost-• Cutting- 2 [email protected] per hour• Sewing- 1 hr. @Rs.30 per hour• Finishing -2 hrs. @ Rs.20 per hour• Factory Overheads• 30% of Labor cost• Transport and communication- 5% of direct costs• Profit = 20% of total cost

• A company makes three products A, B,C and their cost of manufacture is as follows.

A B C• Direct material per unit Rs 3 Rs 4 Rs5• Labour Rs 2 Rs 3 Rs 4• Selling price Rs 10 Rs15 Rs20• Output 1000 units 1000 1000• Total overheads are Rs 6000 out of Rs 3000 are fixed and rest are

variable .• You are required to show the statement showing cost of each product

and Profit according to absorption costing and marginal costing.