Chapter-1-part-2FLOW-OF-COST.-Costing-and-Pricing.pptx

flow of cost

1. FLOW OF COST IN SERVICE, TRADING & MANUFACTURING SERVICES TOPIC 2

2. WHAT IS FLOW COST? The flow of costs refers to the manner or path in which costs move through a firm. Typically, the flow of costs is relevant with manufacturing companies whereby accountants must quantify what costs are in  raw materials , work in process, finished goods inventory, and  cost of goods sold . Understanding Flow of Costs

3. LIFO and FIFO The flow of costs refers to the manner or path in which costs move through a firm. Typically, the flow of costs is relevant with manufacturing companies whereby accountants must quantify what costs are in  raw materials , work in process, finished goods inventory, and  cost of goods sold . Understanding Flow of Costs

4. LIFO and FIFO There are several methods for accounting for the flow of costs. These include   LIFO (last in, first out),   FIFO (first in, first out),  specific identification, and weighted average cost. For example, the costs of raw materials might vary over time, whereby some are higher in price than others. After the goods are sold, the company must account for the cost of goods sold by removing the items from inventory to COGS. Understanding Flow of Costs

5. Example of Flow of Costs on Service

6. Example of Flow of Costs on Manufacturing

7. Example of Flow of Costs on Manufacturing

8. Costing Methods Standard costing Job costing Process costing Direct costing Target costing Activity-based costing (ABC)

9. STANDARD COSTING T his type of costing is probably the most common method due to its simplicity. The predetermined costs are derived from the company’s historical experience and are updated periodically to reflect changing conditions. The advantage of this approach is that it is relatively easy to compute, making it the least time-consuming. It also provides a consistent basis that determines the cost of the product.

10. 2. Job costing Job costing is for tracking the costs when every project is different, and the cost of each job varies. This method looks at both direct and indirect costs. To calculate the cost of a job, you first add all the direct costs. Then, you allocate a portion of the indirect costs based on how many resources are consumed for the assignment. For example, if a job took up  50%  of the factory space for a day, you would allocate  50%  of the day’s rent to that task.

11. 3. Process Costing Process costing, a process referring to a particular stage in manufacturing, helps mass producers with slight product variations track costs. For example, the first stage might be cutting the fabric, and the second stage might be sewing the garment. To calculate the cost of a process, you add up all the direct expenses incurred in that specific production stage — including the materials used and wages of your operators. You then allocate a portion of the indirect costs based on how much the process uses the resources.

12. 4. Direct Costing The variable costs are those that vary with the level of production, such as raw materials and labor. The fixed costs, such as rent and insurance, are not included in the product cost. This approach provides a better understanding of the variable costs and those that are fixed. It also makes decision-making easier since the effect of changes in production levels on costs is more transparent. What’s more, this method is more straightforward to compute than others since you only need to consider the variable costs.

13. 5. Target costing Target costing is a method used to ensure that products are designed and priced to meet customer needs. With this method, you know what the sale price needs to be, so you start with that in mind. Then, you work backward to ascertain the cost of manufacturing it. To calculate the cost of a product, you first need to determine the target price. This is the price that the product needs to be sold at in order for the company to make a profit. Then, you work out the  manufacturing cost  to meet the target price.

14. 6. Activity-based costing (ABC) Activity-based costing looks into the cost of each unit from mass production runs depending on the activities involved in making it — ABC is a more sophisticated version of job costing. In activity-based costing, overhead costs are assigned to activities rather than products. This is done by first allocating indirect costs to cost pools. A cost pool is a group of related costs incurred when performing a particular activity.